More Worrying Developments in South America

As regular readers know, I have been concerned with the recent trend in South America against business interests. There are two more recent examples that highlight my concerns.

First, Hugo Chavez is attempting to spread his leftist policies by interfering with Peru's presidential election. In a Wall Street Journal article Peru Recalls Ambassador From Venezuela (subscription required), the Associated Press writes that Peru has recalled its ambassador because of Chavez's interference.

LIMA, Peru -- Peru recalled its ambassador from Venezuela to protest what it said was President Hugo Chavez's "persistent and flagrant" interference in Peru's presidential election.

The diplomatic spat came Saturday over the Venezuelan leader calling candidate Alan Garcia a "thief" and his repeated endorsements of nationalist front-runner Ollanta Humala. The two candidates will likely face off in a runoff election in late May or early June.

"The government of Peru has decided to immediately remove its ambassador from the Bolivarian Republic of Venezuela for the persistent and flagrant interference in internal affairs of Peru, in clear violation of the principles and norms of international law," the Foreign Ministry said in a statement.

And second, Bolivia decided to nationalize its natural gas fields. David Luhnow and José de Córdoba in a Wall Street Article Bolivia Seizes Natural-Gas Fields In a Show of Energy Nationalism (subscription required) chronicle the developments.

Emboldened by Venezuelan President Hugo Chavez's moves against private oil companies, Bolivia nationalized its natural-gas industry, ordering foreign companies to give up control of fields and accept much tougher operating terms within six months or leave the country.

In a dramatic sign of how high energy prices have sparked a resurgence of nationalism from Caracas to Moscow, Bolivian President Evo Morales yesterday announced the nationalization at the country's biggest natural-gas field, San Alberto, and then ordered army troops to take control of it and the country's other fields, operated mainly by Brazil's state-run Petróleo Brasileiro SA, or Petrobras, and Spain's Repsol YPF SA. To date, foreign investment in Bolivia's energy sector totals about $3.5 billion.

"The time has come, the awaited day, a historic day on which Bolivia retakes absolute control of our natural resources," said Mr. Morales. The former coca grower won a landslide victory in December elections partly on a promise to nationalize the gas industry, seen by many poor here as the country's ticket to prosperity.

While I have sympathy for the South American people in wanting to receive fair value for their commodities, I do not believe that nationalizing industries will lead them to prosperity. Instead, as South American governments become more hostile to corporate activity, companies will simply decide not to invest. Less investment results in reduced production and less government revenue over time.

With less investment and the consequent less production, commodities will likely continue to escalate in price. As I have mentioned in prior posts, investors should continue to monitor the developments in South America because they will likely affect businesses in North America and Europe.