The Bolivian Hydrocarbon Revenue Sharing System and its Impact on Territorial Inequalities

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The Bolivian Hydrocarbon Revenue Sharing System and its Impact on Territorial

Inequalities*

Marco Just Quiles

Freie Universität Berlin, LAI

[email protected]

Abstract

This paper focuses on the political conditioners and socio-economic outcomes of the

intergovernmental hydrocarbon revenue distribution in Bolivia since 2005. The hydrocarbon revenue

allocation creates significant territorial inequalities in fiscal terms and thus constitutes a striking

intergovernmental conflict pattern that is particularly fueling the persistent decentralization dynamics

in current Bolivia. The paper identifies two major sources of the territorial fiscal imbalances within the

hydrocarbon revenue sharing system: the strongly uneven departmental revenue allocation as well as

the unbalanced revenue transfer allocation between the subnational scales. Pointing to specific

political-institutional features, particularly the subnational legislative overrepresentation and the party

affiliation, it states the predominance of political rather than efficiency and equity incentives behind

the shaping and functioning of the Bolivian hydrocarbon revenue sharing system. Considering the

evidence available, these political economy factors are decisive for the unbalanced outcomes of the

intergovernmental transfer allocation. Thus, the present case study provides a vital example for how

the revenue distribution, by rather functioning as a tool of spatial control and political mobilization,

can create and reinforce regional inequalities in resource abundant countries.

Keywords: Intergovernmental Revenue Distribution | Territorial Fiscal Imbalances | Natural Resource

Revenues | Territorial Conflicts | Bolivia

* Paper prepared for the VII CEISAL Conference in Porto, 11-15.06.2013, Panel: “Desigualdades y

sistemas fiscales en América Latina: continuidad o cambio?”. This paper is an outline of the author’s

MA thesis entitled “The Political Economy of the Bolivian Hydrocarbon Revenue Sharing System”,

(April 2013).

mailto:[email protected]

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1. Introduction

Distributional conflicts over natural resource revenues are a common feature in many

resource rich countries around the globe. Natural resources are often unequally distributed

within a countries territory. Simultaneously, more than any other economic activity, extractive

industries are territorially bound (Hinojosa et al. 2010). Ownership claims and territorial

disputes over the allocation of natural resource revenues have been particularly intense in

countries where the distribution happens to coincide with political, ethnic, religious or other

divisions between social groups (Ross, Lujala and Rustad 2012). In many countries natural

resource abundance has shown itself to be a catalyst for territorial conflicts (Ross 2002, Ross,

Lujala and Rustad 2012).

Bolivia constitutes a vital example for how natural resource abundance can reinforce

territorial conflicts and regional autonomy claims, especially of resource rich regions. Bolivia

is the second largest gas producing country in Latin America. The hydrocarbon sector

accounts for 7 per cent of the GDP and contributes more than 50 per cent to the total export.

Simultaneously, the hydrocarbon sector has turned into the most important source of fiscal

revenues. Since 2006, the gas and oil production has been contributing around 40 per cent to

the total income of the public sector, notably more than domestic taxes. Thus, Bolivia can be

categorized as resource dependent country.

The fiscal dependency on hydrocarbon revenues becomes apparent not only on the national

but also on subnational state levels. In particular Prefectures and Municipalities are highly

dependent on fiscal transfers from the central state, largely covered by hydrocarbon revenues.

While Municipalities rely on around 70 per cent on fiscal transfers, central state payments to

Prefectures account for more than 90 per cent of their total revenues (Brosio 2012: 6, 10). Due

to this precarious financial dependency, the intergovernmental hydrocarbon revenue

distribution has turned into a highly conflictive and embattled issue between national and

subnational actors.

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The horizontal1 dispute on the allocation of the hydrocarbon revenues coincide with the

persistent autonomy claims of the eastern lowland Departments Santa Cruz, Tarija, Beni and

Pando, the so called Media Luna2. Although regional identity had traditionally been strong in

these Departments, the regional autonomy agenda has seriously intensified since the election

of the first indigenous President Evo Morales in December of 2006. The conflict lines are

multiple, comprising political, economic, cultural and ethnic cleavages. Nevertheless, the

hydrocarbon ownership and the distribution of the hydrocarbon revenues are a particular

problematic issue within these territorial disputes (Weisbrot and Sandoval 2008: 1, Laserna et.

al. 2009: 32, Bebbington et. al. 2009: 4, Frank 2010: 6).

Tarija and Santa Cruz possess almost 80 per cent of the national gas deposits. The claim for a

larger share of hydrocarbon revenues is an inherent part of the autonomy agenda of both

producing Departments (Weisbrot and Sandoval 2008: 8, Eaton 2011: 302). Although there

have been relevant decentralization reforms on the administrative level since 2005, the

hydrocarbon fiscal regime remains highly centralized. Conflicts evolve frequently in regard to

the revenue distribution amounts that largely fund intergovernmental budget transfers. Since

2006 several changes in the hydrocarbon fiscal regime – among others the notable budget cuts

for the Prefectures in 2008 – have fueled the emotionally charged discourse of the regional

opposition, accusing the national government of exploiting the hydrocarbon distribution

system in order to foster centralistic state structures and thus undermining the regional

autonomy demands (CONALDE 2007). The national government in turn legitimizes its

distribution policy by pointing out the strategic importance of natural resources in the struggle

against poverty and social inequality (CPE 2009, art. 348, 359). Therefore, the revenue

allocation functions according to social policy criteria.

