The government of Bolivia has just announced that it intends to raise capital by issuing its first government bond since the 1920s, when JP Morgan helped the country fund construction of a railway. This time around, Bank of America, Merrill Lynch and Goldman Sachs will be leading the bond issuance, designed to promote investment in natural resource production, manufacturing, and the generation of electricity. The government of Bolivia hopes that issuing this bond will erase investors' collective memory and change the prevailing view that the government routinely expropriates foreign investments in the natural resource sector.
Nothing would do that more than stopping expropriating foreign investments. Bolivia first expropriated foreign-owned assets in 1937 (Standard Oil of New Jersey -- ExxonMobil's corporate ancestor) and has seized control of oil and gas assets on numerous occasions since that time. President Morales has a well documented history in that regard, including mass gas sector nationalizations in 2006, and the expropriation of four electricity-generating companies in 2010.
Morales's actions are particularly noteworthy today because they come at a time when many in global business thought nationalizations were passé. But it also comes at a time when economic nationalism is on the rise and the state has demonstrated a growing propensity to become more engaged in business. This is a global phenomenon, and evidence of the value placed on securing long-term energy and natural resources at a time of high commodity prices and seemingly insatiable demand.
In Bolivia's case, history is at the heart of this issue. Since the 19th century, Bolivia has fought with its neighbors over land and what lies beneath it. Approximately half of the land Bolivia once held, which at one time extended to the Pacific coastline, is gone:
- In 1884 a Chilean attack on Bolivia's Litoral Province cost Bolivia its coastline (the war was ultimately fought over the ability to export dried bird dung, prized at the time for making fertilizer and saltpeter);
- In 1903 Brazil persuaded the large state of Acre to secede. Brazil thus gained a highly productive rubber-growing state, at Bolivia's expense;
- A 3-year war with Paraguay ending in 1935 was motivated by Bolivia's desire to secure a disputed border in which it hoped to find oil (it wound up losing a region the size of Utah to Paraguay in the process); and
- Argentina and Peru secured additional portions of Bolivia through diplomatic demarcations later in the 20th century.
It is the cumulative history of land loss, the resulting national humiliation, and Bolivia's desire to secure and control its natural resources that is ultimately behind President Morales's actions. Resentment over the war with Chile stopped plans last decade for a gas pipeline to the Chilean coast, even though financial backing and export markets were already in place.
Bolivia was one of the first Latin American countries to adopt 1980s IMF policies, which tied loans to privatization, debt reduction, and a relaxation of labor standards. State-owned companies were sold, government spending and regulation was reduced, and foreign capital was courted with the promise of a new beginning. Yet today, half the population still lives on less than $2 per day.
While nationalization is a short-term "fix" for national economic aspirations, its longer-term consequences are nearly always damaging, since foreign businesses hesitate to invest in countries that demonstrate a propensity to nationalize foreign-owned assets. Among Bolivia's neighbors, Brazil, Chile, and Uruguay have achieved what Morales has failed to achieve -- having managed to combine fiscal prudence with open trade and investment policies, and preserving their options with respect to foreign traders and investors while addressing broader national social needs. Morales has closed the door to foreign investors in the natural resource sector, and violated international law in the process by failing to provide fair, adequate and prompt compensation -- not a particularly good combination.
The larger lesson to be derived from Morales's actions is that despite the era of globalization, in which all countries are presumed to play by the same rules and national economies are inextricably linked with the global economy, human behavior and aspirations remain unchanged. Citizens of every country want to be able to say they have control over their own destiny and natural resources. The rise of democracy in Latin America has accentuated this desire, for it raises pressure on leaders to ensure that national economic aspirations are achieved.
In the end, though, Bolivia is attempting a bond issue for a very simple reason -- it has difficulty raising cash in the capital markets -- a position it brought upon itself. Morales has the chutzpah, and three Wall Street institutions have the temerity, to issue bonds for a government that has personified 21st century Latin American socialism and continues a time honored tradition of expropriating foreign-owned assets. It is a sign of the times that Morales would have the audacity to attempt to raise capital in this manner, with the complicity of three Wall Street titans. No doubt, plenty of investors will snap up the bonds. Good luck to them.
*Daniel Wagner is CEO of Country Risk Solutions, a cross-border risk consulting firm based in Connecticut (USA), Director of Global Strategy with the PRS Group, and author of the new book Managing Country Risk (www.managingcountryrisk.com).