Lessons from Bolivia: re-nationalising the hydrocarbon industry

Stephan Lefebvre & Jeanette Bonifaz

President Evo Morales came to power in Bolivia in 2006 amid widespread discontent. The country had been experiencing a long-term economic growth failure, with income per capita in 2005 lower than it was 27 years prior, and privatization efforts had been widely unpopular, including with the indigenous majority. Conflicts over natural resources, most notably the water and gas wars of 2000 and 2003, respectively, led to the resignations of Presidents Gonzalo Sánchez de Lozada in 2003 and Carlos Mesa in 2005. The Morales administration marked a dramatic turn-around for the country. The economy began to grow, experiencing its fastest growth in decades. Bolivia increased its sovereignty over economic policy; social spending increased by 45 percent from 2005-2012 and poverty was reduced by 25 percent from 2005-2011. In order to achieve these results, President Morales nationalized the hydrocarbons sector by decree early during his first year in office, allowing his government to engage in effective redistribution and macroeconomic policies that benefited the poorest segments of society.

For decades, natural resources extraction in Bolivia has alternated between public and private control. The oil and gas industries in Bolivia were privatized in 1996 through Hydrocarbons Law No. 1689 in a process heavily supported by the International Monetary Fund (IMF) and the World Bank as part of a neoliberal reform plan to increase foreign investment in those industries. YPFB (Bolivia’s state hydrocarbons company) was divided into three companies and 50 percent of the shares were auctioned to the private sector, a process that turned control of YPFB’s major assets over to private companies. The winners of the auction, including Enron, Shell and Repsol YPF, were not asked to pay for their shares; instead they simply committed themselves to investing an amount at least equal to the sale “price” over a period of seven years, the epitome of neoliberal governments giving away state assets.1 Additional efforts to attract foreign capital included lowering royalties and taxation rates on the gas industry from 50 percent to 18 percent. International companies were allowed to take possession of any hydrocarbons they extracted, except for a small amount slated for domestic consumption in Bolivia.

Foreign investment and production increased, and new natural gas deposits were found, but the public sector’s chronic fiscal deficit worsened. Rather than attempt to raise taxes on the immensely profitable hydrocarbons industry, now dominated by foreign corporations, the government announced it would create an income tax (the so-called “impuestazo” of 2003) despite prevailing low wages, high unemployment, and high levels of poverty. At around the same time, the government announced plans aimed at raising revenues by expanding gas exports with a pipeline through Chile, which would enable sales to the U.S. and Mexico.

As the public’s backlash against these policies increased, and the country was immobilized by protests. Following the killing of over 60 protesters by state security forces, President Sánchez de Lozada resigned and fled the country, and Carlos Mesa took office in 2003, calling for a referendum on the energy sector to take place in 2004. 92 percent of voters supported nationalizing Bolivia’s gas and 87 percent supported repealing the 1996 privatization law.2

In response, President Mesa reluctantly passed Hydrocarbon Law 3058, which increased taxes and royalties paid on gas extraction from 18 percent to 50 percent. Not only was this seen as too conciliatory to foreign companies, a lack of political will led to the law not being fully implemented. Protests grew throughout the country, and Mesa resigned in 2005.

In May of 2006, five months into his presidency, Evo Morales nationalized the hydrocarbons sector, re-founding the state company YPFB through a repurchase of majority shares in the privatized enterprises and claiming public ownership over the country’s gas and oil resources.3 Foreign companies now turned over extracted resources to the state, which fully controlled sales, transportation and distribution as well as key decisions regarding the refining of raw materials. The nationalization decree also forced foreign oil companies to renegotiate contracts with the new administration. This has resulted in increased revenues to the central government that in 2011 were worth 16 percent of total hydrocarbon revenues (in addition to the 50 percent achieved under Hydrocarbon Law 3058). The added income has additional significance because the 2005 Hydrocarbon Law, largely preserved by Morales, created a system in which much of the public sector revenues bypass the central government and are distributed unequally and regressively among Bolivia’s nine departments