This paper provides evidence that the hydrocarbon revenue allocation creates significant

territorial fiscal imbalances and thus constitutes a striking intergovernmental conflict pattern

that is particularly fueling the persistent territorial disputes and decentralization dynamics in

current Bolivia. Unlike previous works that have addressed the uneven hydrocarbon revenue

allocation across the regions in Bolivia (Weisbrot and Sandoval 2008, Velásquez-Donaldson

1 The horizontal distribution concerns how resources are allocated across subnational governments and

legislative districts. The vertical distribution concerns the resource allocation to different levels of governments

or scales (Haggard and Webb 2004: 236). 2 The denomination Media Luna refers to the mentioned lowland Departments that, especially since the election

of Evo Morales in 2005, became the geographic area of the opposition to the national government.

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2007, Hinojosa et al. 2010, Laserna 2009, Laserna et. al. 2009), this paper points in addition

to political economy factors that shape the hydrocarbon revenue distribution in Bolivia and

could actually explain the addressed distribution imbalances.

Considering the revenue sharing system as a result of political bargaining, the central

hypothesis of this paper is that rather political-institutional and party political features are

driving the hydrocarbon revenue distribution than efficiency and equity criteria, which could

actually decrease the economic territorial inequalities among the Bolivian Departments.

Against this backdrop, the hydrocarbon revenue sharing system is not just a technical

mechanism to divide resource revenues between the central government and the subnational

governments, but functions as a mechanism of territorial control and political mobilization. In

order to test the raised assumption, we will recur particularly on two approaches that contain a

solid explanatory value for the subsequent case study. In order to identify the political

conditioners of the horizontal revenue allocation, we consider the ‘malapportionment’-

argument by David Samuels and Richard Snyder (2001). To approach the political incentives

behind the vertical hydrocarbon allocation, we highlight the importance of partisanship or

party affiliation of subnational officials and governments towards the national governing

party.

The paper is structured as follows: section two provides an overview of the most important

theoretical considerations for this study. Section three elucidates the features of the

hydrocarbon sector and its fiscal regime. Section four focuses on the intergovernmental

hydrocarbon revenue distribution. Section five provides a political economy analysis of the

hydrocarbon revenue sharing system. Finally, section six summarizes the findings and

formulates the conclusion.

2. Political Conditioners of the Intergovernmental Revenue Allocation:

Malapportionment and Subnational Party Representation

Classic fiscal federalism literature suggest that intergovernmental transfers should be

allocated on the basis of equity and efficiency criteria in order to ensure an even distribution

across all regions (Musgrave 1959, Oats 1972, Gramlich 1977). However, a more recent set of

literature has provided empirical evidence indicating that territorial revenue distribution

cannot solely be explained by concerns on equity and efficiency alone. Moreover, tactical

policy considerations constitute important allocation determinants (Khemani 2004, Haggard

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and Webb 2004, Porto and Sanguinetti 2001, Gibson and Calvo 2000, Díaz-Cayeros 2006

Boex and Martinez 2005, Wright 1974, Cox and McCubbins 1986, Dixit and Londregan

1996).

Early studies exploring the political economy of the intergovernmental grant allocation,

derived from the North American context. Departing from the hypothesis that political

behavior can be seen as a rational effort to maximize the prospects of electoral success, Gavin

Wright (1974: 30) argues that the New Deal spending per capita can be regarded as a result of

maximizing expected electoral votes. Both, Philip Grossman (1994) and Robert Inman (1988)

stress that the distribution patterns of central transfers to the U.S. states do not follow

necessarily motivations to correct inefficiencies of a decentralized tax system but rather

correspond to the "political capital" and bargaining power of state politicians and interest

groups.

Political expediency explanations have been also used to approach intergovernmental transfer

characteristics in developing countries. Stuti Khemani (2003) provides evidence from India

which emphasizes that fiscal transfers are significantly higher in those states where the

respective subnational government is affiliated to the national ruling party. In turn,

opposition-ruled states tend to receive notably lower fiscal payments. Additionally, the central

government appears to allocate greater resources to stronger represented states in the national

parliament. Finally, among partisan states, grants are notably higher in those where the

governmental party rules with a legislative minority and thus require a stronger support

(Khemani 2003: 27, Khemani 2004: 3). Alberto Porto and Pablo Sanguinetti (2001) highlight

significant imbalances regarding the ratio between the legislative representation and the

respective population amount of the Argentinean provinces in order to understand the

allocation of transfers. Over-represented provinces have been receiving comparatively higher

transfers from the national government than the average. Edward Gibson and Ernesto Calvo

(2000) also depart from the Argentinean case by focusing on the electoral dynamics between

1989 and 1995. They observe an increased public spending and patronage in economically

marginal regions while budget cuts where concentrated in economically prosperous ones.

According to the authors, these reforms were not solely driven by fiscal equalization

concerns. Moreover, the main reason can be attributed to the federal country structure where

poor and under populated regions are highly over-represented in the national Senate. By

providing copious fiscal transfers to these economically peripheral but politically valuable

regions and simultaneously shuffle of the fiscal costs to the economic forefronts, the ruling

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Peronist Party managed to build “peripheral coalitions” that assured the reelection of

President Carlos Menem in 1995 (Gibson and Calvo 2000: 33, 35). Other works have

emphasized the regulative potential of fiscal transfers in regard to the intergovernmental

power balance. Thus, national stakeholder can increase their bargaining power or boundary

control by reducing or withholding transfers to subnational incumbents (Eaton 2002, Wibbels

2005, Díaz-Cayeros 2006).

In sum, the referred literature suggests that political incentives are driving forces in the design

and execution of the intergovernmental grant allocation and thus function as distribution

conditioners. Therefore, the territorial revenue redistribution encompasses more than equity

and efficiency criteria. Two political conditioners are particularly valid in order to understand

the intergovernmental hydrocarbon revenue allocation in Bolivia: the subnational legislative

overrepresentation, malapportionment, and the party affiliation of subnational governments.

