World Development, Vol. 4, No. 3, March 1976, pp. 231-239. Pergamon Press. Printed in Great Britain.

The Limitations of Bargaining Theory:

A Case Study of the International
Petroleum Company in Peru
GEORGE PHILIP*

Institute of Latin American Studies, London

Summary. -- The usual bargaining model used to analyse the interaction of foreign companies
and developing countries is inadequate because its•political assumptions are usually misleading
and tend to abstract from a highly complex reality. The case of the International Petroleum
Company in Peru is used to illustrate how political parties there were constrained by the
presence of a iarge foreign firm to act in certain ways which could not have been predicted by a
`rational' model of bargaining.

The economic policy of host governments
towards foreign companies - particularly those
operating in the field of natural resources - is
often analysed in terms of a 'bargaining
in,,del'.1 It will be argued here that the political
assumptions underlying such models are inade-
quate and often misleading, and that as a result,
their descriptive value is l imited However
useful they may be in illustrating world-wide
trends, or pointing out the logic of particular
situations, they contribute little to the under-
standing of the behaviour of particular host
countries. It will also be argued that, when used
in any kind of prescriptive sense, these models
contain political values that need to be made
explicit. This argument will be illustrated with a
case study of the International Petroleum
Company (IPC) conflict in Peru in the ten years
prior to 1968.
THE BARGAINING MODEL OUTLINED
The assumptions made by 'bargaining
theorists' correspond closely to those made in
conventional Pronclmieq. They abstract from
internal political concerns, and regard the host
government, as well as the foreign company, as
an appropriate unit of analysis . to
this view, a foreign investment necessarily
generates conflict between the multinational
corporation and the host government over the
distribution of the surplus (or rent) from a
project. This kind of conflict is 'capable of
rational analysis ',2 by means of concepts
derived from game theory. Most treatments of
this subject assume a two-person non-zero-sum
game, which suggests thal: the interests of the,
host country lie in some kind of negotiated
settlement with the foreign company. It is also
possible, however, to come to 'different
economic conclusions by using the same model;
one may, for example, conclude that confisca-
..c
tion makes a countA.‘j b et. ter c The analytic
* I wish to thank Rosemary Thorp, Laurence
Whitehead and Geoff Bertram for their help in the
preparation of this paper.
1. This approach has been advocated most explicitly
by C. P. Kindleberger, American Business Abroad: Six
Lectures on Direct Investment (New Haven: Yale
University Press, 1969), especially chapter 5, and R. F.
Mikesell, 'Conflict in foreign investor-host country
relations: a preliminary analysis', in R. F. Mikesell
(ed.), Foreign Investment in the Petroleum and
Mineral Industries (Baltimore: Johns Hopkins Press,
1971) pp. 29-56. It is, however, very common to find
it used in a less formal way.
2. R. Mikesell, op. cit. p. 29.
3. As did M. Bronfenbrenner, in 'The appeal of
confiscation in economic development', Economic
Development (aid Cultural Change (April 195,5) p .
201- 18.

231
232 WORLD DEVELOPMENT
usefulness of this approach, however, depends
upon the realism of certain political assump-
tions. For the model to have descriptive (rather
than simply heuristic) value, governments must
maximize in some coherent fashion. This
requires the existence of a government which
has the power to negotiate with a foreign
company, come to an agreement with it, and
then enforce the agreement (or which has the
power to confront and nationalize the
company). It also required that this government
can in some sense be said to represent the
national interest. It may be true that a bargain-
ing model will adequately describe negotiations
between a host country President and a
company over the size of a bribe, but this
possibility is not very interesting for those
concerned with the question of Pconomi,.
development.
These assumptions have been adopted on
they m be defended
various grounds. Firstly, ay
because economic analysis is possible only if
some behavioural assumptions are introduced.
simple dea with
The `maximi.,ing state is r to l terms :vhatever.
and not necessarily less realistic, than one
operating under specific, assumed constraints.
often more interested
Secondly, economists are
in potential than performance, since they may
wish to remind governments of the costs
involved in not carrying out particular pro-
grammes. Finally, defenders of private enter-
prise may find it convenient to their arguments
s that the host
to adopt a model that
governments can be held )fully responsible for
regulating the behaviour of the multinational
company.4
This model has yielded insights that are
useful, if limited,5 and it contains interesting
political implications. These include the sugges-
tion that an able and secure government has
considerable scope, or room for manoeuvre, in
it
its dealing w h foreign investment. If this a.. so,
then the skilfulness with which particular
objectives are pursued may go a long way
towards explaining policy. It is also implied
that relationships between government and
company may be defined, not only by political
will, but also by the objective economic situa-
tion in which each finds itself.
