Wednesday, 25 April 2012

This is not nationalisation: it is merely theft


“THOMAS MORE: …And when the last law was down, and the Devil turned around on you–where would you hide, Roper, the laws all being flat? This country’s planted thick with laws from coast to coast – man’s laws, not God’s – and if you cut them down…d’you really think you could stand upright in the winds that would blow then?”
- from A Man For All Seasons, by Robert Bolt
Laws, in short, protect us from the unscrupulous. And although contract law, I admit, is not something which generally makes pulses race, its enforceability is an essential part of a civilised society. If I own something, I need to know that, unless I agree to its sale, it will still be mine in a year, in ten years or a hundred years. In other words: steal from me, and you will be punished.

Studying economics in my younger days, two reasons stood out as to why poor democracies often stay poor. The first was corruption: once corruption took hold in a country, it became a cancer that it was very difficult to get rid of, and it would mean that ultimately only venal politicians took and held power.

It was often linked with the second, and perhaps even more important reason, though. It was about avoiding kleptocracy, or rather, the preserving the simple, pedestrian mechanism of contract law. It was simple: if you bought something and later someone else could take it from you without redress, then you would have reservations about buying it in the first place.

And it is by this important principle that foreign investment in developing economies often fails to happen, setting back their development by decades. Investment dollars fail to arrive; new projects become scarce; growth is stunted.

And this is how it happens: last Monday, several senior Spanish staff of Argentine oil company YPF turned up to work, only to find themselves banned from the building. Not through company closure, but because the government had decided to appropriate the 51% of the company owned by Repsol.

Cristina Fernández and her now-deceased husband Nestor Kirchner, have run Argentina for the last decade. In the early days they were praised for taking the country from its disastrous debt crisis to a more stable, growing and increasingly important economy. Politically, they were not seen to be strongly of the left. However, in the two years following Kirchner’s death, the country has accelerated the move he started: towards the short-termist, populist tactics of its neighbouring, human-rights-challenged President, Hugo Chávez of Venezuela.

First came the sabre-rattling over the Falkland Islands – one of the few disputed territories in the world where the self-determination case is practically unarguable – a none-too-subtle diversion from an economy hitting the rocks. Then the raids on central bank reserves: just like Chávez. In February, the Economist stopped publishing economic indicators from the country, for the simple reason that it no longer believed them (or, as it delightfully put it: don’t lie to me, Argentina).

And last week’s endgame was also a direct lift from Chávez and his friend Evo Morales, President of Bolivia. Nationalise the oil companies, and present it as ending exploitation by those nasty neo-colonialists. Except this was real investment, made in good faith, which Argentina desperately needs: on top of everything, it also has a severe energy crisis.

But this is nationalisation, I hear you say: is this not what the Labour Party once did? Well, no. The difference is here, if you buy something at a fair price (or even an over-inflated price), it’s one thing. If you force a fire sale below the fair price, as Fernández is doing, it stops becoming nationalisation. It is merely theft.

Now, are foreign companies are always blameless in their actions in emerging markets? They are not. Was YPF was originally sold off too cheaply? Perhaps (looking at UK privatisations, it would not be the first time). But that, clearly, is not the point.

A deal was done: contracts were signed. Not only is there the moral imperative to honour a contract, there is a vital practical one: if you set the precedent, as a government, that laws only apply “when I say”, other countries – and more importantly, companies – will question your word. Foreign investment can go from a flood to a trickle overnight; Spain is already planning retaliatory action via the European Commission.

The same self-destructive course towards anti-Western politics, state-sponsored robbery and economic disaster was set by Venezuela some time ago. But we expected better of Argentina. And to those who think this “nationalisation” is showing a bright new, anti-Establishment, anti-Western model for us all to follow, as these articles did: wake up. The people who will ultimately suffer for all this populist foolishness are ordinary Argentines. As the Economist points out:

“For Argentina, it is a disaster…the effects of nationalisation will be felt far beyond energy. Spain is Argentina’s biggest foreign investor. After seeing YPF’s fate, Spanish banks, utilities and telecoms firms may also look for the exits. Ms Fernández has also endangered Argentina’s trade relations with Europe, one of its biggest export markets…yet the country still belongs to the G20 and can borrow from multilateral organisations, and its citizens can visit all of Europe without a visa…If the West revokes these privileges, Argentines might see the true cost of their president’s antics.”
And finally – again, like Chávez – Fernández is already trying to tinker with the constitution (in hard times and younger democracies, always a worrying sign); to remove presidential term limits and open the way for a permanent presidency.

It is probably not stretching the point too much to say that the Argentine opposition has a relatively short time to get its act together, before controls over critical media are tightened,
as is already happening, and a democratic nemesis is made more difficult, as it largely is already in Venezuela. Because when governments start cutting away at, or riding roughshod over, the laws which protect their civilised way of life and their economic growth, you know that a country’s long-term decline lies not far off.

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