27 September 2007

Bringing old ghosts back in

Amidst speeches praising the rescue of national sovereignty, the presidents of Bolivia, Evo Morales, and Venezuela, Hugo Chávez publicly announced, on August 10th, the creation of an oil company owned by both states: the Petroandina. Initial projections from both governments predict that the company will invest USD 600 million within the first year. This is intended for a further exploration into the oil and gas fields recently found just north of La Paz, the capital of Bolivia. The announcement is one step further down the road of a sui generis process of regional integration that has been developing in South America.

According to textbooks, regional integration processes usually lead to the formation of common markets, including lowered tariffs and trade barriers that ease the national firms’ ability to compete in their neighboring markets. Nonetheless, what is taking place in part of South America now is not an integration of markets but an integration of transportation and energy infrastructure led by common state-owned enterprises.

Despite the clear consolidation of market-oriented economies such as in Chile, Brazil and Colombia, newly elected governments are bringing the national States back into to business. After almost two decades of market-oriented reforms promoted since the debt crisis of 1980’s, countries such as Venezuela, Bolivia, and in a lesser degree Ecuador and Argentina, their respective national governments are reclaiming the right to manage main sectors of their domestic economies, in particular the oil and natural gas industries. What has changed in a continent that for decades was the stage of market-oriented reforms sponsored by international agencies such as the IMF and the World Bank?

In this short article we will try to answer this question and show the nature of that integration project sponsored by the President of Venezuela, Hugo Chávez.

New and Old Lefts

Crucial to this process is the already mentioned election of new state-oriented governments in many countries of the region. The wave of new left-leaning governments gaining power throughout the continent in the beginning of the decade can be interpreted as a desire for policies that would extend further than the stabilization programs of the 1990’s, as well for more effective social policies in a region fraught with social and economical inequality. It’s not a coincidence that the word “redistribution” was the catch-phrase of of the newly elected presidents’ campaign speeches (Panizza, 2005).

Nonetheless, as Castañeda (2006) suggests, the diversity within this freshly emergent left has to be taken into consideration.

The new governments can be divided in two different types. The first one is the “new” left which recognizes the importance of a market economy, low fiscal deficits and low inflation and which battles inequalities through social policies. The second type of left, though, could be seen an heir to the populist tradition of Latin America: fiscally irresponsible, nationalistic and prone to authoritarian decision-making. The latter left, elected in Venezuela and Bolivia, is the force responsible for bringing the state back in. According to Castaneda (2006), South America is far from being completely free of this ghost.

The Oil Effect

But the election of “old” left governments does not provide sufficient basis for understanding the whole process. One evident reason for the emergence of more responsible economic policies in South America since the 1980’s debt crisis was the well-documented shortage of credit in the international financial markets at that time. With the disappearance of easy sources of loans, there were few other alternatives than adopting sound fiscal and monetary policies, privatization and regulatory reforms in order to either attract international investments, or to generate surpluses that could be used in public investments. In this context, the pursuit of old-fashioned populist policies would be a prelude to a prolonged recession or hyperinflation, as experienced by several countries in the region.

So what could allow new governments to take this old path again? The answer can be found in the case of Venezuela and the country’s abundant oil reserves. With oil prices sky-rocketing, President of Venezuela Hugo Chávez is able to spend his country’s vast oil fields – it is the world’s fifth largest oil producer – to finance his “Bolivarian Revolution”. With this apparently infinite gold mine, President Chávez is increasingly taking back the control of privatized firms, threatening investors and firms that do not want to submit to his pricing regulation, and steadily increasing public spending through heavy subsidies (the price of a liter of gas around 4 cents of a US dollar) and generous social programs. The public appeal of these policies is evident in the terrible defeat by the opposition in the last election, as well as in the public support for the not-quite-democratic constitutional reforms, proposed by Mr. Chávez in the last years. In Venezuela, the State is definitely back in and fueled by a lot of gas (Shifter, 2006).

Just a Little Help to My Friends

The situation in Venezuela has resulted in more than domestic effects. President Chávez goal to export his 21st century oil-based socialism to his regional neighbours has produced a change in the regional balance of power and created favorable conditions for other governments in the region to implement new state-led economic policies. In addition to the controversial support for a presidential candidate during the last Peruvian election, and the disputes with Brazil for the regional leadership, Chávez is using the oil revenues to create conditions where friendly governments can adopt economic policies that diverge from the legacy of market-oriented reforms of 1980’s and 1990’s. The countries where this influence is more visible are Bolivia and Argentina.

