A Velasquez Final Version Inequality Institutions

Institutions and inequality in the Bolivian multiethnic society
(1996-2018)
Iván Omar Velásquez-Castellanos 1 2

trAndeS
Mayor de San Andrés University (UMSA)
Ludwing Torres Carrasco 3

La Salle University
Abstract
Egalitarian societies, strong and solid institutions are considered as the key element for economic development; however, countries
differ greatly in the quality of their institutions infrastructure, or due to the absence of better opportunities in the labor market and also
due to the difficulty of accessing their levels of inequality. Institutions represent and constitute the symbolic level of organizations; they
are sets of rules, norms, laws, written or informal, that govern the relations of the organizational structure of the society and form
positive or negative relations which affect the well-being between the members that play different roles in social organizations such as
the family, the school and other institutionally structured areas of organizational life: politics, economics, religion, communications and
information and leisure. Social inequality, also known as economic inequality, is a socio-economic problem resulting from the poor
distribution of income and / or income in the social area. Social inequality is an expression that reflects the discriminatory treatment
suffered by a group of people, but favors other strata of society, generally minorities. Thus, social inequality occurs in undeveloped
countries such as Bolivia, but also occurs in countries with high levels of development, in both cases it can be the product of lack of
education, access to welfare variables, cultural assets, or to health services, or to education, which usually affects an important group of
the population. Social inequality also generates other types of inequalities such as gender inequality, racial inequality, and regional
inequality, among others. In the last years Latin America, has had 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 issues 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. In this research for the Bolivian case, the data analyzed with household surveys for the period 1996-2018 show high levels
of inequality accompanied by low institutional quality; over time. Moreover, on the same period 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, O43, D70

Key Words: Institutions, Inequality, Governance, Causality, Bolivia
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 A first version of this document was prepared for delivery at the 2019 Congress of the Latin American Studies Association, Boston,
USA, May 24 - May 27, 2019.

