Global Trends by Martin Khor

Monday 8 May 2006

Winds of change in Latin America

Last week’s dramatic gesture by Bolivia’s new President, the indigenous leader Eva Morales, to “nationalize” his country’s natural gas resources is the latest sign of the winds of change blowing in Latin America.  More countries are abandoning orthodox policies and searching for other ways to achieve social development.


The winds of change are blowing rather strong in Latin America.   While the change has been gradually building in the past few years, it became more evident last week when the new Bolivian President Eva Morales announced the “nationalization” of the country’s large natural gas resources.

In a way, it should not have been a surprise, as in his election campaign Morales had promised to do precisely that.  And in a 2004 referendum, 95% of votes were for nationalization.

Bolivia is one of the continent’s poorest countries, the majority are indigenous people, and Morales has become the first indigenous person voted to the country’s top post.

In a television interview on BBC a fortnight ago, he was articulate in voicing how the indigenous people had not benefited from the country’s development, how the foreign companies had too much control of Bolivia’s resources, and that the benefits had now to flow to the nation and especially its poorer communities.

On 1 May the President announced the gas resources would be “nationalized”, the foreign oil companies (the biggest being from Brazil, and others from Spain and the US) were given six months to re-negotiate contracts with the government, and soldiers were sent to guard the facilities throughout the country.

It was a dramatic political gesture on Labour Day, and it grabbed world attention.  The move wasn’t as radical as might have been conveyed through the “nationalization” term.  

The government is not seizing the companies’ gas installations, or asking them to leave. It is asking to re-negotiate the terms under which the companies are allowed to operate.  In effect, the government wants a higher share of the royalties and profits arising from the sale of gas.

“Production sharing arrangements” between the host government (and its national oil agency) and the foreign oil companies are common in oil and gas producing countries, for example Indonesia, Malaysia, Saudi Arabia and other Middle East countries, Venezuela and other Latin American countries.

The terms of the agreements are the issue, and obviously Bolivia wants to improve them.  It also is making the point that the gas reserves (it has the second largest in the region) belongs to the country and not the companies, and it thus has the right to negotiate what it considers to be fair deals.

Still, when a small and poor country shows its muscles, the more powerful tend to get astounded.  This could be why there was quite an uproar, especially in the capitals of countries owning the oil companies affected.  Spain said it was deeply concerned, and implied it could withdraw the debt relief it had agreed to provide to Bolivia.

Brazil’s Petrobas company is the biggest in Bolivia, and Brazilians too were shocked.  To their credit, the Presidents of Brazil, Bolivia, Argentina and Venezuela convened an emergency summit last Thursday, to try to sort out the issue among themselves, and perhaps to reaffirm, or salvage, the regional unity of Latin American countries.

The Bolivian nationalization is the latest in a series of developments marking change in the region.  Many countries had come under brutal military dictatorship, and in the past two decades they gradually returned to democratic systems.

The region fell under a debt trap in the 1980s, which depressed their economies.  With debt rescheduling came the policies of the so-called “Washington Consensus” (made up of the International Monetary  Fund, World Bank and United States Treasury) with privatization, trade liberalization and tight monetary and fiscal policies at the centerpiece.

The policies did not work, growth rates were stifled, poverty rose and the recent period has been termed “The Lost Decades.”   In recent years, there has been a change in governments in Brazil, Argentina, Venezuela, Uruguay and now Bolivia, with free-market leaders replaced by those advocating a bigger role for the state, more nationalistic policies and greater stress on social development.

Recently, Brazil and Argentina announced the pre-payment of their loans to the IMF, thus freeing themselves from endless negotiations over policies they may not agree with.

Many countries in the region are abandoning many aspects of the orthodox policies that have not worked for them.  They are searching for better alternatives that can provide growth, jobs and social development.

Argentina went through a traumatic financial crisis, changed governments many times, introduced a scheme to repay creditors a fraction of their loans, and amended its development plans, with its growth improving in recent years.

Venezuela, buoyed by high oil prices, is channeling more state resources to social development.  The government also re-negotiated the terms of contracts with oil companies, thus providing an example for Bolivia.

As for Bolivia, it caught global attention with the Presidential victory of an indigenous leader, and now its nationalization move.  The world will watch whether the oil companies will adjust to the new realities and stay on, with new contracts. 

More important, whether President Morales can fulfill his other election promises, especially to uplift the indigenous majority from centuries and decades of poverty.