In Bolivia the nationalization of natural gas refineries in 2006 led by Bolivian president, Evo Morales, was publicly supported by Chávez, and by the promise of investments by Petróleos de Venezuela S.A. (PDVSA), the Venezuelan state-owned oil company, to increase production. Consequently, Morales could send foreign oil firms – including the Brazilian state-owned oil firm Petrobras – home because he was backed by the petro-dollars of PDVSA (Oil and Energy Trends, 2006). It is reasonable to wonder if Mr. Morales project could be this radical without the Venezuelan support, especially when considering that the country is one of the smallest economies in the region, with a GDP in 2006 of only USD 22 billion. To reject all foreign investors under such conditions, without a Plan B, would be an unwise move even for the logic of more radical nationalism.

In Argentina, the help of Chávez has been less direct but not less effective. Since the Argentinean default of 2001, the country hasn’t tried to sell any new bonds on international financial markets, which puts less pressure on the government to implement more acute market-oriented reforms, or adopt more austere fiscal and monetary policies. With President Nestor Kirchner, the Argentinean government has implemented economic policies of nationalization, price-controls, systematically undervalued currency and plans to create a development bank to boost investments (Grugel & Riggirozzi, 2007). However, the sustained independence from the international financial markets has only been possible because the Venezuelan government has bought USD 2,7 billion in Argentinean bonds since 2004. In other words, the isolationist strategy of the Kirchner administration has been possible because Chávez has been financing the Argentinean debt. Besides the “little” help received from the Venezuelan government, both countries also benefit from the recent general increase in commodities prices, such as in natural gas, for Bolivia, and in wheat, for Argentina. With revenues from exports also going up, they are able to increase the scope of the State intervention in the economy and the range of social programs (Santana & Kasahara, 2007).

Infra-structure Integration and What Else?

The integration project financed by President Chávez is apparently bi-dimensional, based on the idea of a common infra-structure of roads, oil and gas pipe-lines, and a shared ideology of strong interventionist States and state-owned firms. But it is hard to figure out what else we could integrate since domestic markets tend to be protected from any kind of competition according to this logic. The idea of opening up the market for labor and goods, for instance, would represent a potential loss of domestic jobs, as well as making it difficult to justify state subsidies to domestic firms. The creation of common monetary institutions doesn’t seem very plausible either, considering that controlling the currency is a fundamental strategy of his economic model, a strategy that has also been adopted by Morales and Kirchner (Kellog, 2007). Because of that, it is not surprising that the Brazilian President, Lula da Silva, is not pushing his Congress harder to approve Venezuela’s membership in Mercosul – the regional free-trade agreement that includes Brazil, Argentina, Uruguay and Paraguay (Camargo, 2006). As representative of a more moderate left and president of the biggest economy in the region, Mr. Lula has good reason to be suspicious of Venezuela’s growing influence over the sub-continent.

Another interesting question is what we can expect of such integration in terms of stability. What would happen if Morales, his partner, lose the next election? Or what would happen if the oil prices fall? What will Chávez do if the inflation starts to rise again (it was already around 12% in 2006)? The answers are troubling. Even though the oil prices don’t show any signs of falling in the near future, it will end, and it will end faster if the production increases in order to finance Chávez’s many projects. And Bolivia’s and Argentina’s dependency on these revenues is do not bode well for their economic development.

An even more serious concern is the fact that, although legitimately elected, Mr. Chávez has been giving serious signs that he wants to stay in power longer than the constitution presently allows. His movement toward a constitutional reform that would change the Venezuelan rules in concordance with his desire to stay in power is a serious threat to a region that is experiencing its first taste of democracy after decades of military rule. And, although it might not be a real possibility, it will be even more dangerous if Chávez‘s controversial methods are adopted by his friends. In the worst case scenario, the result of this integration process, besides bringing back the ghost of economic mismanagement could be the return of the authoritarian ghost as well. Let’s hope that one is forever exorcized.

Yuri Kasahara


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