3 Questions and comments: ludwingtorres@hotmail.com
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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 Gini4 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.
Located in the center of South America, the Plurinational State of Bolivia is the most unequal country after
Brazil, Colombia and Chile in terms of income distribution, almost 50 percent of its population lives in poverty,
although the boom of the last decade reduced extreme poverty, it is still high compared to the indicators of the
region, access to health and education is highly inequitable, despite its enormous wealth of natural resources:
mainly minerals and hydrocarbons. Bolivia, has a population according to the National Census of Population
and Housing (CNPV) of November 2012 of 10.38 million inhabitants, with a territory of about 1.1 million km2
borders with several countries of South America. A characteristic fact of the Bolivian population is its native
and indigenous composition of more than 50 percent, which in the rural area reaches 68.3 percent. The new
Political Constitution of the State (CPE) promulgated on February 7, 2009 in its Article 5, recognizes 36
indigenous nations or indigenous groups in the country, however, the most important are the Quechua and
Aymara, which together add up to 56 percent of the population, so Bolivia is constituted in a multi-ethnic
society (Velasquez, 2017).
According to estimates made by the Economic Commission for Latin America (ECLAC), the total fertility rate
for the five-year period 2000-2005 was four children per woman, which until 2012 has remained unchanged.
Likewise, estimates made by the National Survey of Demography and Health of 2008 (ENDSA, 2008) place it
in 3.5 children per woman in 2008. Around 35 percent of the population is under 5 years old and only 4.5
percent is older 65 years old. With regard to population concentration, just over 71 percent of the population
is concentrated in three of the nine departments in which Bolivia is politically divided: 26.38 percent in La Paz,
26.72 percent in Santa Cruz and 18.65 percent in Cochabamba, according to the results of the National
Population and Housing Census (CNPV) of 2012.
In general, the population density is low (7.5 inhabitants per km2). Urban areas in Bolivia increased their
demographic importance by 23 times more than in the twentieth century and today they concentrate 67 percent
of the total population. According to the census (CNPV) of 2012, he 62 percent of the total population aged
15 or over is recognized as a member of one of the so-called native peoples: 30.8 percent as Quechua, 25.2
percent as Aymara and 6 percent like Guarani, Chiquitano, Mojeño or other.
4The 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 proxy indicator, which measures the inequality of the income.
2
In general, progress in some areas of human development in Bolivia since its founding between 1825-2018 has
been extremely disappointing, especially in prolonging the life of the population, increasing years of schooling
or literacy, its advances or improvements have been considerably slow and sporadic throughout that period.
Regarding the qualitative aspects of Bolivian well-being, such as the increase in their per capita income, the
reduction of poverty, the reversal of inequality, aspects related to equity and environmental quality have proven
to be problematically complicated to improve, and they have lagged in comparison to international standards.
Undoubtedly, a better quality of life for people in Bolivia requires that the country generates greater and better
income, this occurred in different periods where the rise in the prices of minerals first, and gas afterwards,
improved national income. However, these revenues were not translated into advances in welfare, nor were
those resources distributed equitably, showing that poverty in Bolivia has historically been stubbornly difficult
to reduce, to this, we must add the high inequality (income, health and education) and low social mobility
among different sectors of the population that trap their opportunities and reduce their expectations of well-
being (Velásquez, 2017).
Concerning institutionalism, political instability, coups, corruption and short-term public policy, made advances
in human development imperceptible, trapping the country in impoverishing growth. Empirical evidence shows
that progress in well-being requires adequate public policies and strong institutions aimed at achieving sustained
growth. Achieving higher income and a better quality of life also requires much more in different aspects such
as: Improving social indicators, including health, nutrition and education, establishing equal opportunities in
education and employment, maintaining a cleaner environment and more sustainable, establish a more impartial
judicial and legal system, promote better and greater political and civil liberties, strengthen institutionalism from
trustworthy and transparent institutions, finally: freedom necessary to have access to an enriching and varied
cultural life are some issues that are urgently needed to resolve to guide Bolivia towards development.
Regarding the institutions, their importance for economic development has been extensively investigated from
different disciplines and there is vast empirical evidence that highlights the fact, that institutions matter and are
key to development, but in Latin American societies it is one of the aspects that they need to be strengthened
for their institutions are so weak and ineffective to face development problems. According to the Andean
Development Corporation (Álvarez, F., Eslava, M., Sanguinetti, P., Toledo, M., Alves, G., Daude, C., & Allub,
L., 2018) three out of four citizens in Latin America, have little or no confidence in their governments and their
institutions. And about 80 percent believe that corruption is widespread in public institutions. These figures
have deteriorated from levels of 55 percent and 67 percent in 2010, respectively. Citizen distrust grows and is
leading to a disconnection between society and public institutions, thus putting social cohesion at risk and
weakening the social contract. Likewise, the Development Center of the Organization for Economic
Cooperation and Development (OECD, 2018), the United Nations Economic Commission for Latin America
and the Caribbean (ECLAC, 2018), and CAF (2018) highlight that after five years of economic slowdown and
a two-year recession in 2015-2016, Latin America is on a smooth recovery path, however the growth and
income boom of the past decade contain high heterogeneity in the region, with countries in Central America
that stand out against the growth rates of Mexico, South America, and the Caribbean. Likewise, the OECD,
ECLAC and CAF highlight the fundamental role that institutions play in overcoming the trap of middle income
- the slowdown in growth that takes place after reaching average income levels - in which most of the economies
of Latin America and the Caribbean. Countries in other regions that successfully overcome this trap invested
in strong institutions, deepened their integration with the world economy and, in some cases, benefited from
significant external financing to support public investment (Álvarez, F., Eslava, M., Sanguinetti, P., Toledo, M.,
Alves, G., Daude, C., & Allub, L., 2018)
The weakening of the region's economic performance in recent years has had an impact on living standards
and could jeopardize the remarkable socio-economic progress of previous decades. Today, 23 percent of Latin
Americans still live below the poverty line, and about 40 percent belong to the vulnerable middle class.
According to CAF (2018), the rapid expansion of the middle class, stands out as one of the main socio-
economic transformations of recent times in Latin America and the Caribbean. 34.5 percent of the population
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could be considered as a consolidated middle class in 2015, above 21 percent in 2001. If subjective measures
of belonging to social classes are used, even more Latin Americans consider themselves as "middle class”,
although their income level would place them in the lowest income category. The influence of the middle class
on the political agenda, driven by higher aspirations, rising expectations and changing demands, may be even
greater than statistics suggest and explain the growing dissatisfaction with the quality of public services and
institutions.
The CAF (2018) in its annual report “Economic Outlook of Latin America 2018, Rethinking Institutions for
Development” underlines that trust in institutions, as well as satisfaction with public services, has deteriorated,
thus weakening the social contract in the region. For example, the proportion of the population satisfied with
health services fell from 57 percent in 2006 to 41 percent in 2016, being well below OECD levels - close to 70
percent. In the same way, satisfaction with the education system dropped from 63 percent to 56 percent for
that period. This contributes to social unrest and the unwillingness of citizens to pay taxes - also called “tax
morale”. In 2015, 52 percent of Latin Americans, 6 percentage points more than in 2011, said they were willing
to evade taxes if they had the chance to do so. Social discontent with public services is even greater for the
poor and vulnerable population because they cannot access other services of better quality, generally more
expensive and provided by the private sector.
In this regard and with respect to institutions, its importance for economic development has been extensively
investigated from different disciplines and there is vast empirical evidence that highlights the fact, that
institutions matter and are the key to development, but in Latin American societies it is one of the aspects that
need to be strengthened due to how weak and ineffective its institutions are to face development problems.
Douglas North (1981) along with other economists was one of the precursors who analyzed the role and
operation of development institutions, North based on neoclassical theories - according to which institutions
are efficient - focused his research on redefining the relationship between economy and institutions North
understood by institutions the formal rules (constitutions, laws, property rights) and informal (taboos, customs,
traditions, codes of conduct) that contribute to maintaining law and order in a society. In his research he tried
to explain why states produce rules that do not necessarily stimulate economic growth and development. In his
book Institutions, Institutional Change and Economic Performance (1990), he describes the nature and
importance of the institutional framework and how its dynamic evolution is crucial to explain the economic
success or failure of countries. It also emphasizes the role history plays and institutional changes in long-term
economic development. And it advocates the need to integrate social sciences and promote interactions
between economics, psychology, political science and sociology to understand and explain institutional change
and its implications.
With the emergence of populist movements and the deterioration of institutions in the last decade in Latin
America, there is no doubt that we are in a period of radical change in democratic institutions and that the
theories cited are once again topical. Given the weakening and deterioration of the institutions of the last period,
economic inequality, migration, disruption caused by new technologies and / or the emergence of China as a
world factory with its unfair competition with subsidies have been identified as guilty, low wages, etc. All these
factors could be described as short term. However, the dynamics of change in the institutions that govern us
and by which societies are governed, are intrinsic factors that interact with history, with the economy and with
cultural changes. These interactions could be the basis of deeper explanations of the social reality of our time.
Undoubtedly, democracy is supported by institutions and political actors that must play their role, so, that the
State meets the needs and expectations of citizens. In a democratic society it is vital that the brakes and
counterweights system function properly to create a balance in the economy. The political power exercised
without control or accountability runs the risk of being corrupted and acting abusively. Therefore, in a political
system that boasts democratic, issues such as the division of public powers, the existence of strong control
bodies, the critical and objective work of the press and the exercise of responsible citizenship, are essential.
4
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.
For the current study, it is the data that demarcate the conceptualization of institutionalism, 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
endogenous response to the change of a parameter of interest, to reason and contrast a structural trend over
time. In this way, this document consist on the following, after the introduction in section 2 we present a
literature review, the modeling that feeds the relations between institutions and inequality is presented in section
3, element that provides the guideline for the empirical testing strategy that serves to respond to the research
question, which is developed in section 4, giving the specification of the data in section 5, the main findings are
presented in section 6, and finally the conclusions and remarks are presented in section 7.
2. The Literature Review