Gas nationalization had a number of interrelated benefits for Bolivia. By claiming a larger role in the industry, the state was able to increase its ability to capture rents associated with hydrocarbon extraction. For each year between 1970 and 2005 the balance of Bolivia’s non-financial public sector was in deficit, but in 2006 the government achieved a surplus of 4.5 percent of GDP and it has remained in surplus every year since, a change that can be attributed to higher revenues. Since 2005, revenues to the government from the hydrocarbon sector have increased almost seven fold (in nominal U.S. dollars). Of course, the government budget has also been helped by higher tax collection, which is linked to the faster GDP growth.

Nationalization of the gas industry allowed the state a bigger role in determining the industry’s broader impact in Bolivia. The government renegotiated supply contracts with Brazil and Argentina, significantly raising the export price of gas and thus bringing them closer to a fair market value. With nationalization, local content commitments were suddenly a part of negotiations for gas industry contractors, consultation periods with local communities could be better enforced, and technological transfer agreements could be arranged to increase the benefits accrued to Bolivians. For example, in 2013, Morales inaugurated the country’s first natural gas liquids separation plant, as part of a program to increase the value-added of the gas industry in Bolivia, and thus the rents accrued from exploiting the country’s natural gas.

Higher revenues allowed the government to increase spending on social programs. Over 11 percent of the government’s revenues from the hydrocarbon sector are earmarked for universities, indigenous groups and the Renta Dignidad grant, a monthly payment to low-income residents over the age of 60 which has provided support for more than one million people. Overall, public spending on health, education, pensions and poverty alleviation programs rose 45 percent in real terms from 2005-2012. Although this increase did not keep pace with the fast growing economy, it helped lower poverty from 60.6 percent of the population to 43.4 percent over the same period (2005-2012), thus lifting about one million people out of poverty (from an initial population of 9.4 million).

In addition to spending on social programs and infrastructure, some of the resource earnings were directed to Bolivia’s Central Bank where they helped grow the country’s stock of international reserves. International reserves, mostly U.S. dollars, act as a buffer against external shocks, preventing balance of payments crises by ensuring an adequate supply of U.S. dollars for importers to exchange for local currency. In 2005, Bolivia’s international reserves could cover 6.9 months of imports, while in 2013 the country’s international reserves could cover 15.9 months.

Bolivia’s more than adequate level of international reserves is one of the main factors that has allowed the country to avoid resorting to loans from the IMF. For the 20 years preceding the Morales administration, Bolivia was operating continuously under successive agreements with the IMF (with the exception of one 8-month period). Agreements with the IMF were a de facto condition for funding from other sources, especially the World Bank, Inter-American Development Bank and high-income governments. Neoliberal policies were imposed on Bolivia by this creditors’ cartel, who among themselves “collaborated extensively on fiscal and financial sector reforms as well as other structural reforms [for Bolivia],” though the World Bank “took the lead in advising the authorities on capitalization (privatization),” including the gas privatization of 1996. Nationalization of Bolivia’s hydrocarbons sector in 2006 went against the recommendations of these international development institutions and the Washington Consensus. In 2006 the World Bank even wrote that with nationalization, revenues to the government “could diminish due to a fall in [natural gas] production.” The actual result was very different, as predicted by many who supported the re-nationalization decision.

Bolivia’s success in recent years signals a second independence for the country, now able to pursue economic and social policies without the influence of the United States, which wields considerable power within international financial institutions like the IMF and World Bank. In Bolivia, impressive poverty alleviation and faster economic growth were achieved through an economic program that prioritized increased sovereignty over natural resources.

Republished from Open Democracy

1 Kaup, Brent Z. “A Neoliberal Nationalization.” Latin American Perspectives 37.172 (2010): 123-138.

2 Velasquez-Donaldson, Christian. “Analysis of the Hydrocarbon Sector in Bolivia: How are Gas and Oil Revenues Distributed?” World Resources Institute (2007), 7. 