David Samuels and Richard Snyder (2001) describe malapportionment as a situation where

the shares of legislative seats of a subnational unit are manifestly disproportionate compared

to the shares of their population. This can lead to a disproportionally greater representation of

rather sparsely populated regions in the national legislative. Malapportionment constitutes the

annihilation of the ‘one man one vote’ paradigm and thus changes the decision-making

context of incumbent executives and legislators. The legislative overrepresentation has

particularly consequences in regard to the legislative and intergovernmental bargaining

(Samuels and Snyder 2001: 652), e.g. within the allocation of intergovernmental transfers.

Over-represented subnational units generally tend to receive more than their fair share of

spending from the central government (Turgeon and Cavalcante 2012: 2). Malapportionment

enables a “buy off”- situation where public spending and patronage is exchanged for political

support. Thus, over-represented territorial units constitute a better investment for central

governments. The payoff can be in form of legislative bargaining support in the national

congress or in form of electoral support (Turgeon and Cavalcante 2012: 2).

Samuels and Snyder’s comparative data set (78 countries) reveals striking results for Bolivia.

Bolivia has the third most-malapportioned upper chamber, merely surpassed by Argentina and

Brazil. Also in terms of lower chamber-malapportionment, Bolivia ranks among the top ten

countries, in Latin America solely surpassed by Ecuador (Samuels and Snyder 2001: 661,

662). Thus, malapportionment constitutes a significant political-institutional feature in Bolivia

that has to be considered in the study of the intergovernmental transfers and revenue

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distribution. More malapportioned regions are more attractive to the central government

because the indicated “buy off”-situation promises a better investment: relatively slight

expenditure for a comparatively higher weighting of votes in the legislature. This political

institutional feature increases the “political capital” of some regions and enables them to

strengthen their position within intergovernmental bargaining processes.

As Stuti Khemani (2003) indicates by reference to the Indian case, party affiliation likely

influences the central transfer allocation. Subnational governments tend to receive notably

higher transfer amounts if they belong to the national governing party. There are different

explanations. Departing from the hypothesis that an increasing public spending likely

motivates the voter base (Cox & McCubbins 1986), national governments tend to support

party affiliated subnational governments in their voter mobilization with higher fiscal

transfers. A second approach suggests that party affiliation can facilitate coalition building

between the different levels of government, especially if party discipline is strong. According

to Tulia Faletti (2010), these coalitions between national executives and governors or mayors

are essential in order to make central state reforms achievable. Against this backdrop, fiscal

transfers are an important instrument for national governments to ensure its influence on the

subnational level. Increased fiscal transfers are likely emphasizing partisanship and

reinforcing accountability of subnational officials towards their national counterparts.

The strategic potential of fiscal transfers can be used within the horizontal but also the vertical

revenue distribution. Under rational choice conditions, the central state – seeking to maximize

its influence and power across the country – will tend to transfer more resources to the scale

where the repercussions are likely to increase the state power. Jorge Martinez-Vazquez and

Andrey Timofeev (2009: 90) state more generally in regard to interest groups e.g. central state

politicians: “interest groups might also attempt to reshuffle the vertical distribution of state

powers towards the scale where that interest group (…) is more effective in exercising

influence”. Kathleen O’Neil (2003) argues along these lines, although departing from

electoral concerns of political parties within decentralization processes. Thus, a party will

tend to distribute political and fiscal power to the arena in which their political allies seem

most likely to gain control of it (O’Neil 2003: 1087).

The strengthening of the scale – e.g. fiscally – where particular the central government party

can exercise its influence best, has been well-documented for the Bolivia case (Prado Salmón

und Prado Zanini 2009, Vargas Villazón and Moreno Morales 2009, Paz Patiño, García Yapur

and Garcés Velásquez 2009, O’Neil 2004, Frank 2010). Gonzalo Vargas Villazón and Daniel

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Moreno Morales (2009: 250) observe an augmented use of scale-shifting since the 1990s.

Political actors in Bolivia have increasingly sought to readjust the scale relations and

competences in favor of the scale where their political project was supposed to be asserting in

the most efficient way. Jonas Frank (2010) provides vital evidence for the latest developments

under the Morales government. Departmental autonomy, a central claim of the Media Luna

Departments, has been persistently opposed by the President’s Party, Movimiento al

Socialismo, MAS. As the departmental elections in December 2005 confirmed – MAS could

only succeed in three Departments (Chuquisaca, Potosí and Oruro) – electoral victories were

hardly achievable on this scale. Confronting a notable loss of power in the light of

departmental autonomy, MAS abandoned the tenacious reluctance towards regional

autonomy, but favoring a multi-scalar decentralization. Against this backdrop, Frank

(2010:11) regards the creation of two new administrative scales (namely the Indigenous

Autonomous Territories and Regions), introduced by the new Constitution in 2009 and

financed by revenues assigned to the Departments, as a “maneuver of MAS to undermine and

hollow out the power of the Departments in a ‘divide-and-rule’ strategy”.

In sum, the reviewed literature suggests that legislative overrepresentation as well as

partisanship and electoral chances on the subnational level can shape the “political capital” of

some scales or regions that is likely to increase their strategic value. The selected approaches

are particular significant for the Bolivian case: both, malapportionment and subnational

partisanship, have been a central element to understand the intergovernmental dynamics in

Bolivia. This paper applies these theoretical insights to the intergovernmental hydrocarbon

revenue distribution in order to explain its political conditioners.