For the proper functioning of a society, the role of institutions is a key to generate development. Thus,
traditional political institutions such as: the legislature, the legal system, political parties up to the State establish
a normative ordering based on the constitution and laws that govern the conduct of the persons and societies,
but there are also other institutions such as economic companies such as business, religious institutions such
as the church, social institutions such as unions or clubs, or various institutions such as Non-Governmental
Organizations (NGOs), all of them have played a central role to a greater or lesser extent in economic and
social development. Therefore, the relevance of the institutions lies in the government, without taking into
account the perspective or type of government, in which they form the main means and pivot through which
is structured not only democracy, the political system, but also, and in a special way, our political practices,
behaviors, rules, norms, routines, codes and naturally the processes of socialization, participation and social and
political interaction.
In this sense, institutions represent and constitute the symbolic level of public organizations as private; they are
sets of rules, norms, laws, written or informal, that govern the relations of the organizational structure of the
society and form positive or negative relations that affect the well-being between the members that play
different roles in social organizations such as the family, the school and other institutionally structured areas of
organizational life: politics, economics, religion, communications and information and leisure. In this
investigation we will follow the definition of institutions according to North, D. (1981) who understood by
institutions the formal (constitutions, laws, property rights) and informal rules (taboos, customs, traditions,
codes of conduct) that contribute to maintaining the law and order in a society and influence economic
development and growth.
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
5
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 to promote
redistributive improvements, with institutional improvements; similar findings achieved in the works of
(Rodrik, 1999), (Di Tella and Dornbusch, 1989), (Wallerstein, 1980).
A new literature has generated different analytical models where economic conditions affect institutional
quality. In this sense, Hoff and Stiglitz (2004) and Sonin (2003), suggests that an equal distribution of income
is a more fertile ground for good institutions5. Whereas the former presents a static framework of institutional
subversion, this paper is more closely related to Sonin (2003), whose dynamic model suggests an institutional
vehicle for the adverse effect of inequality on growth whereby low-quality institutions are associated with
wasteful redistribution toward the rich6. While similar, the mechanism proposed here identifies the intensity of
rent seeking from a public asset—such as technological knowledge or a natural resource—as a source of low
institutional quality (Chong and Gradstein 2004).
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 institutionalism 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
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 who 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.7
5 Some recent work from Glaeser, Scheinkman and Shleifer (2003) for a more micro-based model and Gradstein (2004), where
democracy is viewed as a commitment device to ensure high-quality institutions (Chong and Gradstein 2004)
6 Recent research underlines the importance of institutions for economic performance, invariably finding that the rule of law, political
stability, and respect for property rights enhance economic growth. See, for example, Easterly (2001, 2002) Easterly and Levine (1997),
Hall and Jones (1999), Knack and Keefer (1995), Mauro (1995), and Rodrik, Subramanian and Trebbi (2002) (Chong and Gradstein
2004).
6
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, according to the model proposed on the Annex 2. 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 (see Annex 2):
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 factors7 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.
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.
7 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
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 2018.
Household surveys have as basic units of sampling households, but as units of analysis it is 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, 2017 and 2018; all the MECOVI Surveys 1999-2002, the Continuous
Household Survey 2003-2004, as well as the Household Surveys from 2004 to 2018, 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.
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)8, (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 Mastruzzi9, 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 is 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
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).
8 The Gini index is the Gini coefficient expressed as a percentage, and is equal to the Gini coefficient multiplied by 100.
9 For more information about WGI, see: https://bit.ly/2W1E6h8
8
(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 quality10.
(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 freedom 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 represent a better
institutional environment.11
5. Results found
5.1. The level of Inequality

Social inequality, also known as economic inequality, is a socio-economic problem resulting from the poor
distribution of income and / or income in the social area. Social inequality is an expression that reflects the
discriminatory treatment suffered by a group of people, but favors other strata of society, generally minorities.
Thus, social inequality occurs in undeveloped countries such as Bolivia, but it also occurs in countries with high
levels of development, in both cases it may be the result of lack of education, access to welfare variables,
infrastructure, or due to the absence of better opportunities in the labor market and also because of the difficulty
of accessing cultural goods or health services or education that usually affects an important group of the
population. Social inequality also generates other types of inequalities such as gender, racial and, regional
inequality, among others.
In Bolivia, poverty is a social problem that affects a sample of the population (Table 1), 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 like Bolivia 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. At the
Latin American level, Bolivia has been one of the countries with the greatest inequality in the region, however,
vertical inequality (Graph 1) - measured by income and asset distribution among individuals - has significantly
reduced in recent years especially in the bonanza period between 2006 and 2013. The new Political Constitution
of the State (CPE) promulgated on February 7, 2009 in its Article 5, recognizes 36 nations or indigenous peoples
in the country, however, the most important are the Quechua and Aymara, which together represent 56 percent
of the population, so Bolivia is a multi-ethnic society.
For more information of ICGR, see: https://bit.ly/2Py15xQ

