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Wednesday, July 05, 2006

Stiglitz: Nationalization of Bolivia's Energy Resources Driven by Commendable Democratic Progress

Joseph Stiglitz defends nationalization of oil and gas fields in Bolivia as a way to renegotiate unfair and perhaps illegal contracts put into place under previous administrations:

Who Owns Bolivia?, by Joseph E. Stiglitz, Project Syndicate: A few months ago, Evo Morales became Bolivia‘s first democratically elected indigenous head of state. Indigenous groups constitute 62% of Bolivia’s population, and those with mixed blood another 30%, but for 500 years Bolivians had been ruled by colonial powers and their descendants. Well into the twentieth century, indigenous groups were effectively deprived of a vote and a voice. ... So Morales’ election was historic, and the excitement in Bolivia is palpable.

But Morales’ nationalization of Bolivia’s oil and gas fields sent shock waves through the international community.  ... Genuinely concerned about raising the incomes of his desperately poor people, he recognized that Bolivia needs foreigners’ expertise to achieve growth, and that this entails paying fairly for their services. But are foreign owners getting more than a fair rate of return?

Morales’ actions are widely supported by Bolivians, who see the so-called privatizations (or “capitalizations”) under former President Gonzalo “Goni” Sanchez de Lozada as a rip-off: Bolivia received only 18% of the proceeds! Bolivians wonder why investments of some $3 billion should entitle foreign investors to 82% of the country’s vast gas reserves, now estimated to be worth $250 billion. ...

No wonder that Bolivians thought they were being cheated and demanded a new deal. On May 2, Morales simply reversed the percentages, pending renegotiation of the contracts: the companies operating in the two largest fields would get 18% of the production for themselves. As part of this new deal, Bolivia should also get a larger share when prices increase. (Bolivia may, of course, not want to bear the risk of a fall in the price, so it may strike a deal to transfer some of the downside risk to foreign companies, giving them in exchange more of the upside potential.)

To most Bolivians, what is at stake is a matter of fairness: Should foreign oil and gas companies get a fair return on their capital, or a supernormal return? Should Bolivia be paid a fair value for its resources? And should Bolivia, or foreign companies, reap most of the windfall gains from increases in energy prices?

Moreover, many deals were apparently done in secret by previous governments – and apparently without the approval of Congress. Indeed, because Bolivia’s Constitution requires the approval of Congress for such sales, it isn’t clear that Morales is nationalizing anything: the assets were never properly sold. ...

As with many privatizations elsewhere, there are questions as to whether the foreign investors have kept their side of the bargain. ... The foreign companies’ contribution was supposed to be further investment. But did they fully live up to their commitments? Are accounting gimmicks being used...? Bolivia’s government has, so far, simply raised questions, and set in motion a process for ascertaining the answer.

The problem in Bolivia is a lack of transparency, both when contracts are signed and afterwards. Without transparency, it is easy for citizens to feel that they are being cheated – and they often are. ... Around the world, oil and gas companies have themselves to blame: too often, they have resisted calls for greater transparency. In the future, companies and countries should agree on a simple principle: there should be, to paraphrase President Woodrow Wilson’s memorable words, “open contracts, openly and transparently arrived at.”

If the Bolivians do not get fair value for their country’s natural wealth, their prospects are bleak. Even if they do, they will need assistance, not only to extract their resources, but also to improve the health and education of all Bolivians – to ensure long-term economic growth and social welfare. For now, the world should celebrate the fact that Bolivia has a democratically elected leader attempting to represent the interests of the poor people of his country. It is a historic moment.

    Posted by on Wednesday, July 5, 2006 at 11:50 AM in Economics, Oil | Permalink  TrackBack (0)  Comments (8)

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