3. The Hydrocarbon Sector and its Fiscal Regime (Upstream)

The long standing emphasis on the extraction and processing of natural resources is a

historical characteristic of the Bolivian economy (Ruiz Gonzáles 1986: 183, Morales and

Sachs 1989: 60, Gustafson 2006: 360, Hinojosa et. al. 2010: 8). Against the backdrop of the

dominant role of the mineral sector in the Bolivian history, there has been a significant shift to

the hydrocarbon exploitation within the last decades. While until 2000 the hydrocarbon sector

contributed only around 10 per cent to the total export, gas and oil constitute the primary

export goods for the Bolivian state since 2004. Simultaneously, the hydrocarbon sector has

turned into the most important source of fiscal revenues. Today, gas and oil exports account

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for more than 40 percent of total exports, contributing around 6.5 percent to the GDP

(between 1990 and 2000 around 4.2 percent) and representing nearly 40 percent of total

Public Sector Income (CBH 2011: 44, Brosio 2012: 3) (see Figure 1).

Figure 1: Total Public Sector Income in Per Cent and Per Sector

The Hydrocarbon Law N° 3058 (Ley de Hidrocarburos N° 3058, LH 2005) from May of 2005

sets the principles and fundamental procedures for the Bolivian hydrocarbon sector. In fiscal

terms, the law establishes three types of payments to the state: royalties, payments to the

national treasury and an additional hydrocarbon tax, the Direct Tax on Hydrocarbons

(Impuesto Directo a los Hidrocarburos, IDH). Added up, all payments cannot be less than 50

per cent of the value of the total hydrocarbon production at the fiscal point (LH 2005, art.8).3

Table one provides an overview of the payment amounts and the beneficiaries.

Table 1: Hydrocarbon Revenue Levy and Distribution

The law distinguishes between the departmental royalties and the complementary national

royalties. The former is a royalty of 11 per cent over the departmental hydrocarbon production

at the fiscal point, favoring the producing Departments of Tarija, Santa Cruz, Cochabamba

and Chuquisaca. Latter is a 1 per cent compensational royalty over the national production

that is allocated to the non-producing Departments Beni (2/3) and Pando (1/3). Further, the

law determines a payment to the National Treasury (Tesoro General de la Nación, TGN),

amounting 6 per cent over the national production. The most important payment is the Direct

Tax on Hydrocarbons, IDH, of 32 per cent over the national production. This tax is distributed

to the non-producing Departments with a share of 12.5 per cent, to the producing Departments

with a share of 31.25 per cent and to the National Treasury with a share of 56.25 per cent. As

it will be shown subsequently, the distribution system of the IDH is complex due to its further

secondary distribution.

The IDH distribution is organized in different stages. The first stage distribution earmarks a

12.5 per cent share over the total IDH income to the producing Departments, a 31.25 per cent

share to the non-producing Departments and a 56.25 per cent share to the National Treasury.

The Hydrocarbon Law N° 3058 empowers the executive to determine the secondary

3 In May of 2006, President Evo Morales enforced by decree the third nationalization of the hydrocarbon sector

in the Bolivian history. The Supreme Decree (Decreto Supremo, DS 28701) established the renegotiation and

signing of cooperation contracts between the state-owned company YPFB and foreign oil companies. the total

states share could be increased from 50 per cent (18 per cent royalties and 32 per cent IDH) to a final and

current state’s share of 75 to 85 per cent (18 per cent royalties, 32 per cent IDH and 25 to 35 per cent YPFB-

participation) (Aramayo Ruegenberg 2009: 18, Velásquez-Donaldson 2007: 17, 19).

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distribution of the IDH to the following entities: National Treasury, Indigenous Aboriginal

Peasant Territories, Municipalities, Universities, Military, Police and others (LH 2005, art.

57) (see Figure 2).

Figure 2: IDH Distribution: First- to Fourth Stage before October 2007

While the allocation at the first stage remains regulated by the Hydrocarbon Law, the

allocation amounts on further stages have been modified in the last years, mainly by Supreme

Decrees. One of the most contentious legal changes was introduced by Supreme Decree N°

29322 from October 2007 that modifies the intra-departmental distribution of the IDH, before

then regimented by Supreme Decree N° 28421. The new decree reduces the Prefectures’

amount to 24.39 per cent while increasing the Municipalities’ amount to 66.99 per cent and

retaining the universities’ amount at 8.62 per cent (DS 2005 N° 28421, DS 2007 N° 29322).

Considering the high fiscal dependency on hydrocarbon revenues, particularly in the case of

Prefectures, this change signified a huge financial debilitation for idem.

In sum, the Bolivian hydrocarbon fiscal regime is highly centralized. In legislative as well as

operational and administrative terms, the national government is the lead executer while

leaving the subnational governments no significant competences in the three mentioned fields.

The Constitution, as well as the Hydrocarbon Law, clearly articulate that the overall control of

the hydrocarbon policies remain at the national level, both in legislative and operational

terms, through the respective national state organs (CPE 2009, art. 360, art. 362, and LH

2005, art. 12). Legal changes can be introduced by national laws or Supreme Decrees. Nor the

Constitution neither the Hydrocarbon Law assigns legislative and significant decision making

competences to the subnational levels. Further, the hydrocarbon revenue distribution is based

almost exclusively on criteria which do not take into account any demographic, economic or

social-policy considerations (see Figure 2). Moreover, the predominantly formula-based

distribution amounts are the result of legislative bargaining and thus representing the political

power relations in the Congress at the time the Hydrocarbon Law and the subsequent