3 Ibid, 51

Bolivia eyewitness: Pro-poor change transforming the country

Tyson Baird, Green Left Weekly

President Evo Morales and his party, Movement Towards Socialism (MAS), won a resounding victory last month. This gave the Morales administration a further five-year term to deepen the progress of the past nine years.

I was privileged to take part in a delegation to Bolivia via the New York-based Alberto Lovera Bolivarian Circle. The delegation travelled around the country learning from, and offering solidarity to, the exciting revolutionary processes taking place in Bolivia.

We met with a wide variety of political and social movements, with a particular focus on the issue of food sovereignty.

Since Morales was first elected in 2005, many important social gains have been achieved for Bolivians.

Poverty has been cut by 32%. Education and health care are now free and universal. Wages have risen. The elderly now receive pensions. This is just to name a few changes.

Most impressively, a sense of dignity and power has been returned to the indigenous majority. It was acutely evident that the people are actively shaping the future of the country. They are proud and emboldened by this fact.

Morales is the first indigenous person to become Bolivia's president, and is now set to become the longest serving Bolivian president.

Beyond the president, indigenous representation in power is significant. Examples include a parallel justice system allowing certain legal matters to be resolved at a local level via traditional means.

The acknowledgement of indigenous languages and culture, now taught at an indigenous university. The term “Plurinational State” that Bolivia has officially adopted is by no means a symbolic gesture.

Symbolically, but importantly, women are now seen wearing the traditional bowler hats and skirts while holding powerful government positions ― a huge turn around from previous administrations. “You are not welcome here dressed like that,” was the experience of a female leader upon first entering parliament in 2005.

The role of women in Bolivian politics and social movements is impressive and exciting. We met with various leaders who spoke with infectious passion and confidence.

This seems unique in an otherwise macho society. Today women make up over 50% of members of parliament.

Positions of power are now held by the poor. This allows them to decide on the most appropriate measures for development.

Creative and inclusive policies have been developed to assist the advancement of all of society.

Visiting coca farms in the tropical Chapare region, it was immediately evident that US government allegations that Bolivia is doing nothing about drug production are unfounded.

Coca is a plant traditionally used by Bolivia's indigenous people, for whom it is culturally significant. However, it can also be manufactured into cocaine, leading the US to push for its eradication.

Under the MAS government, coca production has been reduced. The farmers are legally allowed to grow a coca plot that is 40 square metres in size. This enables coca farmers to earn a living, but also encourages diversification of their crops and land use.

Coca leaves are then sold through the regulated Coca Federation to meet domestic needs.

Such regulations allow the poor farmers ― living in mud huts with modern technology often limited to a light bulb, a television and a mobile phone (hardly the requirements for drug manufacturing) ― to make a modest living.

This is a far cry from the complete failure of US-backed drug enforcement of the past, which in the name of the “war on drugs” removed poor farmers from their lands and led to significant bloodshed.

Under these restrictions, the government is able to prosecute those who grow coca outside of the established parameters, while allowing Bolivian farmers to legally produce a product that has been used for thousands of years in the region.

On Election day, October 12, the streets of the capital La Paz were transformed into a playground. Skateboards, bikes, football games and alfresco dining reclaimed the bitumen.

Electoral laws do not allow the sale of alcohol or the use of private cars on election day, giving the usually chaotic city a charming calm.

Early in the evening, thousands of sober MAS supporters flocked to the Presidential Palace in Murillo Square, singing and dancing.

At 9pm, Morales, flanked by Vice-President Alvaro Garcia Linera and other companeros, appeared on the balcony to address the faithful and claim a resounding victory with more than 60% of the vote.

The elections gave a formal endorsement to deepen the revolution for five more years. The band played and opportunistic vendors were selling beer before the fireworks had stopped.

In 1781, the Spanish dismembered Bolivian freedom fighter Tupac Katari in Murillo Square. His parting prophecy was: “They will only kill me, but I will return and it will be in the millions.”