Nevertheless, there are obvious problems
deals an issue tha
with a model that with t is so
evidently political in abstraction from politics.
It is certain that at least some writers have used
the model to explain ton muel, and without a
clear enough appreciation of its limitations.
Even more importantly, there is real danger in
the use_ of 'bargaining models' in a prescriptive
sense, arguing that governments ought to
bargain, or basing value judgements on the
automatic assumption that they are able to.
The ideological content of such propositions is,
clear, but the precise nature of some of their
implications may be understood better when
the case of the International Petrole..m
Company in Peru has been considered.
THE IPC IN PERU
t
policy in Per-, during the o years
before the military coup of 1968, was domi-
nated by the government's need to react to the
ega
anomalous l l position of the largest
company in the industry -- the International
Petroleum Company, a subsidiary of Standard
of New Jersey The legal conflict was highly
complicated and involved rival interpretations
of events dating back as far as 1825. These
Inst a
arguments will not be repeated her,.. e d, it
will be shown why successive Peruvian govern-
ments were unable to settle the conflict on any
The central obstacle to settlement lay in the
extent to which the IPC conflict became an
issue urithir■ rinmpctio pnlitiec. In fart, the IPC
case revealed deep conflicts of ideology within
Peru. The domestic defenders of the company
- who may he described as `nenliherals' - were
less interested in IPC's legal difficulties than in
the value of its alleged economic contribution.
They were not necessarily nppncerl to nego-
tiating with IPC, but very much against
threatening it. Political pressures tended to
harden their line on IPC ac the 19611s wore on,
but only tactical reasons prevented them from
advocating settlement with the company on the
hest terms available. Fnr them, however,
4. Thus, Kindleberger wrote: 'What cannot be
accepted intellectually, although it is understandable
on other grounds, is the complaint that direct invest-
ment makes excessive profits, when those profits are
the result of host-country action or inaction',
American Business Abroad, op. cit., p. 135.
5. Such as the 'product cycle' model outlined in
some of the literature. This shows how 'bargaining
power' shifts from the foreign company to the host
government during the life of any investment, and
thus puts pressure on the terms of the initial contract.
This shift occurs as the information available to the
host government about the industry increases, and as
the foreign company commits capital, takes risks and
embodies its technology locally, with the result that
the appeal of nationalization grows. Mikesell, loc. cit.,
and R. Vernon- Sovereignty at Ray (New York: Basic
Books, 1971) pp. 53-65, describe this in more detail.
 LIMITATIONS OF BARGAINING THEORY: IPC IN PERU
nationalization was unthinkable: since this was
so, the controversy was futile, and — what was
worse — bad for business. By turning IPC into a
political issue, irresponsible people were doing
damage to investment and, therefore, to
national prosperity. Sometimes the tone turned
ugly; thus, La Prensa, (Peru's leading neoliberal
newspaper), once declared that IPC's
opponents,
are sabotaging the country as can be seen from
those Deputies who have converted the entirely
technical problem of petroleum into a truculent
history of 'nationalism' and Machiavellian
It is easy to see how language of this kind could
be used to justify the taking of repressive measures
against particular nationalists.
These arguments were not contrived ad hoc.
On the contrary, they were widely used and
politically powerful because they echoed the
dominant Peruvian political and economic
orthodoxy of the period. Petroleum was just
another industry, subject to the laws of
orthodox economics, and so working best in
private even if foreign hands. Even those who
were not dogmatically in favour of private
investment in all circumstances argued that
taking over IPC would upset foreign financing
and might cause problems in the petroleum
industry itself. To the 'technocrats', the growth
rate was far more important than settling old
(and dubious) scores. To the old-guard con-
servatives, IPC was private property and that
was that Since it was clear to them that
opposition to IPC was damaging the economy,
those behind it were clearly subversive dema-
vglipc who mulct he prm,mtpri from wmnIring
havoc on Peru, even if they had to be repressed
in the process. Further, quite apart from-the
fate "f the company itself caving in to radical
demands would set a bad precedent for other
property owners closer to home. This economic
neoliberalism was strengthened — notabl:y after
the Cuban revolution ---- by emphasis on anti-
Communism of the most fundamental kind.