Supreme Decrees were approved. The distribution of the IDH payment reveals an even clearer

evidence for missing transparency in terms of efficiency. The second and third stage

distribution among Departments, Municipalities and Universities as well as the criteria

regarding the distribution to the National Treasury is subjected to certain arbitrariness in the

sense that the fixed transfer amounts have to be regarded as legislative bargaining results,

corresponding rather to party political and to territorial interests. Most of the modifications of

the IDH allocation between 2005 and 2012 were predominantly made by the national

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government without the participation of subnational actors (Fundación Jubileo 2012). The

legal changes were introduced mainly by Supreme Decrees and approved by the national

Congress in which the governing party MAS holds an absolute majority of 53 per cent (after

the elections of 2009 even 64.2 per cent) (CLAS/ PDBA 2010). As it will be shown

subsequently, the highly centralized hydrocarbon fiscal regime enables the central

government to shape the transfer allocation in its favor. Put it differently, the hydrocarbon

fiscal regime pattern increases its own susceptibility for discretionary measures on behalf of

the central government.

4. The Hydrocarbon Revenue Distribution

Figure three provides an overview on the upstream payment amounts from the state-owned

company Yacimientos Petrolíferos Fiscales (YPFB) to the Bolivian state, including those

which are transferred directly to the Departments (Departmental Royalties and

Compensational Royalties).4 The IDH constitutes by far the biggest share of the YPFB

payments to the state. While until 2007 the amount accounted for around 473 MM USD the

IDH income between 2008 and 2010 almost doubled to an average of 941 MM USD. The

rising natural gas production since then has been boosting the amount to 1302 MM USD

(estimations for 2012: 1604 MM USD).

Figure 3: Payments of YPFB to the State per Payment Type in USD

In comparison to the royalty payments and the national participation, the IDH accounts

constantly for more than 60 per cent of the total hydrocarbon payments between 2007 and

2012. The immense share elucidates the predominance of the IDH in the income matrix of the

national as well as the subnational governments. Municipalities and particularly Prefectures

rely for the most part on those IDH payments.5

Figure four provides an overview in regard to the scale based (vertical) IDH distribution in

Bolivianos. It illustrates the stable increase of the IDH payments in absolute terms. However,

for the Prefectures this increase ends in 2007 with the implementation of the legal

modifications, stated in the previous section. In contrast, the Municipalities register an almost

4 The entire hydrocarbon gross production is delivered to the states owned company YPFB. Producing

companies receive a recovery amount for their costs of operation (between 15 per cent and 25 per cent of the

total production). The remaining hydrocarbon rent (gross value of production minus companies cost of

operation) is the amount subjected to the payments to the state. 5Nevertheless, for the producing Departments Tarija, Santa Cruz, Cochabamba and Chuquisaca as well as for the

non-producing, but compensated Departments Beni and Pando, the most significant hydrocarbon revenue

payments derive from the departmental royalties.

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doubled IDH amount from 2008 to 2010. These amounts have reached records accounting for

more than 4208 MM Bolivianos in 2011 and 4760 MM Bolivianos in 2012 (preliminary). In

turn, the IDH payments for Universities have remained stable since 2006. Considering the

relatively stable expenditure burden, Municipalities have been successively equipped with

more finances, whereas Prefectures have suffered notable budget cuts while their expenditure

burden even increased (Frank 2010: 8, Monasterio 2010: 43, Fundación Jubileo 2012).

Figure 4: IDH Distribution among State Levels 2005-2012 in MM Bolivianos

Statements on the uneven horizontal hydrocarbon revenue distribution become much more

meaningful by considering the population density in each Department. This association is

crucial to understand the economic and political repercussions of the revenue sharing system.

Population density is one important benchmark to measure the comparative revenue transfer

coverage, especially in intradepartmental expenditure terms.

Correlating the population amount of each Department with the respective absolute

hydrocarbon revenue transfers presents striking insights on the uneven allocation across the

country (see Figure 5). Since the implementation of the Hydrocarbon Law in 2005, Tarija and

Pando are the Departments that receive the highest per capita hydrocarbon revenue transfers.

While at the beginning almost identical, the per capita transfer amount for Pando (¢: 5782

Bol.) is constantly ten per cent higher than the respective amount of Tarija (¢: 3963 Bol.).

Figure 5: Total Hydrocarbon Revenue Transfer between 2005 and 2012 Per Capita in

Bolivianos and Percent (Average)

Although a long way ahead, the third most benefited Department is Beni with an average

transfer of 1238 Bolivianos per capita. Oruro (¢: 907 Bol.), Chuquisaca (¢: 780 Bol.) and

Potosí (¢: 519 Bol.) follow. Cochabamba (¢: 392 Bol.), Santa Cruz (¢: 363) and La Paz (¢:

230 Bol.) are by far the least beneficiated Departments in regard to the hydrocarbon per capita

transfers. Tarija and Pando account together for more than 70 per cent of the total

hydrocarbon per capita transfers. These exorbitant amounts can be explained with the high

royalty payments for Tarija and the high compensation royalties in comparison to its low

population density for Pando (least populated Department). Due to these compensation

royalties, also Beni, the second less populated Department, receives still notably more per

capita revenues than the remaining Departments. Including Tarija and Pando, the national per

capita transfer average reaches 1674 Bolivianos. Excluding both Departments decreases the

national average to 633 Bolivianos. Nonetheless, La Paz still receives 5.5 times less per capita

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transfers than the Department of Beni and respectively 25 times less than Pando. The per

capita hydrocarbon transfer amount of Santa Cruz is 15 times smaller compared to Pando’s

and almost 10 times smaller than the transfers to Tarija. How can these striking fiscal

imbalances, resulting from the hydrocarbon per capita revenue distribution, be explained? The

subsequent section aims to give an answer to this question by correlating selected distribution

determinants to the intergovernmental revenue transfer amounts.