10
11 To learn
more about the data developed by the Freedom House, see:: https://freedomhouse.org/report-types/freedom-
world
9
Therefore, Bolivia is also one of the countries with the highest percentage of indigenous population in Latin
America, according to the National Census of Population and Housing (CNPV) of 2012, 62 percent of the total
population aged 15 years or older It is recognized as a member of one of the so-called native peoples: 30.8
percent as Quechua, 25.2 percent as Aymara and 6 percent as Guarani, Chiquitano, Mojeño or other and
measures of vertical inequality can hide important disparities that survive at the level of group; especially when
there is a history of discrimination and horizontal inequalities between indigenous and non-indigenous groups
in the political, economic, social and cultural spheres. It is also a country with strong and lasting gender
deficiencies; where indigenous women have even less education and employment opportunities than their
counterparts (Barron, 2008).
In Bolivia, the inequality analysis focuses on the distribution of income and the Gini coefficient is used as a
proxy variable, although there are some authors who have approached the issue from the horizontal perspective
of inequality. Molina, 2016 analyzes the horizontal inequalities in Bolivia using data from the Household Surveys
and the National Demographic and Health Surveys (ENDSA) for the period 2000-2013, showed that the
evolution of inequality not only through the income but also in variables such as education, health and the labor
market. This is evident since inequality is primarily income, but it is reflected in other areas such as education
where there are asymmetries of access and educational quality, in the case of health heterogeneities occur with
respect to service coverage both in urban areas, but even more so in the rural area.
Ernst and Isidoro, 2008 analyze vertical and horizontal inequality, considering race, class and gender, and
present a special section for the study of the Bolivian case based on data from the first decade of the 2000s,
which prove an important exclusion of indigenous groups regarding education, health, infrastructure and
figures to measure poverty and more marked in the case of this sector of the population, accompanied by
discrimination in the labor market. On the other hand, despite not explicitly mentioning horizontality, there are
papers (Valenzuela, 2004) that focus on showing the differences between those who recognize themselves as
indigenous in the country and those who do not belong to this group. Valenzuela (2004) highlights that the
gaps in terms of poverty, income distribution and social capital, showing that the status of indigenous in Bolivia
can generate limitations in different aspects such as access to health and education.
Regarding gender inequalities, (Contreras and Gallegos, 2007) study the distribution of income in 13 Latin
American countries in which Bolivia is included. They find that between the end of the 20th century and the
beginning of 2000 all countries (on average) present a gender gap in labor income that is reduced in absolute
value over time. Likewise, education is emerging as the most important variable behind inequality in the region.
Some research (Wanderley and Vera, 2017) also focuses on the evolution of wage inequalities between men and
women over a decade (from 2005 to 2015), a space in which the wage gap between both groups decreases for
all levels of academic training. However, the gaps do not close and the difference and wage heterogeneity
continues to be a problem between men and women in Bolivia.
With regard to vertical inequality from household surveys, inequality was measured based on the Gini
coefficient between 1996 and 2018, we divided the 22 years into three moments of time: The first period
corresponds to the ex-before to the bonanza (1996-2005), the second period is the bonanza (2006-2013) and
the third period is the ex-post to the bonanza (2014-2018). In the ex-before 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-before 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 substantially changed.
What represented in that period was the presence of a social inequality, expressed in an economic heterogeneity
from the point of view of income between the different strata of the Bolivian population, was undoubtedly a
socio-economic problem due to the poor distribution of income and / or income in the social area, at rural but
also at urban level, such social inequality can also be understood as an expression that reflects the discriminatory
10
treatment suffered by a group of people, but favors other strata of society, generally minorities, according to
UDAPE ( 2003) and Velásquez Iván (2007, 2012) at least six out of 10 Bolivians lived with an income below
the poverty line, but at the same time Bolivian society had high inequality rates: the average income of the 90th
percentile (which it contains 10 percent of the population with the highest income) was 15 times larger than
the income of 10 percent of the poor population, the degree of inequality measured by the Gini coefficient of
per capita income ranged from 0.59 to 0.60 (Graph 1) in general, between 0.61 to 0.64 in the rural area and 0.51
to 0.53 in the urban area between 1996 to 2005 Undoubtedly, the combination of high poverty and inequality
was one of the most distinctive characteristics of the Bolivian economy and was one of the causes that
determined, among other aspects, the low growth rates in that period.
Graph 1. Inequality by geographic area at urban and rural level (1996-2018)
0,80
0,69
0,70 0,66
0,63 0,64 0,64 0,63 0,64 0,64
0,61
0,60 0,56 0,55
0,62 0,53 0,54 0,54 0,53 0,53 0,54
0,59 0,59 0,60 0,60 0,52 0,51
0,59 0,58 0,59
0,56
0,50 0,54 0,54 0,52
0,53 0,53 0,53 0,46
0,51 0,52 0,51 0,50 0,48 0,48
0,49 0,47 0,47 0,47 0,48
0,40 0,46 0,45
0,45 0,44
0,41 0,42 0,42 0,42 0,41 0,40 0,39
Gini Gini Urban
0,30
Gini Rural 2 per. media móvil (Gini)
0,20
Period Ex-Before Bonanza Bonanza Period Period Ex-Post Bonanza

0,10
0,00
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
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, 2016, 2017 and 2018).
Elaboration: Own
These indicators determined that at the institutional level in the mid-1990s, Bolivia undertook reforms aimed
at reversing the trends of rural inequality and poverty, mainly based on decentralization and popular
participation that established resource of public allocation mechanisms, expanded the powers of municipal
governments in the provision of education and health services and increased community participation in the
planning and execution of social programs (Velásquez, Iván; Ferrufino Rubén; Gavincha Marco; 2012). The
incorporation of local governments into anti-poverty policies was reinforced with the resources of the National
Dialogue that had funds from debt relief, within the framework of the HIPC initiative. In recent years, several
municipalities have developed the ability to implement social programs that were complemented by national
policies. In the medium term, these actions sought to have an impact on the living conditions of the population.
Institutional decentralization was a factor that increased the levels of managed investment in social sectors and
at the same time distributed the investment in all the municipalities of the country, especially in those in which
high poverty rates prevailed in the ex before boom period. 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 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
11
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. Recent studies indicate that Bolivia
is one of the countries whose level of inequality is fluctuating and varies according to economic circumstances,
and not structurally, due to the high price variability of the few products that Bolivia exports (few minerals and
gas), the commodity boom provided countries like Bolivia with monetary resources to implement social and
redistributive policies (Juana Azurduy, Juancito Pinto and Renta dignidad bonds), also that this type of policies
allowed reducing income poverty (especially extreme poverty) and income inequality gaps, however such
indicators in a context of economic slowdown would tend to worsen, the end of the boom of commodities
may affect the continuity and effectiveness of these policies and their medium and long term results.
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 inequality12 other measures that reflect the level of inequalities from household surveys (1996-2018),
subsequently the poverty lines used in the present investigation are presented.
Table 1
Additional Measures of Poverty and Inequality (1996-2018)
Medida 1996 1997 1999 2000 2001 2002 2003-04 2005 2006 2007
Poverty
FGT (0) Incidence 0.65 0.64 0.63 0.66 0.63 0.63 0.62 0.61 0.60 0.60
FGT (1) Gap 0.20 0.21 0.22 0.25 0.23 0.22 0.21 0.17 0.17 0.20
FGT (2) Severity 0.14 0.14 0.13 0.15 0.14 0.13 0.12 0.09 0.09 0.11
Inequality
GINI 0.59 0.59 0.58 0.62 0.59 0.60 0.59 0.60 0.59 0.56
ATKINSON 0.28 0.27 0.35 0.40 0.33 0.40 0.39 0.30 0.35 0.33
THEIL 0.46 0.44 0.50 0.61 0.62 0.69 0.67 0.55 0.47 0.49
General Entrophy 0,92 1,08 1,10 1,12 1,48 1,66 1.71 1,80 1,45 0,97
Meassure 2008 2009 2011 2012 2013 2014 2015 2016 2017 2018
Poverty
FGT (0) Incidence 0.57 0.51 0.45 0.43 0.39 0.39 0.39 0.39 0.34 0.34
FGT (1) Gap 0.21 0.15 0.17 0.18 0.16 0.19 0.20 0.18 0.17 0.17
FGT (2) Severity 0.13 0.08 0.09 0.11 0.09 0.11 0.14 0.12 0.11 0.11
Inequality
GINI 0.52 0.50 0.47 0.47 0.48 0.48 0.47 0.48 0.44 0.45
ATKINSON 0.30 0.24 0.31 0.38 0.40 0.44 0.52 0.58 0.58 0.57
THEIL 0.57 0.43 0.51 0.56 0.63 0.71 0.78 0.81 0.82 0.84
General Entrophy 1,43 1,91 1,08 1,13 1,2 1,25 1,33 1,39 1,45 1.46
Source: National Institute of Statistics (National Employment Survey, November 1996 and 1997, Household Survey - Measurement of Living Conditions
2015 y 2016, 2017 and 2018).
Elaboration: Own.
12Inequality: 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
12
Lines of moderate poverty and estimated values by geographical area (1996-2018)
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 0.34 507.28 0.56
2017 654.23 0.35 509.62 0.55
2018 678.95 0.27 516.93 0.54
Line of extreme poverty and estimated value by geographic area (1996-2018)

