Ken Silverstein EnergyBiz Insider Editor-in-Chief

Economists and officials at the World Bank have long touted the virtues of open markets, democratic reform and private enterprise to help less-developed nations modernize their economies. And Latin America is a case in point -- a region that has much poverty but which has earned some prosperity because of economic reform there. But, the rise of President Hugo Chavez in Venezuela and President Evo Morales in Bolivia may represent a backlash against free markets and the United States in particular.

"It would be a mistake to believe that the decisions by those leaders don't reflect opinions held by their people," adds Lord Triesman, the British foreign office minister responsible for Latin America, in an interview with the Financial Times. "But it's also a mistake for them to believe that the decisions that they take won't influence investors."

President Chavez has moved to take control of four heavy oil ventures in his country, with a total foreign investment of $17 billion, the paper reports. At the same time, President Morales of Bolivia said that his country would not compensate foreign investors for natural gas assets that it may confiscate. Some of the companies that would be affected include Britain's BP and BG, Brazil's Petrobras and Spain's Repsol.

"Europe should understand that there's a change in Latin America. The people who have been taken advantage of are rising up, but through democracy, not with violence," President Chávez told the Financial Times.

The question is whether the attitudes of Venezuela and Bolivia constitute how the majority of those in Latin America feel. The Bush administration gives an emphatic "no" and adds many countries in the Western hemisphere are committed to democracy and open markets and that the United States government will work with them.

Clearly, multi-lateral free trade agreements with Latin America have faltered. But, the president says that the region is committed to opening markets and that many of the disagreements are associated with agricultural products. Countries such as Chile have dramatically reduced their poverty rates by opening up their economies.

In fact, President Bush recently met with Uruguay's President Tabare Vasquez at the White House. The two discussed, among many things, the expansion of renewable energy and agreed to strengthen bilateral trade relations. Vasquez and influential Brazilian President Luiz Inacio Lula da Silva are moderates, who believe that private enterprise and foreign investment are integral to growth in the hemisphere.

Moderates Exist

Stoking fears of outside colonialism will only work to scare off foreign investors who are needed to modernize the infrastructure of Latin America. In any event, privatization has to be done right or the attempt could backfire and moves would be afoot to reverse the actions. Just how do `deregulation" efforts add up in the utility energy and industry sectors of Latin America?

The 1990s saw a rush to privatize those sectors there. It's not that the promises of new investment and ultimately more prosperity were hollow; it's just that the degree of government meddling was problematic along with an economic slump that eventually plagued the region. Even Brazil was gung ho but has subsequently retrenched. Now, much of the focus is on giving state-run enterprises more latitude to pursue outside ventures. Still, there's opportunity for outside investment. Duke and AES Corp., for example, are active in Latin America.

Many Latin American utilities have tried to make the conversion from government monopolies to private entities, while separating their transmission, distribution and generation businesses. One of the primary aims has been to draw investment and to reduce the debts of the various countries by selling off state-owned assets. Consumers, in turn, were supposed to benefit as the business operations improved.

But according to Great Britain-based Dealogic, commercial banks have decreased their investments overall in the developing world and in the former Soviet Bloc from nearly $26 billion in 1998 to $5.7 billion in 2002. At the same time, consumers feel as if their service has worsened and their costs have gone up -- all while foreign-owned enterprises have "profited" at their expense.

Even the World Bank says that privatization efforts may have overreached. The process is highly complex, which necessitates that it be done meticulously. It says that in most cases the reform efforts were flawed -- not the concept itself. State-owned utilities, for example, are often wasteful and provide services that are under-priced. In the early 1990s, the World Bank estimated that developing countries lost a combined total of $180 billion in their utility sectors because of under-pricing and technical inefficiencies.

The exaggeration of benefits along with customer dissatisfaction has all led to a crisis in confidence in Latin America. About 90 percent of Argentines disapprove of privatization. And, according to polling firm Latinobarometro, as many 63 percent of those polled in 17 countries on the continent are disillusioned with privatization.

All this has slowed progress in Latin America. Many nations there have seen revenues drop and have experienced energy shortages. It's never easy to unravel state-run enterprises, which makes it all the more vital to undertake such an endeavor slowly so as not to alienate the host nation.

If privatization is done properly, however, governments can benefit by reducing their expenditures and cutting their debt burdens. Likewise, consumers would have access to better products and services because of added infrastructure and new power resources.

Time will tell if Venezuela and Bolivia are anomalies or whether they are indicative of a broader trend in the region. Governments are clearly reasserting themselves across many areas of the energy sector. But such moves are a far cry from nationalizing entire industries. Many countries within Latin America are searching for their comfort zone and will experiment with various regulatory structures on the way there.

Latin American governments do not want to be like the United States. But, the hope is that they will not become authoritarian and closed to Western democracies.

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