There are now more than 1 million people on the mountains surrounding La Paz. They have returned and, once more, they have spoken.

The people have halted 500 years of imperial dominance. They can now catch the newly built government cable cars down into the city.

[Tyson Baird is a solidarity activist who lives in Adelaide.]

Law of Mother Earth: A Vision From Bolivia

Peter Neill

Just when you think the world is impossible, the world surprises.

Looking toward the future, one can easily despair over the scale of change required, the intractability of vested interests and governments, and the human energy and imagination required to make any change for the better. We talk of hope, but when specific actions are considered and expressed, all the reasons against often overwhelm the possibility.

Enter Bolivia, where in December 2010, in response to an understanding of the impacts of climate change on the nation's economic and community health, the National Congress voted to support an act to protect the well-being of its citizens by protecting the natural world--its resources, sustainability, and value--as essential to the common good. The act was supported by Bolivian President Evo Morales; revisions of the national legal code were explored; over 2,900 specific conservation programs and anti-pollution projects, conceived as expressions of the practical application of the law, were implemented in all 327 municipalities; $118 million was invested; and full legislation enabling this new social and economic model is expected to be ratified soon.

The language contained in the legislation is astonishing. Here are the binding principles that govern: 1) Harmony: Human activities, within the framework of plurality and diversity, should achieve a dynamic balance with the cycles and processes inherent in Mother Earth; 2) Collective Good: The interests of society, within the framework of the rights of Mother Earth, prevail in all human activities and any acquired right; 3) Guarantee of Regeneration: The state, at its various levels, and society, in harmony with the common interest, must ensure the necessary conditions in order that the diverse living systems of Mother Earth may absorb damage, adapt to shocks, and regenerate without significantly altering their structural and functional characteristics, recognizing that living systems are limited in their ability to regenerate, and that humans are limited in their ability to undo their actions; 4) Respect and defend the rights of Mother Earth: The state and any individual or collective person must respect, protect and guarantee the rights of Mother Earth for the well-being of current and future generations; 5) No Commercialism: Neither living systems nor processes that sustain them may be commercialized, nor serve anyone's private property: 6) Multiculturalism: The exercise of the rights of Mother Earth require the recognition, recovery, respect, protection, and dialogue of the diversity of feelings, values, knowledge, skills, practices, transcendence, science, technology and standards of all the culture of the world who seek to live in harmony with nature.

The legislation continues: Mother Earth has the following rights: to life, to the diversity of life, to water, to clean air, to equilibrium, to restoration, and to pollution-free living. And it further outlines the obligations of the State and the people to these principles and rights as a binding societal duty.

The Bolivian economy does rely heavily on natural resource export activity, earning a significant part of its foreign exchange thereby. But this moves forward nonetheless, as an endeavor initiated and supported by Bolivian political groups representing some three million voters, is on its way to finalization and implementation as national law, supported by the local and national government, with an already existing ministry to implement revisions to the legal system and to continue the applicable programs already underway. Bolivia attempts to move forward, to show us another way, and nearby Ecuador, with similar intent, is right along side.

As importantly, consider the impact of such a change on the most divisive issues elsewhere: the growing global conflict over excess consumption of coal, oil, gas, cement, minerals and marine resources, pollution that destroys the sustainability of the land, privatization of water, genetically modified agriculture, air quality, ocean acidification, species extinction, action to meet the now and future conditions of a changing climate--all the things we fight about elsewhere against the overwhelming evidence that we, through ill-considered, continuing actions, are exhausting the capacity of the earth, taking from nature, and then taking more, with no awareness, at least no evident interest in sustaining any of it for the future.

The Law of Mother Earth: not just an idea, more than a vision. Something new. Something real. Change must begin somewhere, sometime; perhaps Bolivia is inventing the social model and role of governance that will demonstrate how globally we can transcend the divisions and conflicts, beyond the destruction and despair that we feel, toward an harmonious, effective, efficient, and equitable society connected by the true value of nature as sustainer? If so, should we not pay attention?

Republished from Huffington Post