LA PAZ, BOLIVIA (By Mac Margolis, Newsweek) May 7, 2006 — When the tough-talking labor leader Evo Morales took office as president of Bolivia early this year, many people in Latin America and beyond held their breath. Would this socialist and champion of Bolivia's coca farmers, whose raw material fuels the global cocaine trade, make good on his vows to stick it to gringo investors and, like Venezuelan strongman Hugo Chávez, declare war on “neoliberals” and their “Washington Consensus”—the much vilified doctrine of free-market reforms that swept the region beginning in the 1990s? Or, like Brazil's “responsible” leftist President Luiz Inácio Lula da Silva, would he turn his back on the militant compañeros who swept him to power and suddenly embrace international lenders and business in hopes of stirring Latin America's poorest nation from its centuries' old economic slumber?

Barely five months later, the verdict is in. On May 1—fittingly, International Labor Day—Morales abruptly nationalized the country's vast oil and natural gas reserves and infrastructure. With the stroke of a pen, he transferred all privately owned assets in the hydrocarbon sector (oil and natural gas) to the Bolivian state oil company, YPFB, and gave foreigners 180 days to renegotiate their contracts or else get out. Meanwhile, companies like Brazil's Petrobras—which has ploughed some $1.5 billion into Bolivia—and Britain's BG Group, Total of France, and the Spanish-Argentine conglomerate Repsol, will have to pony up a whopping 82 percent of their earnings to the La Paz government. The fine print has still to be worked out, but one thing is already crystal clear: from here on, doing business in Bolivia depends not on the fortunes of the free market but on the vagaries of the mood in La Paz. "Companies that do not accept [our conditions]," announced Hydrocarbons Minister Andrés Solis Rada, "their assets will be confiscated." Chalk up another point for the “Caracas Consensus.”

In one way Morales's move was hardly unexpected; all last year he had campaigned on the promise to return Bolivian natural resources to the Bolivians, vowing to become "Washington's nightmare." Still, the Labor Day decree and the theater surrounding it—Morales donned a petroleum worker's hardhat and dispatched army troops to seize foreign-owned wells and refineries—caught many outsiders by surprise. None more so than the Brazilians, whose government had warmly welcomed Morales's victory as a redemption of sorts for Latin America's poor and downtrodden but never imagined the rebellion next door might turn on them. For all his brazen rhetoric, after all, Morales had taken care to court the favor of his giant neighbor, which is Bolivia's largest foreign investor. He even referred to himself deferentially as Lula's "little brother." No one is calling him Junior anymore.

Such two-fisted politics are not new to Latin America. They hark back to a seemingly distant, almost quaint era when most of the region's economies were run by populists, military men and charismatic caudillos who ignited the imaginations of the poor and neglected with promises of plenty and broadsides against the enemy without. In country after country, those policies faltered as investment dried up and capital-starved economies succumbed to inflation, debt and uncompetitive industries. There was no more glaring example than Bolivia itself, where the gas and oil industry had all but collapsed under the dead weight of hapless government bureaucrats.

Yet while many of the reforms prescribed by the much vilified Washington Consensus took root across the continent—lowering trade barriers and inflation, and boosting fiscal discipline—growth has still been elusive. Instead of a call for deepening those reforms, spiking joblessness and the brooding frustration over fleeting prosperity fueled a backlash against the austerity of the free market and its gringo sponsors. Many former leftists, like Lula, or Uruguay's Tabaré Vazquez, resisted the quick-fix solutions that called for spending their economies back to life.

But with national elections scheduled in half a dozen countries, from Mexico to Peru, over the next seven months, the clamor for what Harvard Latin American expert Kenneth Maxwell calls "the populist temptation" seems to be finding sympathetic ears again. In March, Argentina's Nestor Kirchner, facing rising inflation, browbeat private companies with a price freeze. Hugo Chávez last year ratcheted up state controls over the oil and gas industry, crowding out private investment. In Peru, socialist-leaning Ollanta Humala, leading the field for the Peruvian presidency, is threatening the same.

No one knows just how far Bolivia will go to impose its newfound "sovereignty," but the abrupt change of direction and the belligerent trappings that surrounded it have already sent distress signals across the region. (Bear Stearns, a New York based bank, warns that Morales's nationalization of foreign firms could spark a wider flight of investments throughout the emerging markets.) Not least because Bolivia is sitting on some 1.6 trillion cubic meters of natural gas, the largest reserve in Latin America after Venezuela's, and enough to fuel the needs of an energy-hungry continent for the next century or more.

Although Bolivia's energy decree affects some 20 energy multinationals in Europe and Latin America, no one has more at stake in the short run than Brazil, which built a huge pipeline to pump Bolivian gas thousands of miles across the South American jungle and savanna and sunk $1 billion into wells and refineries. Nearly half of the natural gas Brazil burns today—in industry, homes and car engines—comes from Bolivian wells. Though there's no apparent danger of shortfalls in the short term, future development is a question mark for dozens of industries that had converted to gas-burning machinery on the promise of bountiful supplies from the Andes. Finally, on May 3, Petrobras announced it was suspending further investments in Bolivia.

Though there was much rejoicing in La Paz, the jubilation may be short-lived. For most of this decade, this benighted Andean nation, where 70 percent of the people live below the poverty line, has been stuck on a wheel of political and economic turmoil. Ironically, Bolivia's fortunes began to turn in the late 1990s, when President Gonzalo Sanchez de Lozada opened the doors to foreign investment. The rush of foreign capital threw many Bolivians in dead-end jobs out of work, but it also revived the nearly bankrupt natural-gas industry. Lozada and his successor were forced out of power when Morales rode a tide of nationalist rebels, Marxist intellectuals, coca farmers, unemployed miners and impoverished indigenous people into power, blaming outsiders for their plight. Morales's move to expropriate foreign assets was tailored to please this seething coalition. If he is unable to attract capital to convert the treasures buried under ground into wealth and jobs, the same constituency could turn on him, too.