This was used as a weapon against reform of
most kinds, but just as much so against econo-
mic nationalism.
The rival -view was that the Peruvian govern-
ment should enforce its version of the law
against IPC, taking over the company in
compensation for a 'debt' which it allegedl-y
owed Peru for illegally exploiting the disputed
oilfield since 1922. Extraction of such a 'debt'
would entail complete ,Apiut,iiatik,u of the
company in part payment. This was advocated
by a group who may be described as radical
233
nationalist. The basis of this position was the
demand, on principle, that the laws of the
country should be enforced and Peruvian
sovereignty respected, even if this was economi-
cally costly in the short-run. This argument
united an otherwise diverse political coalition,
including all of the left but also much of the
`old right'.
In fact, this kind of nationalist argument had
a long, though often subdued history in Peru.
The opposition to IPC in the early part of the
century, and the resistance to other foreign
interests that was mounted even earlier, was
based upon rhetoric of a very similar kind. Such
rhetoric was 'radical' in terms of the enemies it
identified, and in terms of the economic
management it proposed. It was radical, above
all, in its attitude to civilian political control.
The weakness of the government, its 'corrup-
tion', its inability to carry out the law in the
face of defiance of the nation by a foreign
petroleum company, all suggested to it that the
desired solution might lie in a truly national,
that is, a military, government. It is not
surprising, therefore, that IPC's most prominent
civilian opponents generally looked to the
military for support and intervention.
This conflict, therefore, was fundamental
and bitterly fought. There was no consensus
within Peru over the relative importance of
sovereignty and a particular kind of economic
advantage. Nicely calculated considerations of
bargaining position played no part whatever in
the controversy, because 'nationalists' and
`nenliherals' had radically different concepts of
social welfare. Outside observers who attributed
any kind of value to Peru ipso facto lost their
detachment and came down openly on one side
or another of what was an internal policy
conflict. At stake, over this issue, was not
simply the fate of ?Pr but din the xvtinle
package of measures supported by each side.
The existence of this conflict alone, how-
ever, does not completely explain the political
difficulties surrounding policy-making between
1959 and 1968. Why was the issue kept alive
for so long? The simple answer is ♦that each side
possessed a veto and used it. The neoliberals or
their allies controlled the Presidency, and the
nationalists and their allies were strong both lit
Congress and the military. However, the nature
of each veto was not completely straight-
forward. It existed, not only because each side
was well entrenched in particular power
centres, but also because the nationalists were
6. La Prensa, 2 July 1967.
234 WORLD DEVELOPMENT
joined, at crucial times, by politicians with
more limited motivations. This will become
clearer after a brief discussion of Peruvian
politics.
Over all, the most important of these
features since 1930 has been the rivalry
between the Apristas (members of APRA, for
most of the time Peru's largest single party) and
the military. This has been extremely bitter and
durable, and, in consequence, APRA has never
been allowed to win a Presidential election. The
result has been impasse under civilian govern-
ments, counter-balanced by long periods of
military rule.
During periods of civilian government, the
Presidency, being barred to APRA, was fought
over by two smaller political groupings that
were unable to govern alone. The political right
generally put up one candidate for the
Presidency, and occasionally more. Between
1956 and 1962 their candidate — Manuel Prado
— was President. The right was opposed by
what might be called 'populist' parties which
were moderately reformist, and generally based
in the south. The most successful of these,
Accion Popular, occupied the Presidency from
1963-8.
If APRA chose to support a President, then
he commanded a civilian majority, but faced, in
the last resort, a military coup. This was the case
with the Prado government, which did have a
certain amount of freedom in carrying out
policy and with Belaunde in 1968 when the
coup followed very quickly after the alliance
with APRA. On other occasions, where APRA
opposed the government, as it did under
Bustamante (President 1944-8) and Belafinde,
it became impossible to carry out any signifi-
cant policy at all.
The effect of political impasse was to
encourage political confrontation and fragmen-
tation. Had civilian government been broadly
based, and secure in the knowledge of its
political strength, it might have been able to
impose any settlement it chose, regardless of
the stridency of the opposition. In such a case,
gronpc opposing certain government policies
would have an incentive to seek compromise, in
the knowledge that they had little chance of
hinrking nr ranging to he overtlirned any
decision that the government might take. In
Peru, however, civilian governments have lacked
this strength - each could he stopped by
Congressional veto, or by direct appeal to the
military. The high probability that obstructive
action could frustrate the goverrunent
encouraged the intransigence of pressure
groups, and tied them in more closely with
opposition political parties or army officers.
