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How to Explain a Building Boom in a Stagnant City
By Lykke E. Andersen*,
La Paz, 24 March 2008.
La Paz is one of the slowest growing cities in Bolivia, in terms
of population. Every year, twice as many people move away from
the city than move into it from other regions
(1). Between 1992
and 2001, the city’s population grew a modest 11%, compared to
the 60% growth of El Alto and Santa Cruz de la Sierra, and the
40% growth of the total urban population (see Table 1).
Table 1: Growth of the 10 main cities in Bolivia
| |
Population
1992 |
Population
2001 |
Percentage increase
1992-2001 |
|
La Paz |
713,378 |
789,585 |
11% |
|
El Alto |
405,492 |
647,350 |
60% |
|
Santa Cruz de la Sierra |
697,278 |
1,113,582 |
60% |
| Cochabamba |
397,278 |
516,683 |
30% |
| Tarija |
90,113 |
135,783 |
51% |
| Sucre |
131,769 |
193,876 |
47% |
| Oruro |
183,422 |
201,230 |
10% |
| Potosí |
112,078 |
132,966 |
19% |
| Trinidad |
57,328 |
75,540 |
32% |
| Cobija |
10,001 |
20,820 |
108% |
| Urban
Bolivia |
3,694,846 |
5,165,230 |
40% |
| Total Bolivia |
6,420,792 |
8,274,325 |
29% |
Source:
INE, 1992 and 2001 census.
Despite the almost stagnant population, and the uncertainty
concerning the future location of the government city, there is
a huge building boom taking place in La Paz at the moment.
Skyscrapers are popping up like mushrooms, and the exceptional
demand for construction workers has doubled the daily wage rate
compared to 2 years ago. Demand for cement in the department of
La Paz increased by 17% between 2006 and 2007, whereas in all of
Bolivia it increased only by 10% (2). More than twice as many
building permits are issued in La Paz than in Santa Cruz de la
Sierra (3),
despite the
fact that every time La Paz increases its population by 100 people, Santa Cruz de la Sierra adds 550. There
are also twice as many construction companies in La Paz than in
Santa Cruz (4).
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This is strange. If I had money to invest, I would be reluctant
to invest in real estate in a stagnant city. Simple economic
laws suggest that when supply increases under conditions of
constant demand, then prices (property values and rent) are
going to fall. There is a real risk of ending up with empty
apartments and offices once the economic boom ends, or even just
slows down a bit.
But there is of course an explanation to this seemingly
irrational building boom, and it was explained to me by one of
the faithful readers of this newsletter. The explanation can be
found in the Bolivian tax system, which has declared the entire
construction sector virtually tax-exempt. The sector does not
pay value added tax nor profit tax. The workers are hired as day
laborers, and thus pay no income taxes nor make any
contributions to the social security system. The only tax the
sector pays is the 3% transaction fee and the 0.5% municipal tax
once the property is sold
(and cheating on both is common). In contrast, the formal
manufacturing and commerce sector pays 67-80% of value added in
tax, depending on the source (5).
On top of that, there
is the "Dutch
Disease" explanation, which predicts that a natural
resource boom, such as Bolivia is experiencing now, will favor
the non-tradable sectors (especially construction) at the
expense of the tradable sectors (manufacturing) due to the
currency appreciation.
These
two factors together easily
explain why there are many more formal enterprises engaged
in construction and real estate than in manufacturing
in Bolivia.
According to the
System of Enterprise Statistics, launched by the
Superentendencia de Empresas last week, 35% of all formal
enterprises in Bolivia are engaged in construction and real
estate, 23% in commerce, and only 15% in manufacturing. More
than 2/3 of all the municipal Enterprise Registrations (Tarjetas
Empresariales)
extended
since 2003 are given to the construction sector.
A s
a private person on the renting side of the market, I think all
this construction looks like very good news indeed.
But as
a development economist, I believe favoring the housing sector
at the expense of the manufacturing sector is an unfortunate
development strategy.
There is not
much we can do about the natural resource boom, but there is no
excuse for maintaining a tax system that only worsens the
situation.
Unless tax
incentives are soon changed, the current natural
resource boom will be turned into mountains of cement, rather
than the productive, competitive enterprises we will need once
the natural resource boom
ends.
(*) Director, Institute for Advanced Development Studies, La
Paz, Bolivia. The author happily receives comments at the
following e-mail:
landersen@inesad.edu.bo.
(1) According to information from INE based on the 2001 census.
(2) According to the Sociedad Boliviana de Cemento (SOBOCE),
www.soboce.com .
(3) In 2006, there were issued 358,000 construction permits in
Santa Cruz and 783,201 in La Paz (www.ine.gov.bo)
.
(4) According to FUNDEMPRESA's
records of formal businesses in
Bolivia (www.superempresas.gov.bo)
.
(5) According to the World Development Indicators of the World
Bank, the effective tax rate for formal enterprises is 80%. But
tax evasion is widespread in Bolivia, and according to the
admittedly outdated 1997 social accounting matrix, the effective
tax
rate for the formal sector is “only” 67%.
Ó
Institute for Advanced Development Studies 2006.
The opinions expressed in this Newsletter are those of the
author, and do not necessarily reflect those of the Institute or
of the sponsors.
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