Thursday, August 20, 2009

Can lithium aid Bolivia's depression?

Simon writes each week on international issues relating to energy policy.

Twice in the space of the past day, I encountered an energy story I'd never come across before. The story provides a glimpse of a potentially vast revenue stream for a highly impoverished country, but is accompanied by some warnings from history. It features a Latin American nation often overshadowed by its more truculent or troublesome neighbors to the north – Bolivia. It also features the lightest metal in existence, and perhaps the critical ingredient in the electric-car revolution – lithium.

Bolivia is home to the world’s largest salt flats, and these salt flats are in turn home to the world’s largest lithium deposits – by some accounts 50% of all the world’s lithium is located in the high, hot Uyumi plateau. And, as demand for the metal is driven up by battery makers, for use in laptops, longer life AAs, and increasingly by carmakers, the Bolivian government is looking to develop this heretofore-untapped resource. President Evo Morales’ Socialist government has determined that the state will take sole responsibility for the new mining operations, speaking in grandiose terms about being not just the “Saudi Arabia of lithium” – extracting the metal for wholesale – but of becoming the world’s leading battery manufacturer . Such ambitions are bold, but also risky, as many commodity-dependent economies can attest.

The historical record in such situations is not good. The concept of the “Resource Curse” is well established, as the likes of Jeffrey Sachs and Paul Collier have expounded. Excessive dependence on one industry can skew economic allocations, engender corruption and sometimes violence, and inhibits growth. Still, while the problems are well-known, solutions are hard to find. The alternative, ignoring – or at least underutilizing – natural resources won’t help growth either, and may be morally indefensible in a country where 60% of people already live below the poverty line. The jobs and income quality development would provide would be invaluable, especially among the indigenous communities who inhabit the salt flats, and whose income levels are markedly lower than people in other parts of the country.

As prices continue to rise, it is going to become harder to hold off developing these deposits. It seems inevitable that despite Morales’ ideological hostility, there will have to be some involvement from foreign companies. While he can maintain ownership of the resources and their rents, Bolivia simply lacks the expertise, not to mention the capital, to realize their prospects. The treatment of western oil and gas companies in the last few years, summarily nationalizing and expropriating their assets, will have done little to encourage involvement, though.

Of the possible solutions suggested here, one of the more interesting – and implementable – ideas may be one from close(ish) to home. Privatization is out for the time being, simply because it is incompatible with the current politics of the country. Whether or not it would have much success is also questionable, with instances such as the former USSR showing it to be easy to get devastatingly wrong. Creating a Norway- or Dubai-style sovereign wealth fund to take proceedings and invest them in other sectors, to provide a longer-term and diversified revenue stream. Such funds, though, are only as responsible as their governors, and it is hard to tell how accountable the Bolivian government would be. But the third, slightly familiar idea, that of establishing a revenue distribution fund, similar to Alaska’s program for distributing oil proceeds, may be the most preferable. It reduces the dangers of corruption by putting money in the hands of citizens rather than the government. It helps raise individual incomes, allowing for the expansion of other private enterprises. The risks of inflationary pressures exist, but are probably no worse than other forms of distribution of the revenues, and with this system would have the added advantage of helping less well-off parts of society rather than waiting for a trickle-down from elites (which would have the added risk of capital flight).

There are a lot of ifs to be addressed before we see this experiment take shape – at present prices this windfall is still minor, compared with the lucre that hydrocarbon fields provide (the value of Bolivia’s lithium amounts to about two thirds of its current GDP. By contrast, Saudi Arabia’s proven oil reserve are valued at around 40 times its current GDP, and Venezuela’s at around 20x). However, if electric cars expand their market share, and if lithium batteries remain the technology of choice to power them, the price of their commodity should continue to climb. Bolivia may well provide an interesting test case for a country trying to handle a new bounty of natural resources, using all the experience economists have learned from the previous century.

With energy resources having proven the most egregious contributors to the “resource curse” problem through the years, and with the desire to re-invent the sector potentially generating new demand spikes for previously neglected materials, it behooves policymakers to ensure that the mistakes of the past are not repeated in the present. Efficient development need not be irresponsible development, and the owners of such resources, be they public or private, can give extractive operations a better reputation in the this century than they had in the last one.

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