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May 02, 2006

Some Things Never Go Out of Style

You'd think that, if there's one lesson of the 20th century, it would be that government-controlled economies don't work. Russia's still an economic basket case more than 15 years after the USSR gave up the ghost, Cuba will probably need decades to recover from 45+ years of Castro, and even the Chinese are fighting the difficult battle of trying to maintain an authoritarian regime while providing sufficient economic freedom to let the economy grow. Yet it seems the allure of socialism and communism is too great for mere facts to stand in their way, as Bolivia demonstrated yesterday with its decision to nationalize its natural gas fields.

Sure, in the short term, this will probably provide a windfall for the Bolivian government. Despite the fact Bolivia couldn't extract ten cubic feet of natural gas without outside help, the foreign companies will almost certainly go along with the takeover because their options are lousy: they can take what Bolivia offers them and get some minimal return on their investment, or they can abandon Bolivia to its richly deserved fate and guarantee they won't get anything from the money they've already spent there. So they'll continue to extract natural gas and give the Bolivian government its wholly unearned cut of the profits as long as they're at least making more money than they're spending.

This means that all power companies are going to have to take a very hard look at whether or not they want to invest any more money in South America, though. As populism once again takes hold in South America, the investment climate is looking increasingly shaky. Bolivia and Venezuela may be the only countries nationalizing industries now, but it's far from certain populist governments won't take hold in other countries of the region over the next few years. That means people are going to look for smarter places to spend their money. It means that companies certainly aren't going to go into Bolivia looking for additional places to invest, because they'd simply be spending their capital to help the government figure out what to nationalize next.

When property rights are no longer secure, countries see their economy fail. Few will waste their time and effort working their property only to see the state step in and take their work for its own gain. It happened in Russia. It happened in China. It will happen in Bolivia and Venezuela.

That having been said, there's absolutely nothing the United States should be doing about it, other than perhaps expressing disappointment in the decision. As H.L. Mencken observed, democracy is the theory that the people know what they want and deserve to get it good and hard. The citizens of Venezuela and Bolivia have sown the wind; they deserve a chance to reap the whirlwind.