5. Political Economy Analysis of the Hydrocarbon Revenue Sharing System

5.1 Horizontal Revenue Allocation

Socioeconomic Indicators (Extreme Poverty Rate and HDI) and Transfers

According to the Constitution of 2009 (CPE) and the National Plan for Development of 2006

(Plan Nacional de Desarollo), hydrocarbons are a natural resource of strategic character for

the country’s economic development and the struggle against poverty and social inequality

across the territory. This reading implicates that the revenue allocation should be determined

by poverty and economic development criteria. This section measures the influence of those

criteria by comparing selected socioeconomic indicators with the hydrocarbon revenue

transfer amount for each Department. As indicators we will use the extreme poverty rate

(UDAPE 2010) and the Human Development Index, HDI (PNUD 2004).

The basic analytical framework consists of an exploratory data analysis with indicating the

extreme poverty rate in percent and representing the HDI per capita for each Department .

Variable describes the poverty rate of the Department in relation to the national average of

the extreme poverty in per cent . Variable describes the HDI in each Department

compared to the national average of the HDI per capita .

The poverty function is depicted as

The HDI function is depicted as

To describe the impact of both independent Variables and on the hydrocarbon revenue

distribution we relate them to the dependent Variable that represents the hydrocarbon

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revenue transfer amount per Department in comparison to the national hydrocarbon

average revenue transfer amount in per cent .6

The transfer function is depicted as

We computed the ratio extreme poverty vs. transfer (% of national average)

and the ratio HDI vs. transfer (% of national average)

The results of the exploratory data analysis are presented in Figure six. The first set

indicates a notable negative association between the extreme poverty rate and the

hydrocarbon revenue transfer amount. This association disappears when Pando and Tarija are

excluded from the sample. In this case there is no association between both variables. Further,

we can observe a cluster formation: Santa Cruz is the department with the lowest poverty rate

and a relatively low per capita transfer. Beni and Oruro as well as Cochabamba and La Paz

have similar extreme poverty rates. However, Cochabamba and La Paz receive significantly

lower per capita transfer amounts, even compared to the Department of Santa Cruz. La Paz,

although presenting the third highest extreme poverty rate, is the Department that obtains the

lowest transfer amount. Chuquisaca and Potosí are the Departments with the highest extreme

poverty rates. Nevertheless, they receive lower per capita transfers compared to Beni and

Oruro. In the case of Potosí, the poorest Department, the transfer amount is almost equivalent

to the per capita transfer amount of Santa Cruz, the Department with the lowest extreme

poverty rate. Tarija and especially Pando are by far the biggest hydrocarbon transfer receivers

although their poverty rates are comparatively low. While the extremely high shares for Tarija

can be explained by taking into account the high royalty payments, the even higher payments

to the less populated Department Pando eludes any logical explanation.

Figure 6: Socioeconomic Indicators (Extreme Poverty Rate and HDI) vs. Transfers

6 The measured transfers include IDH payments, royalties and compensation payments.

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The second data set shows almost identically the opposite. There is a positive

correlation between the HDI and the hydrocarbon transfer amount per capita. Again,

excluding Pando and Tarija this association disappears. Thus, the results correspond to our

first set .

The model presents quit clear and convincing results. The socioeconomic indicators extreme

poverty rate and HDI do not constitute any distribution criteria at all. Departments with a

particular high poverty rate and a notably low HDI are receiving quit as much, if not even

lower, per capita transfers than Departments with lower extreme poverty rates and a higher

HDI. Pando and Tarija, although belonging to the three Departments with the lowest extreme

poverty and the highest HDI, are by far the leading hydrocarbon transfer receivers. Despite of

presenting the third highest extreme poverty rate, La Paz is the Department with the lowest

per capita hydrocarbon transfer. Herby, we proof that instead of promoting a significant

poverty reduction, the hydrocarbon revenue sharing system is even reinforcing poverty and

inequality by providing notably low or even lower per capita transfers to the Departments

with the highest extreme poverty rates and the lowest HDI.

Political-Institutional Indicators (Malapportionment) and Transfers

As already indicated in section two, Snyder and Samuels (2001) provide data on the high

degree of malapportionment in the Bolivian upper and lower chamber. This section compares

the legislative over-representation of each Department with the hydrocarbon transfer amount

. Thereby, we aim to measure the impact of the legislative over-representation in the

Congress (single-member and multi-member ) and the Senate on the

hydrocarbon transfer amount per capita .

The malapportionment-function for the Congress is depicted as

The malapportionment-function for the Senate is depicted as

16

Again we computed the ratio ,

, , malapportionment vs. transfer (% of

national average)

Figure seven presents the findings of the data model. The first set indicates a positive

correlation between the level of legislative over-representation of the single-member

representatives and the hydrocarbon transfer amount per capita. Santa Cruz, Cochabamba and

La Paz, the less malapportioned Departments, receive the merest transfers while Beni and

Oruro, with a stronger single-member malapportionment level, receive respectively higher

transfer amounts. The association keeps positive after excluding Tarija and Pando. Latter is by

far the most malapportioned Department and, as indicated, the largest recipient of

hydrocarbon revenue transfers per capita.

Figure 7: Political-Institutional Indicators (Malapportionment) vs. Transfers

The second set indicates an even stronger association between the multi-member district

malapportionment and the revenue transfer amount per capita. Thereby, the clusters remain

equal. We observe the same patterns in regard to the ratio between senator over-representation

and per capita transfers. Also this second model presents highly meaningful results. For both

legislative chambers, we observe a convincing association between the level of over-

representation and hydrocarbon revenue transfer per capita. The most malapportioned

Departments, with the exception of the main hydrocarbon producer Tarija, receive the highest

revenue transfers. The least malapportioned Departments Santa Cruz, Cochabamba and La

Paz obtain the lowest transfer amounts per capita.