Year Line of Poverty Urban Area Line of Poverty Rural Area
Moderate - Urban Estimated value Moderate - Rural Estimate 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 0.7
2000 171.46 0.28 131.61 0.75
2001 170.44 0.26 131.53 0.6
2002 170.9 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 253.2 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
2017 398.52 0.09 305.24 0.35
2018 399.91 0.08 308.82 0.34
2015 y 2016, 2017 and 2018).
Elaboration: Own.
5.2. The dispersion measures

Although variance and standard deviation are the most useful scatter measures in statistical analysis, the
dispersion of a data set can be measured with other techniques. 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 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
13
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-before 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 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.
Graph 2
Ratio of the 90th percentile to the 10th percentile, decile 10 and the decile 1 - 1995-2017
Bonanza Period
Period Ex-post
Bonanza
Period Ex-Before Bonanza
2015 y 2016, 2017 and 2018).
Elaboration: Own.
Undoubtedly, the 90/10 relationship shows a more dispersed distribution of the income distribution of the
Bolivians, so what the ratio does is quantify the times that the income of the richest represents versus the
income of the poorest in Bolivia in the period 1996 - 2018, in essence in Graph 2 the high degree of dispersion
between these two segments of the population is shown in which in the ex before period of the bonanza the
separation of both strata is much greater by establishing a segment , of few Bolivians who have a lot of income
compared to a majority of the population that has low income levels. In the boom period the influence of
resources from gas and minerals and the greater distribution of income from salary improvements (minimum
living wage, salary increases and bonuses among others) and remittances, brought about the reduction of the
gap between poor and (90/10), also the relationship of decile 10/1 becomes more pronounced and consistent,
which shows a more pronounced fall in the difference in income between the richest stratum and the poorest
stratum in the era of bonanza with regarding the ex before period. Finally, in the ex post boom period it is
shown that both ratios 90/10 and 10/1 softened and stabilized, which shows that the gap between the richest
and the poorest percentage decreased markedly with a probability of increasing in the face of an economic
outlook of deceleration and lower income from gas exports.
14
Also, in Graph 2, what attracts the most attention in the ex before period to the bonanza, especially between
2000 and 2005, is that the ratios of the measurements made are highly divergent, showing that the richest 10
percent earned 200 times more that the poorest 1 percent, and that the decile 90 earned approximately 50 times
than the decile 10, which shows that the gap between the richest and the poor strata was high and formed a
heterogeneously inequitable society. Later in the bonanza period (2006-2013) and income distribution, it shows
a gap between divergent ratios which reflects disparities but comparatively to the ex-before period is more
limited and certainly a reduction in inequality is evidenced, due to the distributive effect of income, salary
improvements, remittances, conditional transfers among others as mentioned above. Finally, in the period after
the boom, the difference between ratios tends to stabilize, achieving a convergent trend, the big question is:
given a slowdown in the economy and a decrease in income from gas exports, the gap between rich and poor
will return to the situation of the ex before period to the bonanza? There is a high probability that this will
happen.
5.3. 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.
Graph 3. Governance data
Bonanza Period Period Ex-post Bonanza
Source: Worldwide Governance Indicators (WGI).

Elaboration: Own.
Also, Governance is the ability or capability to govern, which emphasizes the order, political, economic and
social stability of a country. While this capacity lies in the fact that something can be managed in an orderly
manner, Governance refers to processes of diverse interactions and actors, and considers the outcome of the
process. It is then a concept of the political order as an integral process, in which the Government is understood
in a relational way, or of networks, where the government, as a pure state administration, finds legitimacy and
efficiency in its interactions and dynamics with other non-governmental actors, generically referred to as civil
society.
15
Governance is also defined as "the interactions and agreements between rulers and governed, to generate
opportunities and solve the problems of citizens, and to build the institutions and standards necessary to
generate those changes." Social movements, conflicts, pressure from corporate groups, deficiencies and
weaknesses of public administration management, political instability, democratic fragility, conflict and
economic instability generated by extractivism are among other factors that affect governance and governance
in Bolivia. On the other hand, governance implies that people can participate in decisions that ensure a decent
life. For that purpose, citizens need freedom of expression and association, respect and strengthening human
rights; and be informed about what the rulers decide and do. Poverty levels, especially in the rural area, social
inequality, low social mobility, heterogeneities in education, access problems and health coverage encompass
the list of problems that also affect governance.
The rulers, meanwhile, must have the capacity to fulfill their functions, and sensitivity to take into account the
aspirations and needs of citizens. In the way of governing are key aspects:
1. Legitimacy, which means acting with justice, allowing the participation of civil society, attending to
their demands, and converting their decisions into public policies.
2. Policies for poverty reduction through employment opportunities, availability and access to
resources (including land and natural resources and means of production); as well as equity in the
provision of public services.
3. Protection of the environment, through the sustainable use of natural resources.
4. Land tenure and equity in access to them.
5. Stability or government capacity to adapt to a changing environment.
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:13 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.
13 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.
16
Graph 4. Governance index
Bonanza Period
Period Ex-post Bonanza