The extensive veto power that oppositions, at
various times, possessed, increased the proba-
bility that the government would fail in some
important task, and so would become dis-
credited and vulnerable to military coup.
In recent Peruvian history, nationalism
(which, until 1968, centred around opposition
to 1PC) has been the battle-cry of the opposi-
tion. It was used by the conservative opposition
to Bustamante's government, when the latter
attempted to contract IPC to explore the
Sechura desert, although Odria's military
government, which was supported by the right-
wing opponents of Bustamante later allowed
IPC to take concessions in the Sechura
under the 1952 petroleum law, on more
generous terms than Bustamante had offered. In
1959-60, the Prado government's proposed
settlement with IPC was attacked on nationalis-
tic grounds by Accion Popular and military
officers. After Belaiinde, the leader of Accion
Popular, was elected President in 1963, he
anticipated opposition from former Prado
supporters (including APRA) who between
them commanded a Congressional majority, to
any agreement with IPC irrespective of the
terms; thus, he allowed negotiations to drag on
for years without reaching any conclusion. In
1968 BelaIinde came to a political settlement
with APRA, and negotiated an agreement with
IPC. This, however, was attacked as a sellout,
both by the left and the far right, and led to the
military coup of October. Indeed, after the
military government took power and national-
ized the company, it attracted fresh foreign
investment on terms that both Belaiinde and
the Apristas condemned as excessively favour-
ableto the oil companies. Thus, over the past
twenty years, every government's oil policy has
been attacke.d by every opposition on
nationalist grounds.
During periods of civilian government, there-
fore, the central problem raised for economic
policy-making was that of political authority.
No strategy towards foreign investment in the
nil industry could he carried nut because the
political base was not there. Thus, the issue of
expertise, and that of reacting to changes in the
`objective' bargaining position between govern-
ment and company simply did not come up.
This situation was very largely the result of
Peruvian politics and history, but the existence
of strong and intransigent pressure groups, and
the fact of political weakness are notable
elsewhere in I atin America Thus the implica-
tions of these features for economic policy-
making may be significant for other countries
 LIMITATIONS 01. BARGAINING THEORY: IPC IN PERU
than Peru. The rest of this paper, therefore, will
draw out some of these general implications
and their effects upon the bargaining model. It
will be argued that any political weakness on
the part of the government can generally be
expected to make a strategy of negotiation with
a large and mistrusted foreign company
extremely difficult. This is so for two reasons,
each of which will be explored below.
SOME GENERAL PROBLEMS OF
`BARGAINING'
Firstly, the issue of foreign investment is,
almost by definition, put onto the agenda by
whatever opposition there may be. The opposi-
tion will select the most vulnerable target, and
the most damaging information (which, in
Latin America, may be wholly fictitious, but
most often is merely slanted and incomplete).
The reasons why foreign companies operating
in raw material sectors may be vulnerable to
such attack have been explained by bargaining
theorists. Once the foreign company has
committed its capital, taken its risks, and
embodied its technology, its competitive advan-
tage over the host government diminishes, as
does the premium that the company would be
able to command in a fresh bargaining relation-
ship. At the same time, the terms of the old
contract continue in force, until the host
government attempts to renegotiate the terms.
There is likely to come a time, therefore, in the
life of any successful foreign investment when
nationalistic attack becomes extremely good
politics, and the government is forced onto the
defensive.
While this may also be true of a number of
other issues, foreign investment is unusually
difficult to deal with for a second reason ---- the
inherent instability of any negotiated settle-
ment. To explain this point, consider the logic
of the two-person non-zero-sum game.
According to this logic, both sides have an
interest in an agreement in general, but neither
with any agreement in particular. Either side
may be tempted to try to hold out for just a
little more at any stage since, although there are
a number of 'possible' terms that are entirely
unacceptable to one side (in the sense that it
would prefer no agreement at all), there are an
infinite number of possible agreement points
that would make both sides better off.
Obviously, in situations of this kind, agree-
ments do occur. Expectations tend to converge
around a focal point where the bargain is
struck. As Schelling explained,
235
The 'obvious' place to compromise frequently
seems to win by some kind of default, as though
there is simply no rationale for settling anywhere
else.?
