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2 THE BEAR'S
LAIR Empowering the
fruitcakes By Martin Hutchinson
The long world boom, driven by cheap money
and resulting in high commodity prices, has had
one overwhelming disadvantage: it has empowered a
series of economic fruitcakes - national leaders
and private sector investors who operate on
principles that make no economic sense.
Without Schumpeteran "creative
destruction" there is no force separating the
sound from the unsound, the valuable from the
insane. The long-term
destruction of wealth through this process will be
far greater than the short-term profits such
people think they are creating.
For
example, the Center for Economic Policy and
Research last week presented the Bolivian Minister
of Hydrocarbons and Energy, Carlos Villegas. Evo
Morales, the President of Bolivia, is a follower
of Venezuela's Hugo Chavez, but appears to be
considerably less of a thug than Chavez.
He also claims to be the first person of
indigenous ancestry elected president of Bolivia,
which if true indeed shows that the country has
been run in the 180 years since independence
largely in the interests of the Hispanic-ancestry
governing class. If so, they’ve done a lousy job,
as Bolivia is the poorest country in Latin
America, in spite of having considerable natural
resources, which of course is a large part of the
problem. As British prime ministers from Sir
Robert Walpole to Lord Liverpool could have told
you, it’s perfectly possible for an oligarchy to
rule in the interests of the country as a whole
and enrich everybody, including themselves, by
doing so.
Villegas was in town to give a
vigorous defense of Bolivia’s nationalization of
its oil and gas resources. All 12 of the foreign
oil companies involved were happy to continue
providing services to Bolivia without ownership of
the oil, he claimed, while doubling production
within five years would allow the Bolivian
government to provide welfare to the poorest in
Bolivian society, including those of indigenous
origin. Fifty percent of hydrocarbon revenues were
to flow to the Bolivian government and the
remainder, net of payments to international oil
companies for services, would flow to the recently
renationalized Bolivian state oil company, YPFB.
Bolivia intends to build a 1,500km gas pipeline
into Argentina, which rations gas prices at about
50% of market price, in order to avoid the vulgar
necessity of piping gas to the much closer Chilean
coast, as had been agreed by the previous Bolivian
government.
Since I was surrounded by True
Believers, some of them distractingly beautiful
(why do the left-of-center think tanks have all
the pretty girls?), I decided against asking an
aggressive question. Instead I merely inquired
politely what Bolivia would do if the oil price
dropped back to say $40, twice its level as
recently as 2002. Villegas replied that I was
foolish to believe that the oil price would ever
drop back; demand from India and China meant that
it might stabilize, but could never significantly
retreat.
The leftist dream of nationalized
Bolivian resources proving wealth to all
Bolivians, without the unpleasant necessity of
bringing in foreign companies has received
majority support in referenda. Its only opposition
comes from the oil-rich province of Santa Cruz,
which is seeking independence, but as Morales has
said, his opponents are motivated by a "bourgeois
ideology" of "free market, foreign investment,
racism, etc". The bourgeois ideologists have
currently seized control of Bolivia's busiest
airport near Santa Cruz city and the dialectical
struggle is ongoing.
Economically, the
Morales government's progress even looks
plausible. Economic growth was 4.5% in 2006, in
spite of an excessive 1.4% population growth rate,
while the budget remained in surplus and inflation
ran at 4%. Thus, taken on the surface, there is no
special reason for the moderately well informed
Bolivian voter, uninterested in the arcane corners
of economic theory, to suppose that Morales'
policies are nothing other than economically
sound; they have indeed produced a better
short-term result than the much-maligned
"neoliberalism" of 1986-2001. Only we know that if
oil prices drop, the Morales experiment will
descend into poverty and bankruptcy quickly,
whereas if they remain high it will merely take a
longer time to do so, as the capacity of
government to destroy value, when unhampered by
legal and market constraints, is essentially
infinite.
It's not surprising that
electorates vote for economically suicidal
political parties when the costs of doing so are
so well hidden. If voters are given the choice
between sound IMF-friendly policies that will
improve their lot in the long run, but may cause
as much as five years of economic pain as
subsidies are removed and interest rates raised,
it is by no means clear that they will always vote
the "right" way. If in addition they are provided
with an economic bonanza from commodity price
movements, replacing 15 years of slow growth under
IMF tutelage with a cornucopia that appears to
make the leftist government's promises of economic
nirvana realistic, their decision making may be
warped for a very long time.
Hugo Chavez,
after all, has been in power for nearly a decade
in Venezuela. The previous governments had been so
corrupt and so economically unsuccessful (lowering
national productivity by more than 25% in the
period 1970-1998) that the vast majority of
Venezuelan voters knew a change was needed, but in
1998 they chose the wrong one. Chavez was in
severe danger of being ousted in 2001-02 and
indeed was temporarily removed by a coup (which in
the good old pre-Watergate days of the James Jesus
Angleton CIA the US would have supported
properly). However
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