Nationalizations: Part I. A Latin American Story

The official announcement was made on May 1st, to match the International Workers’ Day commemoration. Though the largest and more significant gas reserves are still underground, the impoverished Bolivian people’s elation at the government’s decree made me think of a casino where, suddenly, every gambler became entitled to win the jackpot “on the house”, just by staying in the premises long enough. Every citizen a major shareholder.

Of course, nationalization of foreign enterprises is not a novelty in Latin America. Early in the 20th century a special ritual was shaped to mark these redeeming occasions. Here is what I wrote home from La Paz at the time:

As I turned on my hotel room’s TV set, the theatrics of yet another Latin American nationalization looked back at me with its all too familiar elated rhetorics, the fervid speeches evincing historical antecedents and consequences, the cheering crowd, the T-shirts, the “death-to-imperialism” slogans, the indefectible military deployment that accompanies the taking over of an industry hitherto run by foreigners.

A few weeks ago, we Venezuelans witnessed yet another oil nationalization, the second one in 30 years. Early on in February, large telephone and energy networks had already been nationalized.

Strictly speaking, all the Venezuelan government did was acquire more than enough equity in several joint ventures with foreign oil companies to ensure control over large heavy-crude upgrading facilities in the Orinoco Belt. A 60% share of it all, to be exact. Yet the official press release read more as a war dispatch than a financial report. Its inflamed wording described a stock-exchange operation as a fierce battle won over an invading foe.

Corporate logos were removed by military personnel and the national banner was hauled up as two recently acquired Soviet-era Sukhoi-30 jet fighters flew several times over the remote facilities and the jubilant crowd hauled in for the nationalization rally.

This symbolic recurrence of militarism in Latin American nationalization rites can certainly be baffling. It dates back to post-Independence days when our newly born republics asserted their sovereignty by waging wars with their neighbors to settle territorial disputes. But even these wars had to be financed.

During the 19th century, Latin American economies simply could not accommodate taxation. The basic weakness of our nations’ fiscal system stemmed from the meager returns of export-led economies with all its consequences, not the least being that customs’ revenues were accordingly scant.

To make matters worse, the very same elites that would advocate export-led growth were more willing to wage bloody and costly civil wars in order to attain political power than bring themselves to accept their meager exports being taxed. Government monopolies, such as those of tobacco and salt were nothing but vestigial ideas of the Spanish Empire’s royalty system—such as were the quicksilver, alcoholic beverages, gunpowder or playing cards monopolies—and proved not only insufficient to public finances but seldom a source of petty—and not so petty—corruption. Direct taxation over impoverished rural populations was simply out of the question. And, again, export taxes countered the obvious necessity to foster foreign trade.

Thus, during most of the 19th century, and well into the 1930s, Latin American public finances, with only a few exceptions, were continually in a entrapping situation. Even when forcefully supported by foreign investors, the driving force of economic development before the 1930s was the private sector. This sector, decided where to invest, what to produce and what services to offer. The resources available to the state were very limited. Revenue could only be supplemented by borrowing, but domestic capital markets were weak and foreign ones were either reluctant or remote.

This was the context in which, approaching the 1940s, Latin American populist nationalism entered the realm of politics and nationalization came to be the Latin American favorite method of state intervention.

Early in the 20th century, the government of Jorge Battle in Uruguay had been pioneer in creating public utilities to undermine the monopoly position enjoyed by foreign companies while, at the same time, finance the government without apparently taxing anyone. Bur Mr. Battle’s actions were limited to public utilities and, after all, they entailed the creation of new enterprises, albeit doomed to be subsidized, sooner or later, in all their inefficiency. Those state-owned utilities employed an ever growing bureaucracy that got to be Mr. Battle’s party political clientele for decades to come.

The kind of nationalization most revered by many Latin American populist governments (and constituencies!) was the brainchild of Mexican president, general Lázaro Cárdenas, in 1938.

To be sure, the foreign oil companies that had operated in pre-Cárdenas Mexico were part of a tangle of bribery and payoffs. On the other hand, Cárdenas was an ardent nationalist who resented the arrogance of the oil barons. Convinced that the foreign oil companies were an obstacle to Mexico’s economic development, he signed the expropriation order in March, 1938.

As oil industry historian Daniel Yergin wrote, General Cárdenas’s decree “was a great symbolic and passionate act of resistance to foreign control, which would be central to the spirit of nationalism that tied the country together.”1

Mexico’s oil industry nationalization came about in a time during which such “acts of resistance” were in short supply throughout the region. The preceding nationalization of the Mexican railways network, that also had been ordered in 1937 by general Cárdenas, no doubt lacked the defiant semblance of his showdown with the oil companies.

But it set a precedent that “proved” that to catch up with the developed countries it was more expeditious to expropriate than to create and, in all probability, convinced general Cárdenas that he could go one step farther down the nationalization path.

Some 40 years later, in 1976, after long talks about compensation with the foreign companies that had run the oil business for more than 60 years, Venezuela nationalized its oil industry.

The take-over followed exhausting debates in Congress over fastidious matters daintily discussed by both governmental and opposition experts. This secured a lasting political consensus on why and how to take control of the business and how much it was worth.

Of course, there was an official ceremony and plenty of speeches on “take-over day”, but as it all was a friendly agreement, nobody thought a military occupation of the oil camps necessary. It was a big mistake.

Many people down here still think there was something “fishy” about that 1976 nationalization. They think it was a half-hearted, if not outright bogus, nationalization; nothing like mi general Cárdenas in Mexico, 1938.

When acquiring Big Oil equity, make sure to have your troops deployed, otherwise your people might think you are just a businessman instead of an upright socialist.

No troops to be seen; no defiance to show.

… to be continued in Part II