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Latin America’s Nationalist Mistakes

Why the nationalization of telecommunications and electricity in Venezuela, along with resource nationalism in South America, is a big mistake.


In Venezuela, President Hugo Chavez has just declared that he plans to nationalize the country's telecommunications and electricity sectors, a measure that will affect private companies like CANTV.

"All those sectors that are so strategic, such as electric power, everything that was privatized will be nationalized,'' Chavez said today in a televised speech in Caracas. "We will recover the strategic means of production. CANTV, let's nationalize it,'' he said, according to a transcript by Bloomberg.

The decision to nationalize CANTV comes after Chavez bullied the private company into retroactively raising the pensions of former workers. It also follows earlier decisions to raise royalties on foreign oil companies and restrict new mining activity to the Venezuelan state.

In Bolivia, the country's energy minister says he wants to raise taxes sixfold on mining, a measure that would hurt Canadian mining companies like Eaglecrest Explorations  and Orvana Minerals Corp. That follows the May 2006 nationalization of the energy sector. "The neo-liberal governments gave away hills, rivers and mining concessions. We have to start recovering those concessions," Bolivian President Evo Morales said in a speech today, according to Reuters.

In Ecuador, the outgoing government expropriated the operations of U.S. oil giant Occidental and increased government royalties on oil production from 20 to 50 percent. Even in Peru, where a "pragmatic" Alan Garcia won the elections last year, authorities have imposed new taxes and fees on the mining sector.

And in Argentina, President Nestor Kirchner practically expelled French utility giant Suez so the water sector could be run by an inefficient state company.

The government policies come on top of growing protests against foreign investors, especially in the mining sector, where critics are demanding a share of the profits from the recent commodity boom.

All this nationalism is counter-productive. Yes, the profits of oil and mining companies have grown as the international prices of those products has increased. But that's the cycle of the markets. The two sectors also see periods of price reductions and losses.

Punishing the foreign investors in mining and oil in the good times will only lead them to reduce their investments in Latin America, a region that desperately needs more - not less - foreign and private investments.

Just as important as investments that expand facilities and operations, creating direct and indirect jobs, is the transfer of technology and know-how. Latin America lags significantly behind Asia in this area and thus benefits greatly when foreign multinationals share their expertise and even create local research and development centers.

Foreign investors also have been able to train a new breed of Latin American executives, that go on to work for the company outside of Latin America or even start their own companies locally. They have gained from a keen understanding of global competition, much more than they would if they worked for a politicized and mediocre state company.


Then there's the case of CANTV, the inefficient Venezuelan state telecom that was privatized in 1991. Thanks to private management, the company (Venezuela's largest private company) has become a highly efficient and successful operator. It is operated and partly owned by US-based telecom giant Verizon, but was scheduled to be sold to a joint venture of  Mexico-based America Movil and Telmex (which have the same owner). The Mexicans were going to buy Verizon's 28.5 percent stake for $676.6 million to begin with, then eventually buy up shares. The public and institutional investors own 58.2 percent of the remaining shares, while the government of Venezuela owns 6.6 percent and CANTV employees and retirees own 6.7 percent, according to the Yankee Group.

The deal was originally expected last year, but repeatedly delayed due to the Venezuelan government postponing their final approval. Now we know why. CANTV was never going to be sold to Telmex or any one else, but form part of the new superstate in Venezuela (which also runs airlines and produces PCs and tractors in addition to the increasingly inefficient state oil company PDVSA). Coupled with Chavez' plans to create one big political party, close opposition media and be able to govern indefinitely and Venezuela is looking eerily like Cuba in the 1960s.

The increased nationalism is sad in light of the fact that state has never been a good driver of growth and development in Latin America nor a good administrator of companies, which instead typically are overbloated, inefficient and moneylosing operations.

Just as statist, populist policies failed in Latin America when they were tried in the 1970s, they will fail again today.  Instead of restricting foreign investment, Latin American governments need to welcome them with open arms.  Only pro-investment policies will ensure sustained growth, lasting jobs and real poverty declines. 

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