International Trade and Investment

This article describes the negative impact on Bolivian economy and slump in Foreign Direct Investment due to the nationalization of Gas sector by President Morales newly elected government. According to the article President Morales signed a decree a couple of weeks ago. According to the spectators this move was expected, as it was the main slogan of his election campaign in December 2005. Most of the foreign investors see this action by the Bolivian government, as a clear message that no foreign investors are needed in the country any more.

Current action taken by the government was perceived as the result of growing sentiment of nationalism in the country as well. Brazilian company Petrobras, Spanish Company Repsol YPS as well as Spanish government and European Union, vigorously condemned using troops to gain control of gas fields and multinational companies’ offices. Gas sector has been the largest target of FDI in Bolivia in the last decade. Nearly 3. 5 billion dollars have been invested in this sector. The largest investors are Petrobas and Repsol.

Petrobas has invested more than 1. 5 billion dollars and controls nearly half of the gas reserves and all the refining. Repsol has invested more than 1 billion dollars and is among the largest gas producers. Both companies had already cancelled further investment prior to nationalization. Though the country is in need of further investment in order to meet the supply demands. The new decree gives 6 months for the companies to sign new contracts otherwise they will be forced to leave. The state share will also be increased.

The move will generate more 780 million dollars of revenue according to Global Insight. Government will also retake previously partially privatized companies. Most of the analysts agree with the argument that though Bolivian government will boost its revenues in short term, it will loose in the long run. According to an expert Jeremy Martin Bolivia is not a oil producing country like Venezuela thus it cannot go on its own. He pointed towards the decision of investing companies like Petrobras to cancel its all further investment in the region.

Martin says there is a very little chance that the companies will comply to the government’s demands. The decree is the last of the growing hostility against the foreign investors in Gas Sector. The hydrocarbon law has been under significant changes in a couple of years limiting the rights of investors and increasing taxes. All these factors amid political instability has result in fall of investment in the country as the foreign investment fell to its lowest since 1997. Sanchez de Lozada initiated the original privatization process the then Bolivian President.

But he was forced out of office in 2003 by nationalists’ protest. His successor was also forced to quit by same protests. The most negative impact of the move made by Morales was use of military which was strongly condemned by EU and other global powers. According to Farnsworth, who is based in Washington, DC “Internationally this means that government wants complete control over the market. ” Before this decree IMF forecasted economical growth both the current and the following years in Bolivia. According to Farnsworth economic outlook is worrisome.

Multinationals are sidelined completely. There are some speculations are about a major role of Venezuela in the future. Bolivia will only receive short-term investment that wont benefit the country. High expectations of change in the country will also force President Morale to make some spectacular moves. Relevance to Module IV (Trade & Investment): The relevancy of this article to the module International Trade and Investment is quite clear as it discusses the issue of foreign investment in gas sector.

The article clearly describes the negative impacts on the Bolivian economy due to the new decree issued by Bolivian President. The decree gives the government the right to take control of gas fields and refineries owned by multinational companies. In this way Bolivia has lost its credibility in the eyes of foreign investors. Because of this major competitors in the Bolivian gas sector like Petrobras already have cancelled further investment in the country.

Further deteriorating the situation and alarming the foreign investors the government decided to use military to gain control of gas fields and offices. In my opinion Mr. Morales has taken a suicide attempt just to fulfill the promises he has held during his election campaign which practically will prove to be destructive for the countries economy in the long run. That’s why most of the analysts say Morales may gain some revenue boost in short-term but the country is not capable to run the gas sector without further foreign investment, the chances of which are becoming bleaker day by day.

Article Critique and Additional Insight: This article discusses the some important aspects of international trade. One is why foreign investment is falling in Latin American countries. The growing nationalism is one of the major factors indeed. Bolivia is not a country having very abundant natural resources. Mostly the country relies of gas sector. Bolivian government has been showing a hostile behavior to the foreign investors for a couple of years and the situation was becoming difficult for them day by day.

The decree is the last and the most powerful blow for them which will probably compel the investing companies to withdraw from the market. This will result in the lack of foreign investment in this sector and the gas sector will loose its particular boom, which it has experienced due to the investor friendly policies since 1997. Mr. Morales may have satisfied his voters in this way but will he be able to cope with the long-term problem lying ahead? Time will give us the answer in the near future.