Friday, February 04, 2005

Oil, Privatizations and Policies

Fátima wrote,
«My argument is that Ecuador's economic downfall has been a result of a devastating drop in petroleum prices, Ecuador's most important resource. Since then Ecuador's economic disability has led its banking system to collapse, a sudden change in its currency (from Sucre's to dollars) and an increase in unemployment as well as poverty.

«The country has also experienced an emergence of distinction amongst its indigenous people, to which they are trying to claim there rights to a share of the countries resources».

I replied:

But do not loose sight of the role of the military in the era previous to the drop of the oil prices. That is something that has hurt Ecuador very much. On the other hand you could argue, Why Ecuador is so dependent on oil? Isn't it?

Then Fátima wrote again:

«When you speak of the military govt, are you referring to their strong desire to control the oil investments and how they over estimated the role of ecuadors oil? If so, I will definitely incorporate that.

«Also, wouldn't the fact that oil has been an important product of Ecuador, in terms of bringing in income, acknowledge Ecuador's dependency on oil?»

And I replied:

Yes, but not only to that "strong desire" as you put it. You need to take into account the very instability that affected Ecuador during most of the 20th century, and more important the specific policies that the military and civilian governments of the 1960s and 1970s pursued.

Go to the Timeline in the CD-ROM and follow Ecuador's political history. You will see how, unlike other military regimes that brought stability to their countries, in Ecuador even military Juntas were very unstable. Now, the issue with oil is that you do not need to depend completely on it. Oil as any other commodity can be used to boost economic growth, to provide education, or to pursue other aims.

That is the main problem of Ecuador and Venezuela, and many other oil producers worldwide. With the oil revenue you can develop other sources of revenue. Look at Mexico. In the 1970s the country became totally dependent on oil revenue. After the 1982 crisis made evident that it was suicidal to do that, the Miguel de la Madrid's government introduced a series of changes to diversify the economy and to depend less and less on oil. Nowadays oil revenue is still very important for the Mexican government, but a drop in the oil prices does not kill the entire economy as it happened in the early 1980s.

Again, as I said with the case of globalization and military dictatorships it is necessary to look at the details, and not to assume that one feature will be able to determine the performance of the entire economy or the whole country.

The key question with oil in Ecuador, Argentina, Venezuela, or Mexico is what the governments are doing or did with such a precious resource.

In Argentina’s case, as an example, the ideological application of neoliberalism (ideological in the sense that it was blind to specific features of reality) made them put each and every asset on sale, a gigantic garage sale that, of course, ended up in the tragedy that you can see there now. Today, they are trying to rebuild a public sector, but of course, they are strapped for cash because they are still trying to renegotiate their agreements with the US.

In Mexico’s case we had many privatizations: phones, newspapers, TV stations, etc., but the Oil company was never even mentioned as a possibility.

Venezuela tried to follow a pattern similar to that of Mexico, so that is why up until now there is no talk of privatization of PDVSA, although there you have a different set of problems.

In Ecuador all those things that you talk about happened, but they happened within the context of a specific government (very unstable, lacking a long term project, etc.). Where, as an example, is Ecuador's oil revenue? Schools? Roads? Military equipment? Health services?

You can do similar comparisons with, as an example, the phone companies: Why Mexico’s Telmex is nowadays a major player in the region’s sector while Argentinean firms are down the drain? Well, because Mexican privatization followed different assumptions. It was very unorthodox or heterodox if you want, it preserved the monopolistic nature of the firm (and that of course makes angry many people in my country), but at the same time you protected jobs, investments, and avoided the carnage that happened, as an example, in Argentina.

But also in Mexico we had very bad privatization processes, as it was the case of the banking system. Nowadays there is only one major Mexican bank. The rest are local branches of either US, Spanish, or Canadian banks. But then again, the major problem was not privatization by itself, but how the owners of the newly privatized banks carried their businesses, because again, you still have one Mexican bank that was able to survive that carnage.

So, again, look at the specific problems and the specific policies. Do not assume that there is one single feature (globalization, neoliberalism, privatization, military dictatorships, communism, etc.) that explains each and everything happening in the countries. That is fine if you are running for major of Buenos Aires, Mexico City or Caracas, but if you are doing academic research, you really need to understand what specific forces are shaping the processes you are analyzing.

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