Bolivia’s nationalisation debacle

In spite of having the region’s second largest natural gas reserves after Venezuela, Bolivia is among Latin America’s poorest nations with a GDP per capita of $1,192 in 2009. In fact GDP per capita is less than one quarter of the regional average $4,780 (measured in constant 2000 prices).

Nationalisation of the oil industry first occurred in 1937. Since 1952 there has been a military coup, 12 different presidents, policies have constantly changed from nationalisation to reversals of nationalisation and generally high inflation rates (reaching a peak of 11,750 per cent in 1985). The last regime change occurred in December 2005 when Evo Morales was elected president. Despite the fact that foreign companies had invested almost $4 billion in the hydrocarbons sector since Bolivia opened its energy sector in the 1990s, Morales nationalised Bolivia’s gas and oil industry in May 2006.

Morales gave foreign investors a six-month deadline to comply with the government’s demands or leave. More specifically, Morales’ nationalisation decree stated that all foreign-owned companies must hand over majority control of their companies to the state-owned company and were given 180 days to renegotiate their energy contracts with the Bolivian state. Also, during this period, the largest foreign owned companies were slapped with a 32 per cent hike in royalties and taxes.

However, Bolivia needs foreign-owned companies, such as Brazil’s Petrobras, which accounts for roughly 20 per cent of the country’s GDP and 24 per cent of its tax revenue. Morales’ actions are extremely short-sighted because, although Bolivia may see some short-term gains as a result of increased tax revenues, in the long-run there will be less investment, which is the ultimate driver of increased productivity and economic growth.

Author: Jasson Urbach is an economist with the Free Market Foundation. The above is an excerpt from the chapter, Problems with State Ownership of Enterprises, he wrote for the recently published FMF book, Nationalisation.

FMF Policy Bulletin/ 8 March 2011