This section has examined the uneven horizontal hydrocarbon revenue distribution between

the nine Bolivian Departments by introducing two sets of independent variables: the

socioeconomic variables, extreme poverty rate and HDI, and the political variable of the

malapportionment. The exploratory data analysis has originated significant statements on the

influence of these independent variables on the hydrocarbon revenue transfer per capita: First,

the socioeconomic indicators extreme poverty rate and HDI do not constitute any distribution

criteria at all. Departments with a particular high poverty rate and a notably low HDI are

receiving quit as much, if not even lower, per capita transfers than Departments with lower

extreme poverty rates and a higher HDI. Second, the political indicator malapportionment

17

correlates positively with the hydrocarbon revenue transfer amount per capita. The

Departments that are over-represented in the national legislative receive higher transfer

amounts per capita than less over-represented ones.

Following the surveyed literature (see section 2), the presented results provide empirical

support for the political economy assumptions on the intergovernmental revenue allocation.

On the one hand, the data indicates that the hydrocarbon revenue allocation in Bolivia is not

based on equity criteria in order to ensure an even distribution across all regions, as it is

postulated by normative fiscal federalism theories. On the other hand, the “political capital” of

each Department, namely its legislative representation and the respective weighting of votes,

seems to function as a distribution determinant. The political-institutional feature of the

malapportionment creates a situation where the “political capital” of some departmental units

– in the case study the over-represented Departments Pando, Beni, Oruro – is higher than of

other Departments: the less over-represented Departments of Santa Cruz, Cochabamba and La

Paz.

This study assumes this political-institutional revenue determinant to have highly influenced

the creation of the Bolivian hydrocarbon revenue sharing system. As described in section

three, most of the hydrocarbon revenue transfer amounts are formula based. Simultaneously,

we stated that these allocation formulas are bargaining results that reflect the political power

relations between the Bolivian Departments. With the insights gained in this section, we have

defined these intergovernmental power relations on the horizontal level: more malapportioned

Departments are more powerful in the political bargaining due to their higher “political

capital”. This crucial feature is reflected in the hydrocarbon transfer pattern. Thus, we provide

a political economy explanation for the uneven hydrocarbon revenue distribution between the

Bolivian Departments.

5. 2 Vertical Revenue Allocation

This section seeks to provide a political economy explanation for the uneven vertical revenue

allocation and particularly for the latest changes of the hydrocarbon fiscal regime. In a rather

simple model, we compare the political affiliation of the different administrative scales in the

nine Departments with the revenue transfer amount to each scale. For the measurement on the

departmental level, we recur on the results of the prefectural elections in 2005 and 2010

18

(CLAS/ PDBA 2010). For the municipal scale we use results of the municipal elections from

2010 (CLAS/ PDBA 2010). In particular, we consider the amount of mayors that are provided

by the governing party MAS.

The ruling party MAS holds power in the Prefectures of Oruro, Potosí, Chuquisaca (since

2010 also in La Paz, Cochabamba and Pando). On the contrary, the Prefectures of the Media

Luna Departments Santa Cruz, Tarija, Beni are politically opposed. This pattern changes

dramatically when we consider the representation of MAS at the municipal level.

Figure eight shows the political affiliation according to the scale level. The first map indicates

the addressed political power relations on the departmental level. The second map shows the

respective results for the municipal scale. Taking into account the number of affiliated mayors

in the respective Departments, MAS is definitely better represented at the municipal level

than on the departmental scale.

Figure 8: Political Affiliation According to the Scale Level

In the municipal elections of 2010, MAS won 228 of the total 337 mayoralties, followed by

the party Movimiento sin Miedo with 22 and the lowland opposition movement Agrupación

Verdes with only 15 mayoralties. In Chuquisaca, La Paz, Potosí, Oruro and Cochabamba,

MAS succeeded with a vast majority. In Oruro and Cochabamba, MAS candidates were

elected with more than 75 per cent of the majority in more than 30 per cent of the

Municipalities. But also in the opposition Departments of Santa Cruz and Tarija, MAS

prevailed in the appointment of mayors. Only the Departments of Beni and Pando constitute a

slight exception. In former, MAS as won as much mayoralties as the opposition party Primero

Beni. Still, the voting tie places MAS in a better position compared to the political

representation on the departmental scale. It is only in Pando where the governing party was

narrowly defeated with 6 against 9 mayors, won by Consenso Nacional (FAM 2010).

As indicated, Supreme Decree N° 29322 lowered the Prefectures IDH amount from initially

56.9 per cent to 24.4 per cent while the Municipalities were fiscally strengthened by

increasing their IDH budget from 34.5 per cent to 67 per cent (section 3). Considering the

importance of the IDH transfer in the public finance matrix of the Prefectures, this

reallocation signified a huge debilitation for item in financial terms. Taking into account the

additional legal modifications, the overall IDH amount of Prefectures where lowered from

33.2 per cent in 2007 to 9.9 per cent in 2010. In the same timeframe the overall IDH amount

for Municipalities increased from 26.5 per cent to 34.8 per cent. Concurrently, the expenditure

19

burden for Municipalities remained almost equal while the burden for Prefectures

comparatively ascended. Thus, the reallocation of revenues cannot be regarded as an effective

decentralization measure. Moreover, it notably decreases the financial and political room for

maneuver of the Prefectures.

