6 August 2018

What Explains the Ups and Downs of Resource Nationalism?


Through resource nationalism — an attempt by a state to assert greater control over natural resources in its territory through mandates on global extractive industries — host countries seek to create value-added products and services and supply chains or capture assets. Over many decades, the balance of power has slowly shifted in the direction of host states as compared to global corporations. In the short- to medium-term, however, the strength of resource nationalism is likely to ebb and flow with global market cycles and local political cycles. Global geopolitical shifts are another conditioning factor, and China's rise has especially stoked worries in several countries about a loss of sovereignty.


News that the Indonesian government has taken a majority stake in U.S.-based Freeport-McMoRan's giant Grasberg copper mine after a hard-fought dispute is just the latest sign of growing pressures exerted by host states on global extractive industry corporations. The mining industry has cried foul over such actions, with the CEO of mining giant Rio Tinto warning in May that resource nationalism was "gaining momentum," threatening investment in the lucrative sector. But what exactly drives resource nationalism and what explains its ups and downs? As it turns out, the conventional explanation — market cycles — does not account for much of what leads states around the globe to strive for greater control over their natural resources.

The Big Picture

Stratfor noted in its 2018 Annual Forecast that geopolitics was returning with a vengeance amid growing international tensions and looming global trade frictions. Resource nationalism, in which many states appear to be making a bid to exert greater national control over their mineral and energy riches, fits into this broader trend.

Nation and Market

Resource nationalism consists of a range of actions in which the state plays an intrusive role in the natural resource economy in a way that limits or eliminates the operations of a global energy or mining corporation. The state's actions can range from outright nationalization to enacting laws that mandate majority or partial government ownership of an extraction operation, demand higher royalty payments, increase taxes, require a global corporation to hire a certain percentage of local workers or vendors, or set quotas on the export of unprocessed resources.

Resource nationalism reflects the interplay of two principles. One is the global market principle in which the flow of all economic inputs such as goods, capital, services and labor is free and unrestricted across international borders, including those of the host state. The other is the national principle in which the nation (typically acting through the state) regulates how global companies should be run, how much they can own, how much they can export, how much they can profit and whom they can hire.

In an ideal market world, the role of the state is minimal, while private firms decide everything on the basis of profit and cost considerations. In the ideal national world, the state owns all of its natural resources without exception, knows best how to use the resources to benefit its people and harnesses or controls (or, in extreme cases, abolishes) the private sector's role in the resource business as it deems fit.
Fulfilling the Core Imperatives

The core nature of the state also matters. A clientelist state in which the government uses revenues from natural resource industries chiefly to enrich ruling elites and bolster its legitimacy is quite different from a developmental state, which pursues a program (however imperfectly) to empower local actors and create a robust domestic private sector, with its value-added products and services and supply chains.

These two types of resource nationalism present very different implications for extractive sectors. While clientelist states are prone to engaging in arbitrary behavior and outright expropriation, developmental states typically adopt more sophisticated strategies, meaning negotiated outcomes are possible if foreign investors are willing to meet at least some of the host states' demands.

Developmental resource nationalism occurs in a number of countries. One prominent example, Indonesia, took a resource nationalist turn in 2009 when then-President Susilo Bambang Yudhoyono enacted a mining law, although officials had introduced local content requirements much earlier. Further mandates included a 49 percent foreign ownership cap in 2012 and demands for companies to add value to unprocessed ores before export. These measures boosted domestic private miners, while in-state capabilities have grown substantially, partly thanks to state support. On the other hand, Venezuela's expulsion of many foreign players from 2007 to 2010 exemplifies clientelist resource nationalism — a move that has left a collapsing energy industry in its wake. Russia's energy expropriations from 2004 to 2007, meanwhile, straddle the two categories.
The Long Duree

Over the decades, the balance of power in the energy and mining sector has slowly shifted to favor host states over global corporations in many countries. Until the 1950s, practically all energy or mining contracts were outright concessions that granted international companies vast powers. (At the time, the only major exceptions were Mexico and Iran, which nationalized their oil industries in 1938 and 1951, respectively.) The 1960s and 1970s resulted in a major wave of resource nationalization across many parts of the Global South. In parallel to such nationalizations, countries in the Middle East and elsewhere also formed national oil companies during these years.

An era of greater liberalization emerged in the 1980s, cresting in the 1990s when many countries welcomed foreign capital on generous terms. This period, however, did not last long.

An era of greater liberalization emerged in the 1980s, cresting in the 1990s when many countries welcomed foreign capital on generous terms. The period, however, did not last long, as nationalizations — albeit at a lower rate compared with the 1970s — began to occur after 2004, most significantly in Russia. During President Vladimir Putin's drive to consolidate power, Moscow has taken down the oligarchs and entrenched Rosneft and Gazprom, creating huge geopolitical implications, significantly enhancing the Kremlin's power and setting the stage for Russian reassertion in Europe and elsewhere.

