Bolivia's Larger Message
June 2006
Bolivian President Morales's decision to seize
the assets of foreign-owned oil and gas operations and to nationalize large
privately held property holdings later this year serves as a useful reminder
of the political risks associated with owning and operating businesses abroad.
by Daniel
Wagner*
Asian Development Bank
President Morales's action should be no surprise given that numerous countries
around the world—and particularly in Latin America—have a history of nationalizing
natural resources, extractive industries, and large land holdings. Bolivia first
expropriated foreign-owned assets in 1937 (Standard Oil of New Jersey—ExxonMobil's
corporate ancestor) and has seized control of oil and gas assets on numerous
occasions since that time. Its neighbor, Argentina, has a similar legacy, and
Venezuela is in the process of doing the same thing. International law permits
such actions, as long as investors are given fair, adequate, and prompt compensation.
Contrary to international law, Morales has ruled out compensation to foreign
investors, claiming companies such as British Gas, Petrobras of Brazil, Repsol
of Spain, and Total of France have recovered their initial investment and made
a handsome profit for many years while operating in the country.
President Morales intends to nationalize land holdings of wealthy farmers
who hold large unutilized tracts of land that were in some cases acquired by
force or illegal means. His plan seeks to reclaim illegally obtained parcels
and redistribute them to Bolivia's poor. Private investors who own the land
legally will apparently not be affected by the action. But since the 1990s,
hundreds of Brazilian farmers have invested more than $1 billion to purchase
land in Santa Cruz, an eastern region of Bolivia that borders Brazil and has
some of the most fertile land in South America. Those farmers today grow more
than a third of Bolivia's soybeans, which account for almost 7 percent of the
national economy.
President Morales's actions are particularly noteworthy today because they
come at a time when many in global business thought nationalizations were passé—a
legacy of the Cold War. But it also comes at a time when economic nationalism
is on the rise and the state has demonstrated a growing propensity to become
more engaged in business. This is a global phenomenon, and evidence of the value
placed on securing long-term energy and natural resources at a time of sky high
commodity prices, dwindling energy resources, and seemingly insatiable demand.
Hence, can it be any surprise that the interests of business are taking a back
seat to national interests?
History
History is at the heart of this issue. Since the 19th century, Bolivia has
fought with its neighbors over land and what lies beneath it. Approximately
half of the land Bolivia once held, which at one time extended to the Pacific
coastline, is gone:
- In 1884 a Chilean attack on Bolivia's Litoral Province cost Bolivia
its coastline (the war was ultimately fought over the ability to export
dried bird dung, prized at the time for making fertilizer and saltpeter);
- In 1903 Brazil persuaded the large state of Acre to secede. Brazil thus
gained a highly productive rubber-growing state, at Bolivia's expense;
- A 3-year war with Paraguay ending in 1935 was motivated by Bolivia's
desire to secure a disputed border in which it hoped to find oil (it wound
up losing a region the size of Utah to Paraguay in the process); and
- Argentina and Peru secured additional portions of Bolivia through diplomatic
demarcations later in the 20th century.
It is the cumulative history of land loss, the resulting national humiliation,
and Bolivia's desire to secure and control its natural resources that is ultimately
behind President Morales's actions. Resentment over the war with Chile recently
stopped plans for a gas pipeline to the Chilean coast, even though financial
backing and export markets were already in place.
Bolivia was one of the first Latin American countries to adopt 1980s IMF
policies, which tied loans to privatization, debt reduction, and a relaxation
of labor standards. State-owned companies were sold, government spending and
regulation was reduced, and foreign capital was courted with the promise of
a new beginning. But 20 years later, the average Bolivian is worse off than
before, exports have declined, incomes are stagnant, and half the population
lives on less than $2 per day. Bolivia's experience is similar to that of other
Latin American countries (Brazil, Chile, Uruguay, and Venezuela) whose cumulative
disillusionment has led to the revival of leftist/populist governments.
It would be easy to dismiss President Morales's action as simply the result
of his new friendship with Hugo Chavez and Fidel Castro. Chavez has, after all,
made similar noises with respect to foreign-owned energy businesses and routinely
rattles his saber against the United States, as Fidel Castro has done for decades.
But Morales is responding to the long-simmering desire among Bolivians for more
control over their natural resources. This desire is as strong in Bolivia as
it is in Venezuela and many other countries that opened their doors to foreign
investment, even though they may owe the current strength of their natural resource
industries to these investors.
From a diplomatic perspective, Bolivia will surely pay a price for Morales's
actions. Spain has already stated that its bilateral relationship with Bolivia
may be affected by the decree of nationalization—one implication being that
financial assistance may be withheld in the future. Brazil, which derives 51
percent of its natural gas supplies from Bolivia, is concerned, but has taken
comfort from President Morales's guarantee that Bolivia will continue to honor
its gas supply contracts. Brazil will also undoubtedly pay a political and economic
price in the longer term for having become so closely aligned to Bolivia and
Venezuela.
Ramifications
While nationalization is a short-term "fix" for national economic aspirations,
its longer-term consequences will no doubt be damaging since foreign businesses
will hesitate to invest in countries that demonstrate a propensity to nationalize
foreign-owned assets. Brazil, Chile, and Uruguay have achieved what Morales
has thus far failed to achieve, having managed to combine fiscal prudence with
open trade and investment policies, preserving their options with respect to
foreign traders and investors while addressing broader national social needs.
Morales is unlikely to be as successful because he is closing the door to foreign
investors and violating international law in the process.
Another reason why Morales's actions are important is that they come after
nearly all of Latin America has embraced democracy. Let's not forget that Latin
American democracy produced Morales and Chavez, and that the populist "backlash"
currently being experienced in Bolivia and Venezuela is the people's will, as
is the recent election of Hamas by the Palestinians. Democracy does not always
produce the results other countries would like, but to the extent it has enabled
the will of the people to be expressed, it has been successful in these countries.
The larger lesson to be derived from Morales's actions is that despite the
era of globalization, in which all countries are presumed to play by the same
rules and national economies are inextricably linked with the global economy,
human behavior and aspirations remain unchanged. Citizens of every country want
to be able to say they have control over their own destiny and natural resources.
The rise of democracy in Latin America has accentuated this desire, for it raises
pressure on leaders to ensure that national economic aspirations are achieved.
Businesses that embrace globalization by investing abroad would be wise to
remember this. A democratic election is no guarantee of friendly foreign investment
policies, and may in fact work against it.
*The views expressed herein are the author's and do not reflect
the policies of the Asian Development Bank (ADB) or any other entity.
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