The Economics of Trust

British Gas in Bolivia

Trust seems like an old fashioned word these days but when it comes to government and economy a working level of trust is essential. Not everyone can be an economist or the overseer of operations on an international gas pipeline. Not all of us have the background to choose appropriate accounting rules to balance corporate books or to evaluate the health of the national economy itself.

Every society has its convicts, pensioners, disabled, orphans, the illiterate and innumerate, the unemployed and the terminally ill, not to mention elements of infrastructure such as roads and airports. A compassionate society needs to trust that their government will provide for the unfortunate, for this they are willing to pay with their individual taxes or corporate taxes. A society that wants to develop needs to look to its infrastructure needs.

Many levels of trust are necessary for a functional democracy. One needs to believe in the validity or a constitution (or book of laws) and the justice of a legal system. Privilege cannot be the only power. Even those without property, power or money must be protected as citizens or residents of the state. Trust in the elections and the vote is essential, but democracy barely begins there.

Probably the most important duty of a functioning government to its people is the regulation and taxation. As occupants of a position of trust, government civil servants have a job to do. Theirs is the task of applying the laws of the country regulating the operations of national and international companies that operate in their territory. By doing this successfully, revenue is assured which in turn can be re-invested in the country to provide what the people require. Intelligent government planning can also incorporate guarantees for the environmental and balanced growth. This is particularly important in countries like Bolivia that rely for much of export income on the extraction of raw materials.

All of this is great in theory but in Bolivia things don’t necessarily function as all of it’s people might wish.

Why would a privileged South American elite or its foreign corporate allies, want a true democracy in Bolivia? Is it in the interest of the trans-nationals that eagerly compete for gas and oil contracts in the country to have to deal with a functioning government? Alternatively, might it be more profitable to have friends in government who make beneficial things happen for a price?

Let’s take a look at the numbers. Bolivia is a resource rich country with a small population of only eight million. As South America’s poorest country it is difficult to estimate the levels of poverty in the country but a conservative estimate puts the numbers living below the poverty line in the countryside at 80%. Most of the population lives in the high Andes region (the altiplano). Like all of its neighbors, recent internal migration has created expanding urban centers of poverty especially around the twin cities of La Paz and El Alto.

The Bolivian poor are experts in dealing with extractive export-focused industries. Even in the 1500’s Bolivia was famous for producing the world’s largest silver deposits. For centuries a mint in the altiplano city of Potosi turned ingots extracted from a mountain of silver (the ‘Cerro Rico’) into coins used throughout the Spanish empire. Now the mint is a museum, the mountain a honeycomb of small mines extracting marginal zinc and tin deposits, and cruelest of all; Bolivia imports its coins for its under-valued currency, from Italy and Spain. The difference is that the Bolivian government now has to pay to import worthless alloy coins from Europe, while Spain simply took the silver coins for nothing, enslaving the local indigenous population to ensure the labor supply.

Conventional wisdom leads us to believe that an independent functioning democracy would do things differently were another great mineral resource to be discovered in modern times to rival the riches of the ‘Cerro Rico’ but how much truth lies in conventional wisdom? Parallel economic situations might suggest otherwise:Take for example South Africa, home to some of the world’s largest gold and diamond mines or Iraq, home to the world’s second largest ‘national’ oil reserves. Does conventional wisdom apply there? In both cases, it required a bloody revolution for the citizenry to regain rights to the minerals that lay below their feet. The odds were against both populations. In 21st century Iraq, the fight continues, the historical outcome as yet unknown. In 20th century South Africa, some of the world’s largest Anglo-American banking and mining interests underpinned an extreme racist military machine. It took many decades of sacrifice to wrest back partial control of that country’s resources and the legacy of instability and racism still presents its difficulties. The Iraqi people still face the illegal invasion of the world’s largest military power and the interim government has instituted the world’s most generous neo-liberal privatization putting their country and its resources on the block, opening its resources to trans-national investment in a way that is unprecedented in modern times. Only the insurrection keeps the investment out.

Compared to South Africa or Iraq, Bolivia is still small fry. That said, Bolivia was one of the world’s first great neo-liberal experiments; once described by a World Bank official as the ‘Big Bang’ of neo-liberal economics.
If things continue to proceed as they have since 2003, Bolivia may become the world’s first post neo-liberal nation. History is being written as we speak, the stakes are high, and everything hangs in the balance. The Bolivian poor have taken some vital steps towards democratization of their country. They have proven willing cannon fodder in the first battles in their nation’s most recent resource wars. Many have realized that without their sacrifice, their latest attractive resource, the vast gas fields, will do little or nothing to change their lot. Is there an Al Sadr militia, or a Nelson Mandela to be found in Bolivia? Is someone willing to face the odds that are mounted up against them?

The short answer is yes. Bolivia is not a country of people to be slickly manipulated by its own rich and foreign trans-nationals, (at least not recently). In 2002, a US educated mining tycoon took power in Latin America’s poorest country. The winning candidate campaigned as ‘Goni’, however he was often referred to as the ‘Gringo’, as he spoke Spanish with an English accent. Goni was popular with Western businesses. In particular oil and gas interests from the US, Britain, Spain, and Holland. They saw Goni as a man that they could do business with and they proved to be right.
Goni was also popular with the mainly white Bolivian elite. As one of their own; Goni was just as comfortable in Miami as in La Paz’s rich suburbs or the haciendas of Santa Cruz state. Everything was going to plan until Goni’s term was brought to a screeching halt by mass demonstrations of the poor of El Alto in the so called ‘War of Gas’ in October 2003.

He was ousted quickly, though not quickly enough! Two days before Goni left office, he privatized oil and gas at the wellhead giving a generous 70% share of the profits and ownership to the foreign interests that were pumping these precious resources from under the very feet of the Bolivians.
Fast-forward to 2005 and a new President, Carlos Mesa (Goni’s former vice president), rules with high popularity ratings. Mr. Mesa is very popular with rich and poor alike and curiously, early in February 2005, even the US Government offered their support. An historian by trade, an excellent orator, and a highly principled man, Mr. Mesa is possibly the best chance that Bolivia has. One of the many mammoth tasks of this transitional president is to write the new oil laws “Ley de Hidrocarburos, 2005”. This law will lay down the conditions under which exploitation of gas and oil will proceed for the crucial decades of production ahead.

There is a certain degree of urgency but it is important that the new Law will be equitable. Few Bolivians wish that oil and gas exploitation will go the way of the silver of ‘Cerro Rico’. Vast pipelines are actively pumping out Bolivian gas to Brazil’s mega-cities, and to power the engines of almost half of Argentina’s road traffic (my vehicle included). Many new markets are keen to get online, Mexico, California and most controversially, Chile.
On Mesa’s left lies the highly politicized socialist poor who supported the ex-coca farmer and spokesman for the left: Evo Morales. An astute politician, Morales took Mesa’s side for a time but now refers to the man to whom he came a close second in the presidential race, as “Enemy Number One”. His power base favors nationalizing Bolivia’s resources (for the third time) and he is openly despised by Western corporate interests. On Mesa’s right we have the oil companies and their friends in the Bolivian national parliament. The right is no friend of Mesa either, but openly threatens his government with one international law suit after another if ‘their’ interests are touched.

Mesa began walking this tightrope with a five-point referendum in 2004. The questions, the first referendum in Bolivian history, were on the topic of oil and gas. Many of Bolivia’s population are indigenous living largely outside the money system. Their first language is Aymara, Quechua or Guarani and though few have cars or electricity, they understand the value of energy resources. They know the value of their resource being sold back to them at the pump by Shell and ExxonMobil.

Many criticized the referendum because it did not offer re-nationalization. However radical measures such as a 50% royalty on extracted resources did appear. Though this motion passed by a strong margin the 50% measure is something the British Ambassador to Bolivia, Mr. Chris Poole claims is unpalatable to the oil companies, and simply will not happen. Popular anti-Chilean rhetoric was also employed to stir up the centuries-old hatred for the neighbor who defeated Bolivia in war and took away from them what was their mineral-rich pacific coastline. The straw that broke Goni’s back was agreement of his government to export Bolivian gas to California for their eco-friendly buses via a pipeline and port in Chile.

The referendum’s simplistic but vague terminology was also criticized as somewhat unenforceable and open to interpretation. While it is difficult to imagine how a more complexly worded referendum could have worked in a country where Spanish is very often the second language, this criticism may be merited. Recent claims by Spain’s Repsol executives that their extractive profits would not be affected by implementation of the loosely-worded referendum’s terms seem to concur with claims in Britain’s increasingly right-wing magazine, The Economist, that the referendum was clever in its ambiguity (read: good for the trans-nationals, bad for Bolivian taxation revenue).

Coming back to the topic of trust and the future of the Bolivian oil and gas revenues; Mr. Mesa still has his work cut out for him but Bolivia awaits a new oil and gas law due in June 2005 at the latest. Bolivia seems to be taking control on its own internal market too. While still facing a shortage of internal production and difficulties in controlling internal pricing especially for diesel, things are beginning to change in Bolivia. Last month the government announced a deal with Brazil that included 50% re-nationalization of the PetroBras refineries in Bolivia. In a deal which offered huge increases in gas exports to Brazil the deal was sweet enough for PetroBras to rescind control of their Bolivian refinery operations to Bolivian national oil company; YPFB (Yacimientos Petrolíferos Fiscales Bolivianos).

If this is an indication of things to come, we can expect a re-vitalized YPFB at the center of a mixed (public/private) partnership in the future of Bolivia’s oil business. It is time for the government to play a stronger and more lucrative part in the control of Bolivia’s gas and oil reserves. It remains to be seen whether the West will allow real democracy to operate in Bolivia. Their track-record seems to indicate that this is rather unlikely. Mr. Mesa might be well advised to lean on his relationship with Lula and Kirchner (his two biggest customers) to help him with implementation of his government’s plans.

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