A benign beginning in Bolivia, or is it?
Morales has nationalised Bolivian oil reserves, but that doesn't resolve all issues

(column by Joseph Stiglitz, A Nobel Laureate in economics, Professor of Economics at Columbia University)

A few months ago, Evo Morales became Bolivia's first democratically elected indigenous head of state. Indigenous groups constitute 62% of Bolivia's population, and those with mixed blood another 30%, but for 500 years Bolivians had been ruled by colonial powers and their descendants. Well into the twentieth century, indigenous groups were effectively deprived of a vote and a voice. Aymara and Quechua, their languages, were not even recognized for conducting public business. So Morales' election was historic, and the excitement in Bolivia is palpable. But Morales' nationalization of Bolivia's oil and gas fields sent shock waves through the international community. During his campaign, Morales made clear his intention to increase state control over national gas and oil. But he had made it equally clear that he did not intend to expropriate the property of energy firms - he wanted foreign investors to stay (nationalization does not, of course, necessarily mean expropriation without appropriate compensation). Perhaps surprising for modern politicians, Morales took his words seriously. Genuinely concerned about raising the incomes of his desperately poor people, he recognized that Bolivia needs foreigners' expertise to achieve growth, and that this entails paying fairly for their services.

But are foreign owners getting more than a fair rate of return? Morales' actions are widely supported by Bolivians, who see the so-called privatizations (or "capitalizations") under former President, Gonzalo "Goni" Sanchez de Lozada as a rip-off : Bolivia received only 18% of the proceeds! Bolivians wonder why investments of some $3 billion should entitle foreign investors to 82% of the country's vast gas reserves, now estimated to be worth $250 billion. While there has not yet been full disclosure of returns, or an audit of the true value of investments, it appears that investors would, at the old terms, have recouped all their money within a period of just four years. Bolivians also ask why foreigners reap all the benefits of today's high prices for oil and gas. It costs no more to extract oil or gas today than it did when prices were one-third of their current level. Yet, the foreign oil companies get 82% of the increase - in the case of oil, this would amount to a windfall for them of $32 a barrel or more. No wonder that Bolivians thought they were being cheated and demanded a new deal.

On May 2, Morales simply reversed the percentages, pending renegotiation of the contracts: The companies operating in the two largest fields would get 18% of the production for themselves. As part of this new deal, Bolivia should also get a larger share when prices increase. (Bolivia may, of course, not want to bear the risk of a fall in the price, so it may strike a deal to transfer some of the downside risk to foreign companies, giving them in exchange more of the upside potential). To most Bolivians, what is at stake is a matter of fairness: Should foreign oil and gas companies get a fair return on their capital, or a supernormal return? Should Bolivia be paid a fair value for its resources? And should Bolivia, or foreign companies, reap most of the windfall gains from increases in energy prices? Moreover, many deals were apparently done in secret by previous governments and apparently without the approval of Congress. Indeed, because Bolivia's Constitution requires the approval of the Congress for such sales, it isn't clear that Morales is nationalizing anything: The assets were never properly sold. When a country is robbed of a national art treasure, we don't call its return "renationalization," because it belonged to the country all along. As with many privatizations elsewhere, there are questions as to whether the foreign investors have kept their side of the bargain. Bolivia contributed to these joint enterprises not only with resources, but also with previous investments.

The foreign companies' contribution was supposed to be further investment. But did they fully live up to their commitments? Are accounting gimmicks being used to overstate the true value of foreign capital contributions? Bolivia's government has, so far, simply raised some questions, and set in motion a process for ascertaining all the answers. The problem in Bolivia is a lack of transparency, both when contracts are signed and afterwards. Without transparency, it is easy for citizens to feel that they are being cheated - and they often are. When foreign companies get a deal that is too good to be true, there is often something underhanded going on. Around the world, oil and gas companies have themselves to blame: Too often, they have resisted calls for greater transparency. In the future, companies and countries should agree on a simple principle: There should be, to paraphrase President Woodrow Wilson's memorable words, "open contracts, openly and transparently arrived at. "If the Bolivians do not get fair value for their country's natural wealth, their prospects are bleak. Even if they do, they will need assistance, not only to extract their resources, but also to improve the health and education of all Bolivians - to ensure long-term economic growth and social welfare. For now, the world should celebrate the fact that Bolivia has a democratically elected leader attempting to represent the interests of the poor people of his country. It is a historic period.

(End of Joseph Stiglitz column)

The Gravy Train
India must counter Chinese expansions into Tibet and elsewhere

(column by Vijay Simha)

Let's look at a few things Chinese over the last few days. On July 1, 2006, the 1,142-km Galmud-Lhasa railroad was opened that takes a train from mainland China to the Forbidden City of Lhasa. This is an obvious miracle in engineering terms, and also a more important subtle political master stroke. It ought to logically mark the end of the Tibetan movement for freedom and even the Dalai Lama has not objected to the train despite the fears of his followers. The train to Lhasa was followed by the opening of the Nyingchi airport near the junction of Tibet, India and Myanmar. Then, on July 6, 2006, the Nathu La border post was opened after 44 years, opening up trade between India and China on the historic Silk Route. Any one of these would mark a momentous achievement. The Chinese did all of them without a murmur. And there's more. Six hundred companies from China are planning to set up offices in a Rs.1.5 billion mall coming up in west Delhi. The centre is meant to be a gateway for Chinese companies, so that the Chinese do away with middlemen operating out of Hong Kong and Singapore.

Most of the Chinese companies buying space in the mall are small and medium scale manufacturers, operating in sectors like textiles, apparel, electronics and toys. Close to 60% trade between India and China moves through an indirect route and a direct link between Chinese manufacturers and India might bring costs down by 10-15%. Even Canada, culturally miles away from China, have joined in. A group of Canadian investors are launching a luxury train that will charge each passenger about $1,000 a day for lavish services and panoramic views of Tibet. Investors are pumping in around $200 million into the venture, offering round-the-clock butler service, on-board guides, broadband Internet, flat-screen televisions, DVD players, king-sized beds, full bathrooms and showers, a lounge car, gourmet meals, extra-large windows and 10-square-metre suites that will be the largest of any luxury train. It is the first time that China's Railways Ministry has permitted a foreign company to operate on the Chinese rail system. Why should all this concern us? Because India, apart from the US, is the only country that is perceived as a rival to China.

The story of China and India is expected to dominate headlines over the next 20 years and anything China does is of particular relevance to us. "There is an inevitability about Chinese initiatives in Tibet and beyond. We can't stop China from doing what it is doing. We shouldn't be oblivious or get into a tizzy. We must rise to the Chinese challenge and benefit in trade," says Commodore C. Uday Bhaskar, one of India's leading defence and strategic affairs analyst. What China has done over the last couple of weeks is a slam dunk in terms of international relations and strategic affairs. India takes eons to do anything. Some days ago, the union cabinet said India didn't construct roads at its borders all these years because it didn't want the Chinese using them in the event of an incursion. Beijing could be forgiven for doubling up in laughter at this. China operates by fait accompli. Perhaps no country is doing as much as China. Nathu La and Lhasa are instances of an expansion policy that ought to be India's envy. New Delhi should get cracking, because 24 hours by the clock can at times mean a decade politically.

(End of Vijay Simha column)