External Flows and Development in Bolivia

External resources for a low income country have the potential of accelerating growth but also of creating Dutch Disease effects. This paper analyses the empirical impact of the most important external resources, foreign direct investment, aid, and loans, on the Bolivian economy for the period 1950-2009. We use a multivariate CVAR(2) model, which directly deals with endogeneity issues and allows for a more profound insight into the chain of causality, through the impulse responses. Our results indicate that loans are positive for the Bolivian economy in the long run, through an increase in exports and a decrease in purchasing power of exports however, we did not include total debt. We find that the effect of aid is negative for the Bolivian GDP per capita in the long run, which is explained by the temporary increase in purchasing power of exports, which lead to a permanent loss in the exports. Finally, foreign direct investments lead to a positive response of Bolivian GDP per capita and exports, and a reduction of purchasing power of exports in the long run.