However, in the context of foreign invest-
ment, agreement may be particularly difficult —
even within the framework of the model —
since on an emotive issue, the government's
chances of securing a solid enough political base
are lessened by the absence of any single
inherently 'right' solution. As Schelling again
points out, in this game, once a stable focal
point has been broken re-establishment is not
easy.
If one is about to make a concession, he needs to
control his adversary's expectations; he needs a
recognisable limit to his own retreat. If one is to
make a finite concession that is not to be inter-
preted as a capitulation, he needs an obvious place
to stop.8
In a foreign investment situation, there is a
serious problem with finding an 'obvious place',
since changes in the world market, or in the
fortunes of the company will alter the effects
of the original terms. If the change is damaging
to the company, it can pull out. If the change
increases company profits above the anticipated
level, the government will often be induced, or
will almost certainly face pressure, to change
the terms of the contract, despite the desta-
bilizing consequences of such a step.
Precisely the same difficulty, however, faces
a government attempting to persuade a
sceptical domestic public that -- for any parti-
cular set of terms agreed with a powerful and
distrusted foreign company — it could not have
done better. The fact that the given terms may
well come to look much worse some time later
only adds further to the government's pro-
blems. In general, negotiated settlements lack
the legitimacy, either of 'free enterprise' solu-
tions, or of nationalistic ones.
Nationalistic opponents will, in any case, be
most unwilling to accept that any given set of
terms were the best available. They will have
strong motives for denouncing any agreement
as a sell-out and promising to deliver more.
Anybody can play this game, not only those
with a previously established nationalistic
reputation. Even if the contract looks good
enough, secret clauses or corruption can always
be alleged, will often be believed, and may
7. T. Schelling, Strategy of Conflict (London:
Oxford University Press, 1971) pp. 68-69.
8. ibid., p. 71.
236 WORLD DEVELOPMENT
sometimes be true. If political opponents can
actually block an agreement, they may well do
so since they can then both attack the govern-
ment for failing to settle the issue, and deny it
any respite or popularity that settlement might
bring. The act of co-4-g to an agreement with
a company on a controversial issue, therefore,
creates all kinds of problems for a government
and all kinds of opportunities for its opponents.
Agreement with a mistrusted foreign
company may not only provide opportunities
i t
for but also s o a overnment's p,-slitir.al
opponents. If the nationalist lobby is strength-
ened by a government's attempt to come to
terms with such a company, political authority
may be weakened still further. Intensely
charged and damaging conflicts have arisen, not
only betwe,en government and a foreign
company, but also between government and
domestic critics of foreign companies. In Latin
Americo , the emergence of strong nationalist
feeling can be attributed, at least partially, to a
number of historical and economic factors. No
doubt, similar forces have been at work in other
developing areas.
Political interventions in Latin America
either b y behalf 'o f foreign companies
have occurred regularly in the past, and
even more regularly been denounced. No doubt
the nationalist version of history ‘which prevails
in most Latin American countries is not always
accurate, but a number of significant cases of
business interventionism have been very well
documented. Foreign intervention has tended
to sharpen domestic political cleavages — its
beneficiaries are likely to become more politi-
cally dependent on a foreign power, and the
losers to acquire the rallying point of a hate-
interest
object. The successful foreign s or their
domestic partners acquire a correspondingly
heavy commitment to preventing a reversal of
long
fortunes. Qo any possibility of this
persists, the foreign interest will be under
pressure to continue
deeplintervening, and may be
drawn ever more y into the politicQ of the
host country. In reaction to this type of
experience, or fear of it, nationalization of large
foreign eompanieQ, particularly in the nil
industry, is often seen in Latin America by
nationalists as an indispensable rupture with the
past. They tend to view nationalization as
marking the beginning of real, economic
independence, essential to complement the
formal political independence that was achieved
early in the nineteenth century. When the issue
is posed in such terms, nationalization becomes
a cause which it can he very difficult for Latin
American political leaders to oppose publicly,
even though they may believe the consequences to
be economically costly in the short-run.
Nationalism may also have another motive.
Many Latin American countries are racially
stratified, and this is reflected in the political
coltore There has grown up a strong emotional
link between the sophisticated wealthy criollos
and Europe (or the United States) which
constitot,.s at least in part ejection of Latin
American identity. This has led much of the
civilian elite to identify with successful foreign
enterpriQec which may he seen as more eilli-
cated, enlightened and progressive then most
nationals. It also helps to explain the important
role attached to free movement of capital in the
ideology of many Latin American conserva-
tives. When reaction against this attitude came,
it was directed not only against the domestic
civilian establishment, but also against the most
prominent (or vulnerable) symbols of foreign
presence. In Latin America, therefore, there has
generally been a link between nationalism and
social reform, well illustrated by Latin
American writings on deperidencuL
Where strong nationalist feeling exists, it is
particularly likely to be directed at foreign oil
companies. This is true for various economic
reasons. Oil is a non-renewable resource, so that
it is easier to argue that oil wealth is extracted
from the country and not created for it Oil is
also widely regarded as having strategic signifi-
cance. This helps to explain why a nationalist
attitude towards the nil industry is so wide-
spread among the Latin American military.9
There are also reasons relating to the structure
of the industry that require further explana-
tion.
The structure of the world oil market has
added to the controversy surrounding oil
companies. Although very rapid changes have
been in progess over the last fifteen years, the
oil industry is still widely regarded as a classic
example of oligopoly. For a long time, the
industry (outside the US and the USSR) was
effectively controlled by eight major
companies, of which five were American. The
extent of collusion between these companies is
still not known exactly, but one thing is clear;
the existence of a cartel was generally sus-
pected. In any case, whether from collusion or
spontaneous identity of interests, the major oil
9. Military governments nationalized oil companies
twice in Bolivia and once in Peru. They also set up
state petroleum companies in Argentina and Peru. In
Brazil, where there was a civilian government, military
support proved crucial to the setting up of Petrobras,
the state oil monopoly.
 LIMITATIONS OF BARGAINING THEORY: IPC IN PERU
companies presented a common front on many
issues — rarely, if ever, before the 1960s was a
Latin American government able to take advan-
tage of competition within the industry. In
addition, the relationship between the big oil
companies and their parent governments has
long been notoriously close. Perhaps this was
most notable in the Middle East, but Latin
American governments have also found this to
be true on occasion.
Finally, oil companies have been resented
because of their size. Oil investment is generally
very large compared with the size of a 'typical'
manufacturing project — the position of oil
companies is, therefore, likely to be much
more prominent in any Latin American country
than that of other foreign investors. What
makes matters even worse, however, are two
other considerations of size. Economies of
scale, and the logic of exploration, both tend to
bring about concentration in the industry — not
necessarily on a global level, but more than
likely in a small Latin American country where
there is room for only one large refinery. In
Peru, up to 1970, for example, domestic
demand was almost entirely met by one
medium-sized oil refinery, owned by IPC. At
the same time such a subsidiary may well have
seemed very small by the standards of the
parent company. In Peru, IPC was the second
largest taxpayer in 1967, but its assets were less
than 1% of the value of the parent company. 1
In such cases, the dependence of the host
country would be far greater than vice versa.
Hence, nationalists continued to fear that size
could confer a power upon a company which,
in the event of conflict with the host govern-
ment, it would not hesitate to use
Whether or not these objections seem valid
to visiting economists is not the point. The fact
is that they nftPri ofIntrihute to sitnntinns
where host governments dare not commit them-
selves to negotiated solutions with particular
m n i t in a tin n a l o n mpa n ip s nn ma tt er h n u/
the terms may seem to detached observers.
Instead, these companies often come to
hitte
represeilt focal points in r struggles with•
host country politics. In these cases, policy
changes must be explained in terms of changes
n li-st rnn ntrtv nnlitirc rather than 'objective'
bargaining positions. Policy changes of this kind are
likely to be abrupt, and the overall pattern of policy
unstable. Ti-,,,,, for example, Bolivia has lured
foreign investment into the oil sector three times, and
has nationalized its oil industry twice in 1937 and
1969. Argentina's oil policy-
- at least between 1958 and 1966 — revealed
similar variety, and even Mexico (which has the
237
reputation of maintaining a consistently
nationalist position ever since it nationalized its
oil industry in 1938), vacillated' in its intransi-
gence at least once, in 1948. Fluctuations in
policy towards Chilean copper, and Brazilian
iron ore have also been pronounced, and also
related to host country politics.11
In fact, the political problems posed by such
foreign investment do more than create policy
instability; they have often contributed to the
overthrow of governments. Although never the
only issue, nationalizations of foreign
companies undoubtedly made a substantial
contribution to the 1954 coup in Guatemala,
the 1970 abortive and 1971 successful coups in
Bolivia, the 1973 coup in Chile, and even the
unsuccessful efforts to oust Fidel Castro in
Cuba in 1959-61. From the other side,
Belannde's elected government in Peru was
removed by the military largely because of a
settlement which it made with a hated US
company. Immediately after this coup, and also
after the 1969 coup in Bolivia, the government
nationalized American oil companies for
reasons that can only be explained in political
and historical terms and which owed nothing to
any expectation of material advantage. In many
other cases, controversies over foreign invest-
ments have weakened governments which were
subsequently brought down by some later
difficulty.
