Investors in Extractive Industries: Practice Your Forced Grin

Investors in Extractive Industries: Practice Your Forced Grin

A new book comes to us this year from the Mapungubwe Institute for Strategic Reflection (MISTRA), a think tank founded in March 2011 “to create a platform for engagement around strategic issues facing South Africa.” Unsurprisingly, this report suffers from the generic weakness of books written by committee—it reads as if watered down to get a lot of people, perhaps each of whom has more interesting idiosyncratic views—to sign on to the same formulations.

I refer to Resurgent Resource Nationalism? A Study into the Global Phenomenon, edited by Mcebisi Ndletyana and David Maimela.

The book defines resource nationalism as a political drive to increase the extent and expand the range of state interventions in the extractive sectors of an economy. The adjective “extractive” means what it sounds like it means: an industry by virtue of whose efforts something underneath the surface of a country’s land gets taken out, via a well, or a mine, or a pit, to be consumed or exported.

The use of the adjective “extractive” in the definition of “resource nationalism” in this book is important. The word distinguishes diamonds from other resources such as, say, wheat, as the time scale of geological transformation is distinguished from the time scale of human life and the growing season. The sense of permanent depletion that accompanies the operation of the extraction industries helps give urgency to nationalistic demands for profit sharing, regulation, and, in some cases, outright expropriation of the private property of the international corporations that do the extracting.

Thinking About Libya

Resource nationalism in this sense obviously isn’t new. Muammar Al-Gaddafi’s 1969 coup in Libya was one example of such a political drive. The ideas weren’t new then either, but this will do as a starting point. Gaddafi was the leader of a group of officers opposed to the Senussi monarchy (under whom oil had been discovered). Their coup succeeded, and the nationalization of the foreign oil companies doing business within Libya was one of the first self-appointed tasks of the Revolutionary Command Council.

Six years later, Gaddafi produced a tract-sized justification for his proceedings, The Green Book. This tract tells us, “Nationalism in the human world and group instinct in the animal kingdom are like gravity in the domain of material and celestial bodies.”

Coming back to the new book, Resurgent Resource Nationalism?, it is worthwhile noticing the punctuation. Surely there is no need to put a question mark after the phrase “resource nationalism.” Yes, it is and has long been a fact in the world, though one considerably less constant and predictable than gravity. The question mark in the title must refer to the adjective “resurgent.” Is there a new surge of such nationalism underway in 2016 and, if so, is it a regional or, as the subtitle claims, a global phenomenon?

A Cycle of Bargaining Power and Weakness

The authors of this book make reference to a theory set out by the American political scientist Raymond Vernon in 1971, which Vernon called the “obsolescing bargaining model.” Vernon contended that bargaining power regularly swings back and forth between international extractive corporations, on the one hand, and the host states (along with their controlled or sponsored companies), on the other, in large part because the extractive infrastructure becomes obsolete over time. It is when the rigs and pipelines are working smoothly and when surfaces may even still be shiny that the state’s power is at its greatest, because those assets are hostages. The state is tempted to interfere with or simply nationalize an international oil company’s operations and to seek to run them on its own or through local surrogates.

But, once the state does so, it finds that the equipment doesn’t stay state-of-the-art, or even shiny, and that its own position gradually weakens. There will always be reasons, good ones or at least politically plausible ones, to delay or shortchange expansion, upgrade, or maintenance projects, and post-nationalization states generally fail to manage a homegrown body of technocrats adequate to run a national oil company. So, over time, these states find they have to invite the international oil corporations (IOCs) back in and allow them the leeway needed to run the business as they see fit. When a state has to make this concession, of course, the bargaining position of the IOCs is very strong.

For Now: Grin and Bear It

But, after such a privatization moment, resentment can be expected to return, and a new generation of nationalists may soon begin plotting a new takeover. When the IOC has repaired and expanded the facilities, when the infrastructure seems to be running smoothly, its bargaining position is weak, and the dynamics have come full circle. Assets are hostages again.

The point of this book seems to be as follows: Vernon’s model is accurate, but requires an update to account for globalization. In 1971, when Vernon published Sovereignty at Bay, the back and forth might well have proceeded on a different schedule for different nations. Or perhaps one might have argued that the cycles differed region by region. But, since then, all the clocks have been synchronized. In the globalized world of the 21st century, there is only one cycle, and, in that cycle, the world finds itself in the more-assertive-state phase.

How long will this nationalism-everywhere surge last before the considerations Vernon adduced will lead to a reversal? No very confident prediction can be made. In the meantime (the report suggests) the best that the IOCs can do is to grin and bear it. Outright nationalizations, it suggests, are unlikely or will prove rare in this turn of the cycle. States have learned to get their way less directly and in less draconian fashion even when their power is at its height.

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