Nationalization is the sovereign right of nations, but is it sufficient?

Mehdi Shaffaedin

Mr. Morales, the president of Bolivia, has recently taken measures to nationalise the oil and gas industries of the country, following his nationalization of utilities. According to international law, nationalisation is regarded as the sovereign right of nations. But is it sufficient to contribute to diversification and development?

Dependence of developing countries on production and exports of primary commodities and the control/ownership of natural resources has been one influence of colonialism. The result: low return value and falling terms of trade against the host countries. Yet, developing countries have aspired to industrialization and rapid development since their independence. And some of them have nationalized their natural resource sector. One way to industrialize and accelerate development is to increase revenues and foreign exchange earned from the primary sector itself, to use them for diversification. Nevertheless, despite their nationalization, not only has the international market been dominated by TNCs, but also the contribution of the accrued revenues to diversification and development has not been significant.

The UN General Assembly (Resolution 1803 (XVII) in 1962 followed unsuccessful attempts for the control of their petroleum resources through nationalization, by Mexico in late 1930s, and Iran in early 1950. Recognition was made of the sovereignty of nations over their natural resources and their right to nationalization. Later on in 1973 OPEC countries managed to take full control of pricing of their oil exports, which was followed another two GA resolutions in 1974 (3201(S-VI) and 3202 (s-IV)) and 1975 (3362 (S-VII), in which once again the exercise of states in full permanent sovereignty over all their natural resources was emphasized. The GA regarded the “possession, use and disposal” of resources the full and permanent sovereign rights of nations. In the case of petroleum, the price of the product, which shot up in 1973, continued to go up, and after some decline again picked up in early this century.

Unfortunately, nationalization alone has not been sufficient.  The increased revenue received from the exports has led to the rise of “rentier states” and “governmentalism”, rather than developmental states, particularly in oil exporting countries of the Middle East. The revenues accrue directly to the governments, reducing their need for taxation; so does it reduce their needs also for the votes of their citizens. This results in a situation where the citizens have little control on the allocation of the revenues, which is influenced instead by the vested interest of “governmental groups” (government employees, contractors, etc), rather than by the needs of the current and future generation for diversification and broad-based- or inclusive- development. Oil revenues have contributed to some social expenditure, such as health and education, but the reliance on petroleum has not declined much.

The result of government activities has been: mal-distribution of income, dissatisfaction and social tension and deprivation of the masses. The Dutch disease is not the only problematic issue in these countries; there is also the potential for social explosions, as was already the case in Iran during the Shah’s time and led in part to the revolution of late 1970s.

Norway, and to some extent Qatar, are exceptional cases where the oil industry was nationalized and “governmentalism” has not emerged. In the case of Norway, in particular, the government invested the oil revenues through the Government Pension Fund. The Norwegian citizens are regarded as the ultimate owners of the revenues and are represented by the Parliament, which controls the Fund. Further, the government has created a “council on ethics” which advises the Government on investment and maintains fiscal discipline.

The Bolivian Government has also increased social spending; whether it will turn to “governmentalism” will only become clear over time.

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