THE BARGAINING MODEL
RECONSIDERED
The bargaining model, therefore, often fails
to describe events, because it abstracts from
politics. A similar kind of objection must be
made to the use of the model in any kind of
prescriptive sense T he fart that it h as been
used in this way may be explained, at least
partially, by the fact that the model seems to
g nr u l p r nv i c i c an a t t r a c t iv e synthesis of the o n n f l i rt
between nationalists and market economists. It
seems to suggest that a developing country can
njr.‘, the advantages that may c"me from
foreign investment while minimizing the costs,
10. See C. Goodsell, American Corporations and
Peruvian Politics (Cambridge (Mass.): Harvard Univer-
sity Press, 1974) p. 72.
11. Mikesell, op. cit., does contain a number of
interesting case studies, many of which reveal, perhaps
despite the intentions of the contributors, the
importance of host country politics to the treatment
of foreign investment.
238 WORLD DEVELOPMENT
and, above all, without sacrificing economic
power. It will be argued here, however, that
such a synthesis is, unfortunately', too attrac-
tive, and that it evades some of the important
dilemmas that development theorists face.
The central objections can be stated briefly.
The first point is simply an argument for the
second best. Given that particular governments
may not be able 1-.0 byargain with foreign
companies — for the political reasons discussed
above — then a more nationalist direction of
policy may be better than alternatirig instability'
and confrontation. However, it is not clear how
far bargaining theorists can incorporate political
variables into their models -without having to
alter their approach completely. The second
argument is more subversive of conventional
economic approaches. In pre-I968 Peru, and
doubtless elsewhere, there was a political
connection between government's treatment of
foreign investors and its other policies, -e ,nd it
would be misleading to look at the former in
isolation. Each of these objections will be
discussed in turn.
To begin with, consider the ways in which a
bargaining theory would have to take the
possibilities c,4 political change into account if
it was concerned to work out what a govern-
ment's 'optimal' policy would be (given that
‘vere defined in terms of some
economic effect). The first way relates to the
expectation of political change over time. This
has alread-j been integra'ied int0
theory in as much as it relates to company
calculations. It is well known that foreign
companies require, a premium if they are, to
invest in high-risk areas, and that this will
increase the competitive advantage of a national
company. The way in vdrich this. would affect
the calculations of a 'rational' host government,
would have to be evaluated in the same way.
Such a government -would, in considering policy'
towards foreign investors, take into account
what its successor was likely to do. If it
expected that the successor -would embark
upon a fruitless policy of confrontation with a
company, or that it would permit it to repa-
triate an undesirably large volume c,4 profits,
then it would adapt its policies in consequence.
The second way involves consideration of
the effects of foreign investment upon the
`rationality' of the decision-making process
itself. Again, it has long been known that the
presence of prominent, mistr”std foreign
corporations can disrupt the process of admini-
stration, and thus the 'rationality' of particular 12. See the remarks by A. O. Hirschman, How to
d,eicifms 1 2 Also, foreign compnnies with or Divest in Latin America and Why Princeton liniver-
without the encouragement of host country
politicians, do intervene in host country politics
in a variety of ways, perhaps not as often or on
such a large scale as some critics have imagined,
but certainly in ways that are important
enough. Recent developments in Honduras
should silence those who argued that 1,:‘rge-scale
bribery of host governments by foreign
companies was a thing of the past.
Thirdly', a government's domestic political
strength or weakness might be expected to help
to determine the kinds of policies that it would
l oe able to pursue elsewhere in the economy.
For example a government may gain sufficient
political power from nationalizing an unpopular
t thU
foreign company' (at .
J lJl le I l tt/
country), to be able to embark upon an
important and controversial programme of
ref 111 othui alucto of thu which
may be of great economic benefit to the
country. Alternatively, it may use up so much
of its -p olitical capital in forcing through an
agreement with such a company that it loses its
ability to carry out effective policies in other
at cal, UI even to ensure that the tax revenue
extracted from the company is not wasted.