Resource nationalization weakened again because of the commodities crash of 2013 and 2014, but this did not result in the re-privatization of any recently nationalized companies, such as YPF in Argentina (though there was also investor skittishness in the Argentina case). And notably, in countries such as Indonesia, Russia, Tanzania, Zambia and others, a push toward resource nationalism persisted through the commodity trough.

Over the long period of many decades, many (but not all) countries in the Global South have been characterized by a stronger state assertion, greater domestic capabilities, a more robust domestic extractive private sector and the increased importance of natural resources in domestic politics.
Taking Stock of Market Cycles

The long duration of decades provides a fascinating backdrop, but of more immediate interest to business watchers is the short and medium term. Here, it is well understood that resource nationalism goes through major ups and downs.

Global market cycles provide the classic explanation for these shorter-term shifts. When commodity prices are high, host states are tempted to retain a greater portion of the windfall for themselves. But when prices crash, foreign companies have greater leverage, allowing them to force greater market openings. A number of resource nationalization waves mirror commodity booms, such as those that occurred in the 1970s and from 2004 to 2012. Conversely, the commodity trough of the 1980s and 1990s produced a wave of liberalizations in the energy and mining sectors across Africa and Latin America.

But as attractive as the market cycle explanation is, it fails to account for the several anomalous cases in which resource nationalism persisted through commodity downturns or weakened when markets were riding high. One cogent example of the former is Indonesia, in which President Joko "Jokowi" Widodo persisted with protectionist measures in mining throughout the post-2014 downturn, such as his actions in the Freeport dispute. Tanzania fits into a similar category. Tanzanian authorities pushed through a mining act in 2010, just before national elections, when the internal discourse over better utilizing natural resources was robust. Mexico, by contrast, launched its energy privatization drive when oil prices were still high.

A more complete explanation of resource nationalism requires a look beyond market cycles to account for cycles of domestic politics and geopolitical shifts.

To arrive at a more complete explanation, it is thus necessary to account for two additional factors: the cycles of domestic politics and geopolitical shifts. Domestic political cycles are usually country-specific, though waves of populist politics from the left or the right can grip a swath of countries in a particular region, as evidenced by Latin America's leftward turn in the early 2000s, when Bolivia and Venezuela nationalized key industries. The existence of a competitive domestic political scene often plays an important role in this regard. For instance, Indonesia and Tanzania's opposition parties, media outlets and civil society groups have played a critical role in scrutinizing the respective economic arrangements in the relationship between the state and foreign energy and mining players.
The Global in the Local

Geopolitical shifts naturally occur on a wider plane. Occasionally, a powerful norm may emerge, setting an aspirational standard for certain aspects of the global system, which can affect the extractive industries sector. Such a development occurred when much of the globe strongly embraced liberal market norms after the Soviet Union collapsed.

Current global trends, however, may represent a reversal of the 1990s in important ways. First, the financial crisis of 2008 dealt a blow in the eyes of many to the so-called Washington consensus of sweeping deregulation. Second, China's meteoric rise on the back of an explicitly state capitalist model diverged from neoclassical economic prescriptions of small government. An incipient trend is the emergence of protectionism and nationalism in the United States under President Donald Trump. Though U.S. policies are triggering strong countermoves to assert liberal market paradigms in Europe, Latin America and parts of Asia, they could ultimately herald a shift away from liberal market norms — with potentially long-lasting global implications. As it stands, all three developments have strengthened the norm of an interventionist state in national economies, and it would not be outlandish to suggest that they have also aided the cause of resource nationalism worldwide.

And as a result of the emergence of global extractive industry players from outside traditional areas such as Europe and North America — mainly from China, but also India, Brazil and other middle powers — poorer host states could play off a greater number of suitors for resource extraction and processing. If these states play their cards right, they could strengthen their hand in attracting the best terms for inward investments. Nevertheless, the rise of new powers also creates new worries about diminished sovereignty, particularly with respect to the role of China. This has been a major factor in Mongolia and Zambia's resource nationalism, for instance. If China continues its rise, this dynamic is likely to intensify.

Resource nationalism has a long history with many twists and turns, as states the world over have occasionally sought to exert greater control over their energy and mining sectors for a variety of reasons. While chalking up the oscillations between more nationalizations and greater liberalization to simple market cycles might seem attractive, factors such as domestic cycles and wider geopolitical shifts have also played a critical role in determining the trajectory of resource nationalism. Whatever the case, the ups and downs of resource nationalism are sure to remain a part of the global story as markets and local and global politics continue their churn.

No comments: