Tuesday, May 09, 2006

Domesticating the Global Left

One of the most interesting things about the Bolivian government’s (re-)nationalization of its oil and gas production facilities is the reaction of other governments. The Spanish and Brazilian governments have both protested vigorously, despite the fact that they are both governed by left-wing parties. The largest investor in Bolivian fields, in fact, is a state company, Petrobras of Brazil. In a reaction that any robber baron could admire, its officials have hinted at the possibility of suing for breach of contract, perhaps even in international court. The Spanish government, abandoning its usual sympathy for the developing world, is considering reduced foreign aid.

What we are witnessing is the surrender of the socialist left, a final accommodation in many of these countries with the basic premise of property rights. The Spanish and Brazilian governments now have a lot invested in the existing global system that has brought so much prosperity to so many, and are mainly interested in defending it.

Bolivia needless to say, is not so enraptured with the existing order. And there is a reason for that. Consider two kinds of resources: extractable capital and human capital. Extractable capital is resources in the ground – oil and gas, minerals, etc. Unlike most kinds of capital, which can be bolstered by investment, its supply is obviously fixed. (Although greater investment can lead to greater recoverable quantities.) It is also immobile, and cannot really be translated into innovation per se. Only human capital brought to bear on the extractable resources can do that. And human capital is also mobile, and hence less tolerant of being abused.

And so we might develop a simply theory of nationalization and other expressions of economic populism. I would expect it to flourish in societies with little human capital and heavily dependent on extractable resources. Those are the societies where foreign knowledge is most essential to making the resource base profitable. Such capital will also demand compensation for its services. In combination with the lack of domestic human capital (and hence income derived from it) and the corruption and instability that such resources generate, appeals to nationalism might resonate most strongly there. (Bolivia has fought numerous wars over resources over the years – with Paraguay over oil, Brazil over rubber and Chile over guano, of all things. The Chilean war led to the loss of its coastal territory, and simmering resentments over a century later led its government to commit the seemingly suicidal act of refusing to run a pipeline for Bolivian gas through Chile to the sea.)

Below is a chart that plots, on the vertical axis, the percentage of exports in 2003 that were fuels – oil, gas and coal mostly. On the horizontal is the population’s average years of schooling in 1995 times its life expectancy – a proxy for human capital. According to the theory, countries in the upper-left portion of the chart – those with the least human and the most extractable capital – are the most prone to economic nationalism. (For space reasons I only include countries with per capita GDP of less than $15,000 in 2003.)

Lo and behold, the country most obviously so characterized is Venezuela. Others making appearances in the populist zone include the Comoros Islands (a nation with 19 coup attempts since independence in 1975), Syria, Russia, Ecuador, Colombia and Bolivia. Among them only Colombia has been largely free of successful appeals to populism in the last twenty years. The consistency of economic policy in Russia, Venezuela, Bolivia and increasingly Ecuador with the nationalist model in recent years is obvious.

It is a very simple test, ignoring all sorts of complicating factors. Taking note of those caveats, populism would nonetheless appear to be the revolt of those who are frustrated by being unable to marry enough human capital to their resource base to make the latter profitable for the average citizen. Alas, to go down the statist route is typically only to make the problem worse. Bolivia and Venezuela are now in fact repeating mistakes made by previous generations. They are temporarily buoyed by favorable export prices, but if that stops the party will too.

The good news is that, if the predictions I made in a previous posting come to pass, nationalism will be on its way out soon. As nations become more integrated, and as they increase investments in the production of ideas, their stake in property rights become greater. And so we witness the spectacle of leaders in Spain and Brazil, with undeniable bona fides when it comes to fighting U.S. hegemony or insisting on greater transfers of wealth from the world’s rich to its poor, nonetheless having the unique zeal of the convert when it comes to property rights in other countries. And that is obviously all to the good.


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