The Power and the Money

Iceland, European empire, deposit insurance, and terrorism ... really

 Why is the Icelandic taxpayer on the hook, asks Jonathan? The short answer is: blame Europe!

 
Everyone knows about the European Union, the big confederation (with some federal characteristics) of countries sitting there on the Old Continent. Fewer people know about the European Economic Area. The EEA is basically an agreement under which Iceland, Norway, and ... er ... Liechtenstein get access to the European market in return for adopting some E.U. laws and regulations. (Switzerland has basically replicated the same arrangements without formally signing on to the EEA.)  The EEA required its members to adopt European law on deposit insurance in return for granting EEA banks the right to branch into the E.U. As a result, Iceland adopted a deposit-insurance scheme in 1999.

Click the link on the Icelandic scheme. (Or keep reading.) Scroll down to Chapter 5, Article 10. It reads: “This amount shall be linked to the EUR exchange rate of 5 January 1999.”  The reason is quite simple: the E.U. law required countries to create schemes that insured deposit accounts with a value of at least €20,000. Ergo, the Icelandic scheme guaranteed €20,887. Now, the scheme was financed by a 1% levy on bank deposits and was rather vague about what would happen if it could not meet its obligations. Was the government then responsible? Were savers then on their own? What?

The 300,000 British depositors who fell in love with the 6% rates that Landsbanki offered through its “Icesave” accounts did not seem troubled by these distinctions. They deposited £5 billion. In an Icelandic bank. A bank they had never heard of before 2006 based on a tiny island of 300,000 people. Any resemblance to Barbados is entirely coincidental. Barbadian banks do not do this sort of thing. This may be because Barbadian bankers have banked for some time, while the Icelandics were pretty green.

 
Maybe the Britons thought that Iceland was in the Caribbean? More likely they were taken in by a message that Britain’s financial regulators allowed to stand on its website:  “You can also rest assured that with Icesave you are offered the same level of financial protection as every bank in the U.K.” 

Well, when Iceland finally went kablooie, worried Britons began a run on Landsbanki, which led to a rather remarkable conversation between Iceland’s finance minister, Árni Mathiesen, and Chancellor Alistair Darling of the United Kingdom:

Darling: “Do I understand that you guarantee the deposits of Icelandic depositors?”

Mathiesen: “Yes, we guarantee the deposits in the banks and branches here in Iceland.”

Darling: “But not the branches outside Iceland?”

Mathiesen: “No, not outside of what was already in the letter that we sent.”

Darling: “But is that not in breach of the EEA treaty?”

Mathiesen: “No, we don’t think so ... Since we can’t cure the domestic situation, we can’t really do anything about things that are abroad.” 

Darling:  “See, I need to know this in terms of what I tell people. It’s quite possible that there is not enough money in [Iceland’s depositor guarantee] fund. Is that right?”

Mathiesen:  “Yes, that is quite possible.”

Darling:  “You have to understand that the reputation of your country is going to be terrible. It really is a very, very difficult situation where people thought they were covered and then they discover the insurance fund hasn’t got any money in it.”

After hanging up the phone, Darling did something even more remarkable: declare Iceland a terrorist state. It was the easiest way to freeze Landsbanki assets inside the U.K. (Sadly, most of Landsbanki’s assets were not in the U.K.) He then guaranteed that British depositors would be repaid in full. Good politics, of course, and probably needed to prevent crippling bank runs in Britain, where a lot of foreign banks operate.

At that point, Darling went back to Iceland — which desperately needed financial support from other Nordic countries to prevent runs there and obtain IMF money — and convined them to pass a bill that would pay Britain back for the money it spent supporting the deposits of its citizens who had placed their money in the banks of a terrorist state. Icelandic voters, for some reason, were miffed by that ... and the result was the referendum.

 
What happens now is anyone’s guess, although I am fairly confident that my most excellent proposal will not be adopted. Answer your question, LT?

The Commonwealth of Iceland

 So, the Icelandic electorate today told the British and Dutch to shove off. The mess is about the bill for Iceland’s spectacular bank collapses. The Anglo-Dutch governments made their depositors whole at a cost of approximately $16,500 for every man, woman, and child in the Republic of Iceland. The “no” vote appears to garnered 93%. A last-minute Anglo-Dutch offer to cut the interest rate on the debt from 5.5% to 2.75% does not appear to have generated much sympathy among Icelandic taxpayers. 

It isn’t clear what the referendum means. “We want to be perfectly clear that a ‘no’ vote does not mean we are refusing to pay,” said the Finance Minister. In other words, Iceland will probably pay anyway. Nonpayment would hold up an IMF loan and put off the day when Iceland can lift its capital controls and return to some semblance of economic normalcy. It would also imperil (maybe even kill) its chances to join the E.U., let alone the eurozone.