Elaboration: Own.
Bolivia accumulates the criteria that define a low degree of governability (Graph 3). In terms of voice and
accountability (Graph 5), 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.
Graph 5. Voice and Accountability
Bonanza Period

Elaboration: Own.
17
Freedom of expression is linked to democracy, so to speak of democracy is to think about the freedom that
every human being has to move from one place to another to meet, to manifest and express what he thinks
and feels, these last essential elements in the freedom of expression, considered as a fundamental piece because
it allows debate, discussion and exchange of ideas between political actors and members of society around
issues of public interest. That is why we cannot consider as democratic a society where there is no freedom of
expression, because this is a real and concrete manifestation in the public space of another essential freedom -
for the personal realization of human beings - that is Freedom of thought. However, freedom of expression
implies duties and responsibilities, fundamentally to protect the rights of third parties, the State, public order
or ethical principles of citizens. In a democratic State, freedom of expression must be respected, which is the
fundamental right that people have to say, express and disseminate freely what they think without being
mistreated and harassed.
In hybrid regimes and weak democracies, freedom of expression is not respected, media is controlled, and
opposition leaders are prosecuted and indicted, for they denounce acts of corruption, openly violating Article
19 of the Universal Declaration of Human Rights. The freedom to impart information can be attacked in
various ways and in particular it can interfere with the freedom of the press and control of the media, reaching
the extreme of controlling the information they disseminate and punishing those who spread opinions against
the government or provide more coverage to opposition political parties or groups.
Freedom of expression is essential to enable the functioning of democracy and public participation in decision
making. Citizens cannot exercise their right to vote effectively or participate in the public taking of their
decisions but they have free access to information and documentation, without these elements they cannot
express their opinions freely because it constitutes an important mechanism for individual dignity, and for
participation, of accountability in democracy.
Regarding the ex-before period to the bonanza, it is noteworthy that in the 90s a notoriously pronounced peak
above 2.5 is identified, which indicates a strong and important advance or performance in terms of voice and
accountability it refers (freedom of expression, freedom of association and freedom of the press among others)
and contrary to it between 2003 and 2005 there is a significant drop in the indicator, due to the resignation of
the president in 2003 (Gonzalo Sánchez de Lozada). The same happened in the bonanza period where from
2010 onwards until 2013 the fall is below zero tends to recover in the ex-post period of the bonanza but does
not exceed zero which indicates that in the perception of the people are neutral and have become indifferent
about this indicator, attacks on the press, government administration pressure on the media, lack of
transparency and accountability as, are among other reasons that explain the low trend of this indicator.
The perception of how citizens participate in the election of their authorities also provides elements of an
institutional decline. The independence of powers of the state is questionable, an example of this relates the
action on the continuity of the President of the State of the Supreme Court of Justice and Constitutional Court,
who gave way to a re-election over a sovereign and binding referendum, and on the Political Constitution of
the State, situation that gives glimpses that question the rule of law.
By the way, according to International Transparency 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 reaching the
position 132, out of 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.
18
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.
Graph 6. Political stability
Bonanza Period
Period Ex-post Bonanza Period Ex-post Bonanza

Elaboration: Own.
Regarding political stability (Graph 6), the indicator and its tendency are in a negative and highly
cyclical sphere with pronounced ascents and descents, which is a reflection of a strong perception of
political instability, high conflict and citizen dissatisfaction about democracy, corruption and the rule
of law.
Social conflict affects political stability and 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 which ends
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.
19
Table 2, Graph 7 Governance Indicators
Voice and
accountability
50,00
40,00 Political
Governance Indicators 2005 2010 2015 Stability and
Control of 30,00
Voice and accountability 43.75 47.39 46.80 absence of
Corruption 20,00
Political Stability and absence of violence, crimes
violence, crimes and terrorism 18.36 30.33 36.19 10,00 and terrorism
Government Effectiveness 29.27 37.00 27.88 0,00
Regulatory Quality 25.98 23.44 18.75
Rule of Law 26.32 14.22 11.06
Goverment
Control of Corruption 25.37 39.05 27.80 Rule of Law
Efectiveness
Elaboration: Own.
2005 2010
Graph 8. Government effectiveness 2015 Regulatory

Quality
Bonanza Period

Elaboration: Own.
In what corresponds to the effectiveness of the government (Graph 8), 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, as well as 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
20
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.
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 (Graph 9), 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.
Graph 9. Rule of Law - Compliance with the Law
Bonanza Period
Period Ex-Before Bonanza Period Ex-post Bonanza

Elaboration: Own.
Regarding the control of Corruption (Graph 10), 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 means the famous bribes tradition is practiced. And among the public institutions who receive
more of these types of payment, it predominates the police and the judicial system, as shown by the ranking of
public entities most reported in the Ministry of Transparency.
21
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 to have some control mechanisms to stop it, that is to say, that the
legal dispositions are effectively executed.
Graph 10. Control of Corruption
Bonanza Period

Elaboration: Own.
Graph 11. Freedom House indicators
Bonanza Period Period Ex-post Bonanza

Elaboration: Own.
22
Graph 12. ICGR indicators
Bonanza Period


Elaboration: Own.
5. Dynamic relationships and impulse response functions in the system

