Chavez’s nationalization of foreign-owned industries is part of global pattern

Venezuelan President Hugo Chavez’s recently announced plan to nationalize the telecommunications and electricity industries in his country sent shockwaves through boardrooms at Verizon, AES and other U.S.-based corporations with large holdings in Latin America.

While politicians, pundits and stock analysts heralded the plan as the leading edge of a “socialist revolution” sweeping Latin America, a more sober analysis suggests that Chavez’s crisis is politics as usual — the latest episode in a predictable pattern of tensions that tends to arise whenever corporations make large foreign investments.

Venezuelan president Hugo Chavez recently called for the nationalization of telecommunications and electricity industries in Venezuela, a move that could pose problems for Verizon and other U.S.-based corporations with large holdings in Latin America.
Venezuelan President Hugo Chavez recently called for the nationalization of telecommunications and electricity industries in Venezuela, a move that could pose problems for Verizon and other U.S.-based corporations with large holdings in Latin America.

“The one point that has been really missed by the media is that the situation in Venezuela is part of a much wider trend, and is more complex than a rise of leftist governments in Latin America,” suggests Nathan M. Jensen, author of a recent book on the political economy of foreign direct investment by multinational companies.

“The oil, mining and infrastructure industries have found themselves in difficult political situations around the globe,” he adds. “The reasons for this are complex, but the pattern is global. Of the 100-plus contract disputes at the World Bank arbitration center (ICSID), about half are in these industries.”

Jensen, an assistant professor of political science in Arts & Sciences at Washington University in St. Louis, is the author of “Nation-States and the Multinational Corporation: A Political Economy of Foreign Direct Investment” (Princeton University Press, 2006).

His book offers a detailed analysis of foreign direct investment flows in 100 countries since 1970, as well as one-on-one interviews with investment decision makers in countries around the globe, including Venezuela and Brazil.

Jensen’s research offers several reasons the oil and mining industries are the target-of-choice for populist political agendas in developing countries:

  • Major extractive industries are easier to nationalize because politicians can literally send in the troops, occupy and take over operations. This requires much less expertise than nationalizing high tech firms.
  • Although governments may want to nationalize all foreign investments, many investments — from engine plants to banks — require inputs and outputs from the parent firm. Oil and minerals only require buyers, and there are plenty.
  • High natural resource prices often lead to backlashes against oil and mining companies in both developed and developing countries.

“Although recent scrutiny of oil companies in the United States is a far cry from nationalization, the popularity of these companies tends to sink as prices rise,” says Jensen.

Escalating prices, notes Jensen, also played a role in an increase, over the past decade, of nationalizations and contract disputes involving multinational investments in infrastructure industries, such as electricity, telecommunications, sewage, roads and water concessions.

Ironically, many of these same industries were privatized years earlier because consumers were fed up with state-run operations notorious for poor communication services, rolling power blackouts, outdated sewage systems and inadequate road networks. Politicians were happy to push for privatization because public pressure had forced them to provide these low-quality services at well below cost — a big drain on tight state budgets.

After privatization, service quality generally increased but private companies began, not surprisingly, to charge higher prices for their services. During the 1990s, as many countries went through financial crises, public outcry over high prices increased, fueling a major backlash against foreign firms.

Once again, opportunistic local politicians are ready to play to a populist agenda.

“Take over oil and gas and the government increases its immediate take. Take over electricity and water and lower the bill. These firms, even if well-behaved, offer appealing targets for opportunistic politicians,” Jensen explains.

While nationalization may be appealing to politicians seeking to bolster their populist image, such tactics invariably harm a country’s reputation in international financial markets, making it more difficult to raise capital and attract multinational investment.

The bottom line, says Jensen, is that nationalizations may well do direct harm to the very citizens the populists claim they are trying to protect.

“The reason that many of the infrastructure projects are in private hands is that they siphoned off badly needed government resources and provided low quality services to the citizenry,” Jensen concludes.