Gas-Rich, Dirt-Poor, Fed Up

After 20 years of free-market reform, South America's most impoverished country is growing restless

Hundreds of striking schoolteachers demanding 50% salary hikes marched through the streets of Bolivia's capital city of La Paz recently in four straight weeks of protests. The teachers, who earn an average of $75 a month, insist that the Bolivian Treasury could afford to pay them a decent wage if the country's natural resources weren't being unfairly exploited.

Their slogan, as displayed on a banner unfurled at a May demonstration, doesn't exactly trip off the tongue: "Expel The Multinational Oil Companies Without Indemnifying Them!" Primary school teacher Filomena Chuquimia, 48, says it's the only solution to Bolivia's problems. "The government signed 40-year concessions with these companies, but they hardly pay us any royalties," she says. "It's just the latest example of the looting of Bolivia's natural resources, which leaves the country poorer than ever."

Why should people outside Bolivia care about teachers marching in La Paz? Because it reflects a heated debate throughout Latin America about the consequences of globalization. After two decades of free-market reforms that sold control of the national airline, the railway system, and the telephone company to private buyers, and gave international companies the right to exploit Bolivia's huge gas reserves, Bolivians are vehemently questioning the wisdom of those policies.

Critics, led by indigenous organizations that are increasingly powerful in La Paz, charge that the government has handed over the country's natural gas riches to multinationals such as Spain's Repsol YPF (REP ), Brazil's Petrobrás (PEBRY ), and Royal Dutch/Shell Group (RD ) for a pittance in tax receipts. The companies maintain that lower royalties have vastly increased exploration for new reserves and production, and that Bolivia is taking in more in taxes from gas extraction than it ever did.


Cornered by street protests -- including a week of demos last October that left more than 70 people dead -- the government is holding a binding referendum on July 18 to decide whether to charge energy companies substantially higher taxes. The outcome will determine to what extent South America's poorest country can count on foreign direct investment to develop its economy, where gross domestic product per capita is a measly $900. Last year, violent protests forced the government to cancel a proposed $5 billion pipeline to Chile's Pacific coast that could have earned Bolivia some $400 million over 20 years in exports of gas to the U.S.

The country's indigenous majority, which bears the brunt of poverty, seems determined to end what they view as the historic foreign exploitation of their natural resources. They see a pattern that dates back to the 16th century, when conquering Spaniards forced Bolivians to work in dangerous silver mines, and that continued through the tin boom of the mid-1900s. These days, says indigenous leader and congressman Evo Morales, "neoliberal policies mean the looting of our natural resources and the concentration of capital in very few hands." He adds: "We have decided to recover political power and our territory."

Bolivia's President, Carlos Mesa, is listening. A 50-year-old historian and former broadcast journalist, he rose from the vice-presidency last October when the protests forced President Gonzalo Sánchez de Lozada to flee the country. In an effort to quell unrest, Mesa is staging the referendum to ask Bolivians if the country's hydrocarbons law should be rewritten to nearly triple royalties paid by multinational companies and restore government control over exports. "Investors must understand that a poor country is waiting for benefits to reach people's pockets and improve their lives," Mesa told BusinessWeek.

Bolivia is a perfect example of how hard it is to cure endemic poverty with free markets. The country was plagued by instability and brutal military regimes for years before returning to democracy in 1982. Then it was hit by 25,000% hyperinflation in 1985. Drastic reforms followed, including privatization of many state companies. But by far the most controversial measure came with the 1996 hydrocarbons law, which handed 40-year gas concessions to multinational corporations. The companies pumped nearly $3.8 billion into exploration from 1996 to 2002, finding immense gas deposits that multiplied Bolivia's proven and probable reserves nearly ninefold, to 52 trillion cubic feet.

Suddenly, Bolivians learned they were a gas-rich country. But as the years passed they didn't feel any richer; indeed pension reform socked the government with costs that gobble up 5% of GDP annually, reducing money for education and health care. When demonstrations began breaking out in 2003, protesters complained that oil companies were paying rock-bottom taxes because the hydrocarbons law slashed royalties from 50% to 18% and allowed them accelerated depreciation of their investment expenditure. "It wasn't necessary for us to have a hydrocarbons law that practically handed over our resources to investors on a tray," Mesa says. "It could have been done in a more balanced way."

Even if the referendum raising royalties passes -- and it has overwhelming support -- it won't be enough to satisfy the most radical protesters. They want outright renationalization of the gas industry. Mesa says he won't back that solution, but he plans to reassert government control over future gas finds, raise taxes on foreign companies, and find ways to process gas into higher value-added products before exporting it. A new hydrocarbons bill is under discussion in Congress. Mesa is hoping the referendum will give Congress a mandate to pass the law, ending unrest.


In the meantime, though, the political heat is so high that oil majors have had trouble convincing Bolivians that they've invested as much as they have. "There's an idea in the country that the multinationals in this sector are like the devil, that they are taking away resources without leaving any benefits behind. That's totally false," says Julio Gavito, president of Repsol YPF's Bolivia subsidiary. He notes that Repsol invested $823 million from 1996 through 2003. In that time, he adds, the company earned $102 million in profits while paying $745 million in royalties and taxes.

Mesa's best hope to maintain peace is a compromise with the companies -- after voters air their views in the referendum. One idea is a new surtax on production that would rise each year until the sum of royalties plus the surtax would equal 50%. But if the nationalists don't think Mesa is tough enough on the companies, they will continue to use the gas concessions as a rallying point -- and more violence could ensue.

The U.S. wants to avoid such unrest, too. For the past 20 years, Washington's policy toward Bolivia has been focused almost exclusively on eliminating the cultivation of coca leaves, which are the raw material for cocaine. Now, the U.S. is boosting its $150 million annual aid program to include nearly $5 million in emergency work programs to help rebuild parts of the sprawling slum where the biggest protests occurred.

But it will take more than increased foreign aid and higher royalties to solve Bolivia's problems. Much is riding on Mesa's ability to balance the demands of poor Bolivians against the reality of globalization.

By Geri Smith in La Paz, Bolivia

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