While observing this enormous budget increase for the municipal governments, we

simultaneously detect an increasing political representation of the governing party MAS on

the municipal scale by winning the majority of mayoralties in barley every Department.

Although the approval of the legal modifications on the IDH allocation in 2008 does not

temporarily coincide exactly with the Municipal elections in 2010, we assume that the

emerging trends on the favorable electoral chances were taken into account on behalf of the

ruling party MAS in the revenue reallocation processes.

In sum, this section addressed the uneven vertical allocation of the hydrocarbon revenues,

particularly in the light of recent intergovernmental allocation changes. Relating the

subnational party representation to the hydrocarbon allocation transfers generates convincing

findings which are indicating a correlation between both variables. We observe a positive

association between the increasing party representation of the governing Party MAS on the

municipal scale and the notable rises of hydrocarbon revenue transfers to idem. This

correlation can hardly be explained with efficiency or decentralization arguments.

Simultaneously, we notice a vigorous decrease of hydrocarbon revenues to Prefectures, the

scale on which MAS is challenged by relatively modest electoral results and particularly by

strong regional actors that are fueling grave autonomy movements.

The findings coincide with the reviewed literature in section two. It suggests that the party

affiliation likely influences the central transfer allocation. The governing party will tend to

distribute political and fiscal power to the scale where it can exercise its influence best. This

pattern has been observable in the Bolivian decentralization process in the 1990’s and, as our

results indicate, can be enlarged to the hydrocarbon revenue distribution. Thus, subnational

party representation appears to be a deciding allocation criterion. Resting upon the conducted

analysis, this study stresses that the vertical hydrocarbon allocation is significantly shaped by

the subnational representation of the national governing party. Considering the precarious

fiscal dependence on central transfers, the central government, as leading revenue distribution

administrator and legislator, can use the revenue allocation in its favor by fiscally strengthen

the more affiliated municipal scale and debilitating the autonomy seeking departmental

governments. Therefore, from the perspective of this study, the subnational party

20

representation constitutes an important political economy conditioner for the uneven vertical

hydrocarbon transfer allocation and particularly for the recent changes in the

intergovernmental distribution patterns.

6. Conclusion

This study identifies two major features of the Bolivian hydrocarbon revenue sharing system

that are creating territorial inequalities in fiscal terms. First, the analyzed data on the

horizontal revenue transfer allocation shows an extremely high level of imbalance. This

becomes particular evident by associating the total transfer amounts with the population

density. Some Departments, as Pando and Tarija receive hydrocarbon transfers up to 15 times

higher than the comparatively densely populated Departments of Cochabamba, Santa Cruz

and La Paz. This data clearly proofs that the per capita amount does hardly constitute a

criteria for the hydrocarbon revenue distribution. Second, the vertical hydrocarbon revenue

allocation, based mainly on the IDH transfers, is marked by an increasing disparity,

particularly since the distribution modifications at the end of 2007. Since then, the IDH

budgets for Prefectures have decreased notably while the Municipal amounts have more than

doubled. At the same time the expenditure burden for Municipalities remained rather stable

while the expenditure burden for Prefectures even increased. Hence, as in the horizontal case,

there is no rational argument that could explain this transfer shift from an efficiency and

equity point of view.

Departing from these significant insights we pointed to the criteria that are decisive for the

unbalanced vertical and the horizontal hydrocarbon revenue allocation. To approach this

issue, we modeled a comparative data set with two political-institutional variables,

malapportionment and party affiliation, and a stable variable, the hydrocarbon transfer

amount. The obtained results provide striking evidence in regard to the raised hypothesis

about the decisive influence of political-institutional conditions on the hydrocarbon transfer

allocation.

First, regarding the horizontal hydrocarbon revenue allocation, we display a notable positive

association between the level of legislative overrepresentation and the amount of hydrocarbon

transfer to the Departments. In contrast, the variables extreme poverty and HDI exhibit no or

even a negative association. This observation does not only proof the claimed absence of

efficiency and equity criteria but, in addition, might explain the hardly comprehensible

21

allocation formula in the sense that the association defines the “political capital” and the

connected bargaining power of each Department in the legislative creation of the revenue

sharing system.

Second, in order to explain the notable shift of revenue transfers from the prefectural to the

municipal level, we subjected the political representation of the governing party on each scale

to the hydrocarbon transfer amount. The data exhibits a positive correlation for both cases.

While MAS increased its subnational representation at the municipal scale, the departmental

level still constitutes the scale where the governing party is challenged by relatively modest

electoral results and by strong regional actors. The shifts in the vertical hydrocarbon

allocation correspond to these electoral trends: in the examined timeframe the IDH budgets

for Prefectures have been decreasing notably while the Municipal amounts have more than

doubled. In this line, the central government uses the revenue allocation in its favor by fiscally

strengthening the more affiliated municipal scale and debilitating the autonomy seeking

departmental governments. Thus, the hydrocarbon revenue sharing system functions as a

mechanism of territorial control and political mobilization.

In sum, this study detects important features of the hydrocarbon revenue sharing system in

Bolivia that help to explain why idem creates significant territorial fiscal imbalances that in

consequence foster regional inequalities. We highlight two political economy conditioners

that seem to evoke the unbalanced hydrocarbon revenue distribution. In more general terms,

we exemplify how political incentives can influence the creation and functioning of a revenue

sharing system. This study focuses on a resource abundant country with strong regional

autonomy movements. Considering the numerous states with similar characteristics, the

present study might provide useful insights for other cases in regard to the question on how

the revenue distribution can create and increase regional inequalities and conflicts,

particularly in resource abundant countries.

22

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The Bolivian Hydrocarbon Revenue Sharing System and its Impact on Territorial Inequalities

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