The dismal economics of resource nationalism
Resource nationalism is condemned to join other “progressive” economic recipes in the dustbin of history. Sadly, for Latin America, many of its people will find out the hard way
A new specter is haunting Latin America. It is inducing States to chase away foreign firms from, and to assume themselves the management of, the natural resources of their countries. It involves cancelling mining concessions, overhauling investment and mining laws and, last but not least, expropriating foreign firms. It is at work in a handful of countries ruled by so-called “progressive” (read: left-wing) governments under the inspiration of oil-rich Hugo Chávez, president of Venezuela.
The specter has a name: “resource nationalism”.
The specter has already, alas, a result: it has fallen way short of expectations, starting with its country of departure: Venezuela.
The Venezuelan fiasco
Here you have a country that is the world’s eighth largest oil producer, with 14 percent of the world’s proven oil reserves. No less important, world prices of oil have ballooned from $9 a barrel in 1999, when president Chávez’s reign began, to above $100 at present. With all these cards in his hands, Hugo Chávez was, inevitably, condemned to succeed.
Yet, the opposite has occurred. Throughout the twelve years of Chávez’s presidency, Venezuela has consistently exhibited one of the lowest rates of growth of the Latin American region.
Oil output has fallen from 3.3mn barrels per day in 1998 (i.e. before Chávez) to around 2.25mn b/d in 2011. The cash flows of the nationalized oil company – Pdvsa – have moved southwards (i.e. disbursements are exceeding receipts), as the oil revenue is massively transferred to the government so as to finance clientelistic social programs and foreign allies.
As if that were not sufficient to strip the State oil firm of any financial margin of manoeuver, Pdvsa is managed as a government’s bureaucracy; it has seen its payroll increase by 27 percent in the past four years and has recently announced that it intends to hire still more personnel.
With the oil company so badly run, it is no wonder that the world’s eighth largest producer of oil has to import electricity from neighboring Colombia.
For all these failures, Hugo Chávez can blame, neither the “Empire” (i.e. the US) nor an embargo (there isn’t any). He has only himself.
Evo Morales’ Bolivia: a place “not to invest”
Bolivia’s president, Evo Morales, apparently finds pleasure in commemorating every other Labor Day (May 1st in Latin America) with a new nationalization. He did so in 2006, when his government seized the natural gas company. In 2008, he expropriated an Italian-controlled telecoms firm. In 2010, it was the turn of four electricity companies. This year, he seized a Spanish-owned electricity grid operator that supplies 72 percent of Bolivia’s electricity.
Are Bolivians better off with all these expropriations? Not quite. Since the government took over control of the natural-gas company in 2006, investments have not been enough to increase reserves. Blackouts are on the rise since the nationalizations of 2010. Moreover, Bolivia has become a net importer of hydrocarbons.
No less important, it will be difficult for Bolivia to attract the foreign investment it needs as long as it remains one of the two countries (Russia being the other) presenting the highest risk for investment in mining, according to the list established by the consulting firm Behre Dolbear (Venezuela and Zimbabwe have been removed from that list for five consecutive years “due to their inherently low ranking”).
Argentina’s Kirchnerism: Welcome to the Club
Argentina can’t borrow in international capital markets because it has not yet reached a deal with its former creditors on how to reimburse the debt defaulted in 2001. Price controls have depressed local production, pushing up imports as well as the import bill. Taxes and an overvalued peso applied to export transactions dent the international competitiveness of exported goods, thus checking export revenues. On top and above all this, capital flight is on the rise. For all these reasons the country is in dearth of dollars.
It is under those troublesome circumstances that resource nationalism made its entrée on the Argentinean scene.
A few months after a discovery of huge reserves of shale gas, President Cristina Fernández de Kirchner decided to nationalize YPF, the country’s oil-and-gas company owned by Spain’s Repsol at the level of 57 percent. Never mind that it was Repsol that had discovered the shale gas reserves. For Kirchnerism, the time has come to change the rules of the game, expel Repsol and enable the State – no, the government – to capture the manna that the future exploitation of shale gas is expected to provide.
In reality, Argentina stands to lose from that measure. Foreign firms may fear having one day the same fate as Repsol and, as a result, will be inclined to offshore profits and amortize their investments at a faster pace than would have been the case under a more peaceable policy climate. The government, for its part, will have to offer more generous terms to investors in order to attract the billions of dollars needed for the exploitation of the country’s gas reserves.
Resource nationalism is condemned to join other “progressive” economic recipes in the dustbin of history. Meanwhile, the ravages, wastes and frustrations produced by this latest outburst of left-wing folly will have been immense.
Fabio Rafael Fiallo is a Dominican-born economist, writer and retired official of the United Nations Conference on Trade and Development (Unctad)
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