Table 3 (Annex 1) 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
institutionalism 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.
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 parameters14, but to verify the interrelation
between the variables of interest, besides quantifying the effects of shocks on the system15.
14 The VAR specification, by construction, is over parameterized, 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 inter-temporal variations.
15 It is important to note that, in essence, it is considered that all variables are considered potentially endogenous
23
A first element to be tested, to verify the relationship between variables, is to account for the erogeneity 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.
6. Concluding remarks
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 institutionalism
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 which defines 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.
Bolivia is a democracy where credible elections are held regularly. However, respect to freedom of expression
and the rights of indigenous peoples and women remain issues, as well as corruption, particularly within the
judicial system. A 2017 ruling by the Constitutional Tribunal cleared the way for President Evo Morales, head
of the ruling Movement for Socialism (MAS) to run for a fourth term in 2019. The decision effectively
overturned the results of a 2016 referendum in which a majority of voters had indicated a desire to retain
presidential term limits.
24
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, institutionalism 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 institutionalism 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.
There is a perception of the Bolivian democracy moving away from the so-called "liberal democracy", relating
the consideration of living in a rule of law; social demands provide a diffuse channel with institutional
scaffolding, which relates instability with high inequality. Relating negative figures of institutional performance
show a democratic weakening, where institutions should tend to remain and aim to promote stability; high
inequality accounts for a society polarized by income, with a precarious institutional response, the example of
this is provided by the perception of not independent justice, , with punitive and arbitrary punitive work, leading
to an approval of justice by its own hand, the so-called community justice, which leads to a deinstitutionalization
far from the liberal democratic conception.
With regard to institutionalism, political instability, corruption and short-term public policy made progress in
human development imperceptible, by trapping the country in impoverishing growth. Empirical evidence
shows that progress in well-being requires adequate public policies and strong institutions aimed at achieving
sustained growth. Achieving higher incomes and a better quality of life also requires much more in different
aspects such as: Improving social indicators, including health, nutrition and education, establishing equal
opportunities in education and employment, maintaining a cleaner environment and more sustainable, establish
a more impartial judicial and legal system, promote better and greater political and civil liberties, strengthen
institutionalism from trustworthy and transparent institutions, finally: freedom necessary to have access to an
enriching and varied cultural life, are some issues that are urgently needed to be resolved to lead Bolivia towards
development.
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28
Annex 1
Table 1. Simple correlation matrix
Table 2. Dynamic relationship between institutions-inequality, inequality-institutions (2)

1996 - 2005 2006 - 2017 complete series
x>y y>x x>y y>x x>y y>x
Civil liberties Sum.coef. 0,092021 0,098495 0,011712 0,044165 0,03299 0,059198
p-value 0,00218 0,04038 0,00372 0,00717 0,00215 0,00112
Political rights Sum.coef. 0,022185 0,045337 0,054985 0,03193 0,038219 0,024221
p-value 0,00177 0,00318 0,00282 0,00212 0,00191 0,00115
Risk country Sum.coef. 0,011345 0,022559 0,014082 0,017275 0,01541 0,08987
p-value 0,00155 0,00199 0,00197 0,00197 0,00155 0,00155
Stability of government Sum.coef. 0,053149 0,060661 0,04843 0,13148 0,041328 0,032152
p-value 0,00829 0,00934 0,00155 0,00955 0,00977 0,00554
Corruption Sum.coef. -0,07358 -0,07353 -0,07458 -0,08184 -0,08954 -0,08784
p-value 0,00859 0,00859 0,00608 0,00612 0,00606 0,00331
Rule of Law - Compliance with the LawSum.coef. 0,04371 0,042263 0,045999 0,04879 0,047899 0,043098
p-value 0,00513 0,00513 0,00278 0,00278 0,00421 0,00419
Democratic performance Sum.coef. 0,033149 0,031066 0,037915 0,032815 0,032815 0,036642
p-value 0,00943 0,00277 0,00955 0,00196 0,00398 0,00655
Bureaucratic quality Sum.coef. 0,026661 0,0232 0,011655 0,02285 0,023285 0,210751
p-value 0,00519 0,00519 0,00285 0,00285 0,00949 0,00188
29
Graph No 1. Functions impulse 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
30
Graph No 3 Functions boost response to improvements in income redistribution on ICRG
indicators
A. Worldwide Governance Indicators (WGI)
31
Table 3 Summary of basic statistics
1996 - 2005 2006 - 2017 Serie completa
Average Standard Minimun Maximum Average Standard Minimun Maximum Average Standard Minimun Maximum
Variable Desviation Value Value Desviation Value Value Desviation Value Value
I. Inequality indicators (*)
Gini Index (a) 0,5923 0,0100 0,5755 0,6177 0,4944 0,0300 0,4561 0,5644 0,5434 0,0200 0,5158 0,5911
Percentile 90/Percentile 10 (b) 30,3779 9,1103 22,2080 50,9860 12,8515 2,5389 10,2970 19,0170 21,6147 5,8246 16,2525 35,0015
Decil 10/Decil 1 (c) 141,2415 45,3524 96,2504 234,0000 48,5859 13,6371 36,0820 79,6000 94,9137 29,4948 66,1662 156,8000
II. Governance Data (**)
Governance 0,3399 0,2098 -0,0577 -0,6673 -0,5854 0,0310 -0,5329 -0,6204 -0,4949 0,1734 -0,0577 -0,6673
Voice and Accountability 0,0652 0,1967 0,3538 -0,1705 -0,0186 0,0466 0,0765 -0,0816 0,0123 0,1263 0,3538 -0,1705
Political stability -0,4840 0,3371 -0,1348 -0,9734 0,4691 0,2066 -0,2489 -0,8503 -0,4746 0,2530 -0,1348 -0,9734
Government effectiveness 0,3569 0,2172 -0,0696 -0,6887 0,5375 0,1130 -0,3687 -0,7167 0,4709 0,1776 -0,0696 -0,7167
Government quality -0,1162 0,2807 0,1856 -0,6926 0,8632 0,0638 -0,7557 -0,9819 -0,5880 0,4072 0,1856 -0,9819
Rule of Law - Compliance with the Law -0,4516 0,2018 -0,2187 -0,7563 -1,0361 0,1198 -0,8301 -1,2082 0,8207 0,3260 -0,2187 -1,2082
Control of Corruption 0,6957 0,2042 -0,3579 -0,8996 -0,5878 0,1110 -0,4037 -0,7292 -0,6276 0,1558 -0,3579 -0,8996
III. Freedom House Indicators (***)
Gastil of liberties Index 0,3648 0,0248 0,3995 0,3296 0,2615 0,0351 0,3242 0,2095 0,2995 0,0598 0,3995 0,2095
Civil liberties 0,3760 0,0219 0,4124 0,3466 0,2730 0,0420 0,3386 0,2049 0,3110 0,0620 0,4124 0,2049
Political rights 0,3078 0,0375 0,3503 0,2590 0,1821 0,0372 0,2553 0,1483 0,2284 0,0721 0,3503 0,1483
Risk country 0,4106 0,0177 0,4358 0,3833 0,3294 0,0303 0,3786 0,2752 0,3593 0,0478 0,4358 0,2752
IV. ICRG Indicators (****)
ICRG Index 0,5800 0,0000 0,5800 0,5800 0,5825 0,0725 0,7500 0,5400 0,5816 0,0567 0,7500 0,5400
Stability of government 0,6629 0,0637 0,7600 0,5600 0,6517 0,0341 0,7000 0,6000 0,6558 0,0457 0,7600 0,5600
Corruption 0,4643 0,0945 0,5000 0,2500 0,5542 0,0669 0,6300 0,5000 0,5211 0,0877 0,6300 0,2500
Rule of Law - Compliance with the Law 0,6886 0,1368 0,8200 0,5000 0,3725 0,1086 0,5000 0,1800 0,4889 0,1949 0,8200 0,1800
Democratic performance 0,5000 0,0000 0,5000 0,5000 0,4400 0,0362 0,5000 0,4200 0,4621 0,0410 0,5000 0,4200
Bureaucratic quality 0,4029 0,0909 0,5000 0,3300 0,3233 0,0231 0,3300 0,2500 0,3526 0,0681 0,5000 0,2500
(*) Household Survey.
(**) Worldwide Governance Indicators (WGI).
(***) Data developed by Freedom House.
(****) Data from the International Country Risk Guide (ICRG).
(a) For the calculation of the Gini, per capita income equal to zero (0) is excluded.
(b) When classifying the population into 100 groups of equal size, this indicator corresponds to the ratio of the 90th percentile and the 10th percentile.
(c) When classifying the population into 10 groups of equal size, this indicator corresponds to the ratio of decile 10 and decile 1.
Table 4 Simple Correlation Matrix

