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Why When Dealing with an Area’s Natural Resources a Little Nationalization and Mercantilism Can Go a Long Way.

January 1, 2019

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In 2012 I posted on Daily Kos (Here) an article discussing Argentina and Indonesia’s efforts to wrest control of their natural resources from the international financial community. In Argentina’s case, to reverse the disastrous effect of privatization on the profits and production of its national energy company. In Indonesia, the government sought to halt the sad experience of most natural resource producing areas who see the value-added benefits to the economy from those natural resources accrue to those areas that for one reason or another were fortunate enough to have imported them.

Despite the almost universal condemnation from the financial community and in Argentina’s case, the threat of war, both countries persevered and after an entirely understandable bumpy start, both countries prospered from their actions.

In Argentina’s case, the renationalized company’s stock rose by 190% from its post-nationalization depths in mid-2012. Production declines of 6% annually under the privitized management were likewise reversed. Overall output rose by 3% in 2013, and a further 8.7% in oil and 12.5% in gas during 2014. Output increased a further 3% in 2015. (Wikipedia)

The article:

According to the news reports and commentaries, Argentina after selling off their national energy company in 1997 during a fit of privatization, found that its oil and gas production was declining, fewer wells were being drilled and exploration for new reserves virtually nonexistent. The privatized company, a non-Argentinian conglomerate based in Europe (Spain), had apparently prioritized the repatriation of dividends over production, an approach favored and encouraged by the international banking community. In addition, the conglomerate seemed to have valued the Argentinian company not so much for its production but for its assets since they could be collateralized, borrowed against and gambled within the derivative market in search of higher returns.

Argentina recently re-nationalized the company they sold off a little over a decade ago in an effort to refocus it on Argentina’s energy needs.

Although the US, Britain and the EU are furious, Spain is especially upset since the parent company was based in Spain and it cannot be viewed but as another example of the sad state of that country’s economy. Nevertheless, it appears that the primary cause of their anger was not over “free markets,” oil, profits or the bad precedent it may set, but concern over Argentina’s disruption of the chain of securitization anchored in the real world by Argentina’s oil and gas reserves at one end and investment banks in New York and London holding the debt and liabilities of the conglomerate on the other.

The news from Indonesia concerns plans by that nation to ban exports of raw minerals by 2014 in order to encourage local processing to add value and thereby redistribute the benefits of the country’s natural resources from foreigners to Indonesians.

These two news stories may or may not portend the start of a trend that other countries may follow, although as the economic effects of peak production begin to settle in and the value of the resources escalate and if either of these countries is successful others will more than likely follow. Nevertheless, in these two countries at least they indicate acceptance of the view that their patrimony is too valuable to be exploited by foreign entities or subject to the vagaries of the international financial system, without them first seeking to maximize the benefits to the nation.

As for the Indonesian example, there seems to me to be no reason why a nation and its people cannot look at adding value to its natural resources by a healthy dose of mercantilism.

In fact, what these two examples may actually represent is not a burst of rampant socialism but a rebirth of a form of good old-fashioned mercantilism as an alternative economic model in response to what may be the collapse of standard economic theory and free trade under the weight of its fundamental flaw. As Lynn Stout put it:

“The problem with the homo economicus theory is that the purely rational, purely selfish person is a functional psychopath. If Economic Man cares nothing for ethics or others’ welfare, he will lie, cheat, steal, even murder, whenever it serves his material interests.”
(The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public (Berrett-Koehler 2012))

On this foundation, a workable society cannot be built.

Free trade, as it has currently been developed, seems to promote a temporary economic benefit for all, but ultimately perhaps a questionable long-term advantage. At a minimum, its reduction or elimination of internalization of externalities builds up an external social and ecological debt like compound interest. We are seeing it now in America. Unemployed workers do not become socialists or communists, to many of them the appeal of Fascism is irresistible.

On another point, at least in Argentina’s case and perhaps Indonesia’s as well those that oppose their actions have warned of financial retaliation in the form of reticence by the international community to underwrite those countries’ financial needs at a reasonable rate.

I find this unpersuasive. The belief that the financial market will not compete vigorously to place financial products in the hands of, for example, the renationalized Argentinean company to exploit their resources simply because they got burned in the nationalization, flies in the face of history and standard economic theory. The confidence fairy if it exists at all lives about as long as a mayfly.

___________________

On Free Enterprise:

The goal of every business enterprise is not to maximize profit but to separate risk from reward.

The most important goal for any democratic government should be to avoid removing risk from enterprise. Yet it currently appears that the only function of government is to shield enterprise from risk.
Trenz Pruca

 

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