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Latin America's Energy Puzzle

January 09, 2006

FOLLOWING THE SUMMIT of the Americas in Argentina, and with numerous presidential elections set to occur in the region in 2006, the future of Latin America is under extensive debate. According to some, a deep rift has opened in the hemisphere, manifested by street protests at the summit and the inability of consensus-bound leaders to move forward with the Free Trade Area of the Americas.

Indeed, a rift has opened, but it's not the one preoccupying most commentators. Despite overheated rhetoric, it's not the United States versus Latin America. It's not democracy versus authoritarianism, the previous concern of policy makers. Rather, the rapidly emerging divide across the Americas, and the one which should be the top focus of regional leaders, is the desire, or lack of it, to integrate into the global economy. It's time for a new, more useful debate focused on global competitiveness.

Consider the dynamism of Asian government and business leaders, as shown during the two most recent Asia-Pacific Economic Cooperation (APEC) meetings, in South Korea and Chile. Asian leaders are advancing a common trade and investment agenda abroad, while aggressively promoting broad-based education and economic reform at home. Their leadership stands in sharp contrast to the reluctance of some Latin American and Caribbean leaders to undertake a similar agenda.

The comparisons are compelling, and the gap is getting wider each year. Flows of direct foreign investment, openness to international trade, education levels, crime rates and corruption indicators all favor Asia over Latin America and the Caribbean. Not surprisingly, Latin and Caribbean economic growth rates lag behind Asian nations' year after year, despite continued high prices for many of the commodities Latin America supplies.

Not all countries are the same. Some are reaching out, taking concrete steps to prepare their people and their nations for the road ahead. Others are moving in the opposite direction, or simply allowing events to take their course while unrealistically hoping for the best. This issue is illuminated by comparing the manner in which Bolivia and Colombia -- neighbors that both are struggling against illegal narcotics, instability and internal political divisions -- treat energy.

Sitting on massive natural-gas reserves, its best resource for growth and development, Bolivia's constitutional democracy is under siege because its leaders have failed to build a national consensus on the most appropriate means to get these reserves to market. Last May, over the president's abstention, Bolivia's Congress passed a law maintaining an 18% energy royalty while establishing an additional 32% tax. On the one hand, this 50% equivalent tax went against previously signed agreements with the international community, while stifling hope for additional direct foreign investment needed to develop the gas fields, except, perhaps, from the Chinese. On the other, it failed to satisfy thousands of street protestors, led by populist cocalero coca farmer Evo Morales, for energy-industry nationalization. On Dec. 18, Morales was elected president -- Bolivia's sixth since 2001 -- for a term that begins on Jan. 22, and he now has the opportunity to fulfill his stated goal of nationalizing the energy sector, a move that will end most prospects for additional private investment.

As Bolivia falls in upon itself, its prospects for success in the global economy have dwindled. Under a veneer of democracy, instability is driving away legitimate, long-term investors, while encouraging political meddling from coca growers and self-interested outsiders. This has made further instability in Bolivia more likely, and prospects for healthy democracy and economic development less likely.

Colombia has taken the opposite tack on the development of its energy resources. Actively seeking direct foreign investment, Colombia has made significant efforts to improve security, support democratic governance, and reform its energy sector. Colombia's leaders have taken concrete steps to attract energy-sector investment by streamlining bureaucratic oversight of the industry, making government regulations more rational and transparent, decreasing requirements for participation in new projects by national oil company EcoPetrol, and formalizing regulatory standards to allow for fair bidding on exploration and production contracts by international companies.

Looking beyond its borders and striving for intra- and inter-regional integration to foster competitive strength, Colombia, along with Ecuador and Peru, has participated in efforts to conclude a free-trade agreement with the United States to lock in economic and political reforms while building a long-term bridge to the world's largest economy. (Bolivia initially declined to participate in these talks and has been only an observer to the negotiations.)

Beyond traditional trade agreements, look again at Andean energy. Colombia is continuing to integrate with Venezuela despite ongoing political disagreements and deep historical cleavages. In fact, the two countries just announced that they will build a new cross-border pipeline, and integration of the electrical grid continues apace. Bolivia, however, stubbornly refuses to export natural gas to the huge U.S. market through Chile, which would be the most cost-effective route, because Bolivia lost its coastline to the Chileans in 1884.

Filling the vacuum left by Bolivia, Peru is positioning itself as South America's gas hub by building links to Argentina, Brazil, Chile and Uruguay. Peru's aggressive plan is bringing initial investments of more than $2 billion to explore new basins and transport gas to regional markets -- investments that Bolivia desperately needs.

Chile, the continent's brightest star, has signed a trade agreement with the United States and, within APEC, has forged strong ties with Asia to diversify its trade beyond its immediate neighbors. Brazil's leftist government is developing strong political and economic ties with Asia, Europe, and the Middle East, and as President Bush's post- summit trip to Brasilia clearly showed, bilateral relations are strong. Central America and the Dominican Republic sought DR-CAFTA as a vital link to the global economy, their best realistic hope to compete.

While these are positive steps, Latin American and Caribbean nations must realize that direct investment is the lifeblood of development, and that capital will always go where risk-adjusted rewards are believed to be greatest.

With Asia and other regions pulling increasingly ahead, it's past time to strengthen competitiveness in the Americas.

ERIC FARNSWORTH is vice president of the Council of the Americas in Washington. From 1995 to 1998, he was a White House adviser on Latin America. LUIS PINTO is executive director of the council's Energy Action Group.

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