Whenever policy towards a foreign company
al...ers tile strength of a' government (and, in the
Latin American oil industry, this means in
every case), the economic effects of that policy
include possible policy changes that may result
from changes in the distribution of political
power.
Clearly, it is possible for each of these
variables (as well as others) to be incorporated
into some kind of bargaining model. Such a
model might assume that 'a government
maximized some combination of economic
advantage and political power — the combina-
tion varying between countries. Such an
approach would gain in descriptive realism, but
would stray very far from its original economic
focus Indeed it would be forced to include so
many different and unquantifiable variables as
to lose all general applicability. When so loosely
ini
defined, a barga ng model could be used to
describe, or justify, practically anything. Thus,
the prescriptive power of such an analysis
would be reduced to almost zero ar-vi its
descriptive edge would be completely blunted.
These difficulties, however, are not inevit-
able. if economists ,Nish to infb,,-ry-,- by
ignoring politics, then they may do so by
making explicit their requirement for strong
g,-,v,--rnment If a government ran device and
sity, Studies in International Finance, No. 76 (1969).
 LIMITATIONS OF BARGAINING THEORY: IPC IN PERU
execute detailed policy in terms of a clear-cut
set of objectives, and can overcome any opposi-
"LIU- -11
LA/ Ill cc IZIA IG3, en a bargaining
model may be appropriate. Clearly, govern-
ments of this kind do exist — they are generally
to toe found in single or 11-egemonic party.
systems, pseudo-traditional monarchies, or
military dictatorships. If bargaining theorists
wish to argue that governments of this kind are
necessary for effective economic policy-making
towards foreign companies, then they should
do so openly, and mak.e. their ideological
positions explicit. After all, it is not often that
governments of this kind are compatible with
liberal political 'values, and some of the mast
successful of them (for example that of
contemporary Brazil) are clearly repressive.
In taking 'such a position, howe.yer, bargain-
ing theorists would encounter the force of the
second objection that was raised above. As was
Sidi earlier, 1-,argaining theory not only, requires
that the government is strong, but also that it
represents some kind of national interest.
Transfers of income from rich foreign
companies, to the Swiss bank accounts of even
richer domestic rulers, are not, in themselves,
particularly to bring about economic
development. Not every government that can
bargain effectively will be able to, or will wish
to, use the revenue gained, or carry out other
policies, in a way recommended by any reason-
able interpretation of the national interest.
Governments are 1Imi4ed FfY their POlitiCal "MST,
and by the interests of those who support
them.1 3 Moreover, they may themselves have
strong ideological objections 4.0 particular
policies. Thus, even in cases where governments
do bargain, objections to bargaining models
remain in force.
It might be argued that, no matter how
misguided, inefficient or corrupt a regime may
be, soine of the surplus that ',vas bargained
away from the company would be spent within
the country, and so would generate some kind
,
of ec^n"mic gr^wth. However f is not at all
clear that such a pattern of growth would be
239
superior to that generated by a lower, but
perhaps better allocated, level of income,
earned by a national company under a different
regime. For example if the massive revenues
provided by tax revenue extracted from a
lu.u..1611 ,utupauy uy a L/111110.11.. 5
l/ C1 15
strategy were spent in such a way as to
intensify the country's dependence upon a
single commodity, it. is not clear that Unity
could be expected.1 4
Thus, the bargaining model assumes not only
that Iche government has political strength, bu t
also that it is in the hands of a cohesive group
with a strong motivation to carry out general
economic policies 'in the national interest.
Clearly, there are such governments, and many
of these have achieved considerable degrees of
conventionally-defined economic success. The
existence of governments of this kind, however,
should not be taken for granted. Nor should
they be evaluated without some consideration
of the broader consequences of concentrated
economic power and authoritarian government.
, Such considerations might lead to the conclu-
sion that the capture of surplus for develop-
ment, especially from a large foreign company,
is a far more difficult matter than is often
assumed.
13. Much Marxist criticism has been provoked by the
assumption that governments represent the national
interest, rather than that of any particular class.
Indeed, much theoretic-al writing III Latin A'merica has
concerned itself with the relationship between internal
class conflicts and the treatment of foreign economic
interests. The most vivid descriptive attack on the
conventional economic assumptions is still that of
P. Baran, The Political Economy of Growth (New
York: Monthly Review Press, 1957) chapters 6 and 7.
14. On which, see N. Girvan, 'Multinational corpora-
tions and dependent underdevelopment in mineral-
export economies', Social and Economic Studies
(1971) pp. 490-526.