Gini Ratio Ratio
Variable Coefficient Percentil 90/Percentil 10 Decil 10/Decil 1
1. Governance data
Governance 0,4330 0,5901 0,5420
Voice and Accountability 0,3375 0,5093 0,3778
Political stability -0,5000 -0,0012 -0,1226
Government effectiveness 0,1420 0,3457 0,3306
Government quality 0,6074 0,6697 0,7046
Rule of Law - Compliance with the Law 0,7884 0,7534 0,7420
Control of Corruption 0,0316 -0,1911 -0,2584
2. Freedom House Indicators
Gastil of liberties Index 0,9038 0,7742 0,7589
Civil liberties 0,9186 0,7404 0,7378
Political rights 0,8702 0,7966 0,7620
Risk country 0,8899 0,7450 0,7431
3. ICRG Indicators
ICRG Index 0,6286 0,4211 0,3695
Stability of government 0,1133 0,2517 0,2754
Corruption -0,6141 -0,5052 -0,4169
Rule of Law - Compliance with the Law 0,3272 0,4456 0,5281
Democratic performance 0,9607 0,7392 0,7393
Bureaucratic quality 0,4247 0,3710 0,2698
32
Annex 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
endogenous 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 + 116… By 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)
16This 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).
33
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 institutionalism, 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 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)
34
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 institutionalism,
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 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.
35

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Institutions and inequality in the Bolivian multiethnic society

Iván Omar Velásquez-Castellanos 1 2

Ludwing Torres Carrasco 3

JEL Classification: O15, O17, O43, D70

USA, May 24 - May 27, 2019.

2. The Literature Review

5.1. The level of Inequality

For more information of ICGR, see: https://bit.ly/2Py15xQ

Graph 1. Inequality by geographic area at urban and rural level (1996-2018)

Period Ex-Before Bonanza Bonanza Period Period Ex-Post Bonanza

Line of extreme poverty and estimated value by geographic area (1996-2018)

5.2. The dispersion measures

Period Ex-Before Bonanza

5.3. Governability Data

Graph 3. Governance data

Bonanza Period Period Ex-post Bonanza

Period Ex-Before Bonanza

Source: Worldwide Governance Indicators (WGI).

Period Ex-post Bonanza

Source: Worldwide Governance Indicators (WGI).

Graph 5. Voice and Accountability

Period Ex-post Bonanza

Period Ex-Before Bonanza

Source: Worldwide Governance Indicators (WGI).

Graph 6. Political stability

Period Ex-post Bonanza Period Ex-post Bonanza

Source: Worldwide Governance Indicators (WGI).

Graph 8. Government effectiveness 2015 Regulatory

Period Ex-post Bonanza

Period Ex-Before Bonanza

Source: Worldwide Governance Indicators (WGI).

Graph 9. Rule of Law - Compliance with the Law

Period Ex-Before Bonanza Period Ex-post Bonanza

Source: Worldwide Governance Indicators (WGI).

Graph 10. Control of Corruption

Period Ex-post Bonanza

Period Ex-Before Bonanza

Source: Worldwide Governance Indicators (WGI).

Graph 11. Freedom House indicators

Bonanza Period Period Ex-post Bonanza

Period Ex-Before Bonanza

Source: Worldwide Governance Indicators (WGI).

Period Ex-Before Bonanza

Source: Worldwide Governance Indicators (WGI).

5. Dynamic relationships and impulse response functions in the system

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

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

A. Worldwide Governance Indicators (WGI)

Table 4 Simple Correlation Matrix

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

Achieving a profit differential between both values with:

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