Bolivian Gas: Right Goal, Wrong Approach

Bolivia is much in the news these days as Evo Morales accelerates the country's move to the left. Morales' nationalization of Bolivia's natural gas fields and the fallout (see, for example, Pertrobas scraps Bolivia project) is being closely watched as a bellwether for other Latin American countries, and for the questions it raises about how countries should manage their natural resource wealth for the benefit of their people. No matter how laudable his motives, history suggests Morales has just taken a big step in the wrong direction.The issue is not goals but methods. Mr. Morales knows that he needs foreign investment to turn his gas fields into the money he wants to spend making his people better off. As the Financial Times said in a recent editorial, “there is nothing intrinsically wrong about trying to maximize royalties and taxes,” but doing so by killing investment incentives is bad business.I have no doubt that the companies that now extract natural gas in Bolivia drove hard bargains when their contracts with the government were first negotiated. I am even willing to entertain the possibility that those contracts may need renegotiating – Kazakhstan, another hydrocarbon-rich country is doing just that, much to the dismay of the major oil companies active there. But private, commercially driven companies do a better job of getting natural gas out of the ground than do state or state-controlled companies and Mr. Morales needs to make sure such companies continue to find Bolivia an attractive place to do business. My advice to Mr. Morales: leave the extraction of gas to the private sector, fight hard to make sure the state is getting its fair share, and concentrate on how best to spend the proceeds. History's lessons on the spending side of the extractive industries ledger suggest that this is where Mr. Morales' real challenge lies.