Posted on 06/13/2005 10:41:59 AM PDT by Alex Marko
SUMMARY
In early June, Bolivia's government, led by the interim president, Carlos Mesa, collapsed amid widespread popular protests. The trigger was the enactment of a controversial hydrocarbons law which, although it sharply increased levies on foreign companies, was seen by radical protestors as not going far enough. The effective royalty rate was raised from 18% to 50%. The increase will be contested by foreign oil companies which claim it contravenes the terms of existing contracts. However, Bolivia's more radical groups are pressing for outright nationalisation. The future management of the privatised hydrocarbons industry has become a bitterly divisive issue in the country. Mr Mesa's 19-month-old government itself came to power following the ouster of the previous elected president, Gonzalo Sánchez de Lozada, in October 2003 following violent protests against his energy policies in which several Bolivians died.
Gas 'hub'
A decade ago, Bolivia had seemed poised to become a natural gas 'hub' supplying a range of markets in the region. With proven and probably reserves of 48.7tcf, the country has the Latin American region's second largest gas reserves after Venezuela. Foreign investors were brought in to develop the sector and natural gas sales to Brazil began in 1999. However, the persistence of sluggish growth rates and widespread poverty have fuelled growing demands for the state to exact a bigger share of profits in order to step up social investment.
The backlash against foreign investors is not confined to the hydrocarbons sector, but it is at its most radical here. In part this is because the promises of growth and employment creation that the government made at the time of privatisation a decade ago have proved wildly ambitious (although sluggish growth has partly been a product of external shocks and policy initiatives unrelated to the natural gas sector, such as coca eradication). It is also because natural gas is Bolivia's only significant remaining underexploited resource, in a country with a long history of exploitation of mineral wealth by foreign investors.
Re-evaluating the role of foreign investment
The peculiarities of the Bolivian case caution against extrapolating implications for other countries in the region. However, Bolivia's experience can be seen as one of the most extreme examples of a broader re-evaluation of the role of foreign investment in economic development, especially in those countries where poverty is most widespread (as in Bolivia and Venezuela) or where an economy in which foreign investment has played a major role has suffered a traumatic collapse (as in Argentina).
Peru shares some significant similarities with Bolivia, most importantly a discredited political class, unstable governing coalitions and widespread poverty. Moreover, the attitude of local communities in Peru to large projects that exploit natural resources in their territory has become increasingly mistrustful owing to a long history of unkept promises and disregard for the natural environment. These similarities may raise the question of whether a similar backlash against foreign investment could be on the horizon there.
Popular opposition has already been instrumental in derailing parts of the government's privatisation programme (the sale of two electricity-generating companies in Peru's second city, Arequipa, was abandoned in 2002 following three days of violent protest) and several foreign mining companies have been the target of localised protests.
Distinguishing features
There are also at least three significant differences which may make it less likely that existing privatisations and concessions could be reversed in Peru.
The first is that, in contrast to Bolivia's case, Peru's economic model--centred on foreign investment in the mining sector--has helped to deliver macroeconomic stability and steady GDP growth in the past decade, even if, in common with Bolivia, such growth has created little employment.
The second difference is that Peru's radical groups are--so far--more disparate and disunited than those in Bolivia. The third, perhaps most important, difference is that the authorities have recently made a start in addressing popular concerns. In August 2004 the government passed a law under which half of the income tax payments made by companies exploiting natural resource must be handed over to the local and regional authorities.
It is too early to say whether this will be sufficient to allay popular concerns and help weaken nationalist sentiment. Just a month after the law was passed, a proposed expansion of the huge Yanacocha gold mine, owned by the US's Newmont, had to be abandoned in the face of local opposition, following a history of local conflict between Newmont and local residents, involving a major mercury spill and fears over contamination of drinking water supplies.
In short, while there are a series of factors which suggest that a large-scale popular backlash against foreign companies is less of a risk in Peru than in Bolivia, the country seems to possess a number of the preconditions. Whether these become more threatening over the next few years will depend to a great extent on whether the government that takes office in 2006 is able to be markedly more successful than its predecessor in forging a national consensus on economic policy.
If a coherent grassroots movement were to become mobilised, demands for more nationalist and populist policies, including more onerous taxation terms for foreign companies, could become more powerful.
Over-generous privatisations
While it would be simplistic to draw direct implications of the Bolivian experience for other countries in the region, developments there form part of a growing questioning of free-market and FDI-oriented policies.
One factor fuelling the rise of economic nationalism is that many of the privatisations and award of concessions that occurred during the 1990s are perceived to have accorded excessively generous terms to foreign investors. The result, in several countries, is growing demands for a return to a greater role for the state in economic production despite the poor experience of state-led development across the region in the 1960s-1980s.
In Venezuela, President Hugo Chávez's 'Bolivarian Revolution' is pursuing a major extension of direct state involvement in the majority of economic activity, from retroactively changing contract terms for foreign investors in the hydrocarbons industry, to promoting 'endogenous development' centres reminiscent of the failed import-substituting industrialisation (ISI) model of the 1950s and 1960s.
Venezuela is the most extreme example of this trend towards a more dominant state but it is not alone. Following Argentina's traumatic collapse, there is now much wider support for a greater role for the state in the economy. In Ecuador, the new interim government is expected to halt plans to invite the private sector to invest in maturing state-owned oil fields and ageing refineries, with investment instead to be state-led.
Conclusion
The long-term policy environment for foreign investment will remain insecure in many countries until widespread unemployment and inequality begin to be overcome. Governments' failure to formulate and implement effective policies to tackle these problems has, by fuelling popular resentment, contributed to the political instability that threatens the long-term security of the investment environment. Countries where foreign investment is concentrated in capital-intensive industries (creating little employment), where institutions are weak and politicians discredited, provide particularly fertile ground for the spread of nationalist and populist policies, as the examples of Bolivia, Ecuador and Venezuela testify.
SOURCE: EIU RiskWire London
Yes, it worked so well in Cuba, Russia and Cambodia...
South America is in bad shape in places. All types of groups are agitating for revolt.
We live in interesting times.
I was amused, but not surprised, to see my local MSM news daily describe these Bolivian "activists" in sympathetic terms.
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