In light of all that, I would like to resurrect my proposal that Iceland resurrect the Icelandic Commonwealth, this time in the form of the Commonwealth of Iceland. The numbers add up. It makes sense for both Washington and Reykjavík. It would end any need to go to the IMF. The deal could be unwound unilaterally at any time. There isn’t even any need to go the fully-irreversible route on citizenship: the people of American Samoa are U.S. nationals, not citizens. 

Sounding more win-win to me every day. Just like having Britain give its security council seat to India. 

Dubai, Incorporated

 State capitalism is an interesting term. What does it mean? Some definitions, like Rothbard’s, include everything outside perfect laissez-faire. Most Marxist definitions include everything other than complete Soviet-style central planning. Finally, others effectively define it as a synonym for crony capitalism or resource nationalism. None of these definitions strike me as particularly useful.

But state capitalism exists. When I parse the Potter Stewart definition inside my head, I wind up with a a system in which profit-maximizing state-owned companies operate in ostensibly competitive markets. I say “ostensibly,” because both profit-maximization and competition exist mostly in the eye of the beholder.

 

The Emirate of Dubai is the epitomy of state capitalism. The state’s investments run through three holding companies: Dubai Holding, Dubai World, and the Investment Corporation of Dubai (ICD).  Sheikh Maktoum directly owns Dubai Holding, while the latter two are formally owned by the government of Dubai … of whom Sheikh Maktoum is the absolute ruler. All three holding companies have real estate arms charged with developing land granted to them by the emirate. ICD’s Emaar Properties developed the Burj Khalifa, while Nakheel created the offshore Palm and World developments on reclaimed land.

Dubai built its airport in 1960 — over the objections of the emirate’s British advisors — and then borrowed against oil revenues to expand it to handle jumbo jets in 1968. The airport (separately from the airline) directly generates a lot of ancilliary economic activity: landing fees, retail sales, warehousing, maintenance, etcetera. The airport generates even more indirectly … not least the tourist industry. Things like the Burj Khalifa might seem like wasteful ego-driven expenditures. And they are. But they’re also the sort of over-the-top more-Vegas-than-Vegas kind of thing that draws in the tourists, along with the indoor ski slopes and the “seven-star” hotel. Visitor expenditures made up another 8% of GDP.

 
In 1985, Dubai established Emirates Airlines. At the time most air travel between the Gulf and other points was handled by Gulf Air. Mohammed Al-Maktoum worked secretly with Maurice Flanagan, a former British Airways executive who had run the Dubai National Air Travel Agency, to launch the airline with $10 million in seed capital. The Sheikh supplemented that with subsidies Flanagan estimated at $90 million, including two barely-used Boeing 727s, help with aircraft purchases, a training building, and $64.7 million in other off-the-books investments. As you all probably know, the investment paid off: by 2007, Emirates flew 119 aircraft to 101 destinations in 61 countries, earning a profit of $1.4 billion.  Think about that number for a second.  In 2007, the profits from that one enterprise alone contributed 2% of Dubai’s GDP. And 2% is a minimum estimate: Emirates’ total turnover came to $9.6 billion … 15% of GDP. (Obviously, not all of that number accrued to Dubai — but even a quarter would put the airline’s direct contribution at 4%.)

And then there are the free zones. I’ve already mentioned Jebel Ali, but there’s also the Dubai International Financial Center (DIFC). The DIFC has a special legal regime modeled on the United Kingdom, allows for 100% foreign ownership, and guarantees no taxes on profits or income for fifty years. (Inasmuch as that guarantee means anything in an absolute dictatorship.) Then there’s Dubai Media City, which offers a similar deal to firms in media and marketing services, printing and publishing, music, film, internet-related activities, video games, leisure and entertainment, broadcasting and information agencies. Running free zones has become an export industry. The Orangeburg Industrial and Logistics Park in Santee, South Carolina, won’t be able to offer the same range of tax breaks as the Dubai zones, but it will offer whatever the State of South Carolina can provide over two square miles. Ditto, Economic Zones World is neck deep in the Indian government’s attempt to emulate China’s “special economic zones” and has sunk a lot of capital into trying to turn Djibouti into a second Dubai.

So what’s the catch? Simple. The Emirate leveraged the oil money into the financial center, the port, the free zones, and the tourists in part by real estate profits ... but mostly by actual leverage. As the cost of running the government inescapably grew, taxes + profits generated from real estate provided the necessary income. Unfortunately, once the rate of growth in the value of real estate slowed — reversed, actually — the system became unsustainable.

That said, Dubai Incorporated has one advantage over other places that have tried similar development models (everywhere from Singapore to, well, the State of California), which is that it can treat most of its labor force the same way that a real company would. That, however, brings us to Barry Cotter’s question (and eventually Randy’s) and another post.

Questions, comments, requests? I am going to make a strong effort to get around to them.

Reshaping geopolitics

 Two days ago, in a Financial Times column that was bullish on the long-term potential of the Indian economy, Martin Wolf said something very sensible:

“Exhausted by the burden of its pretensions, the U.K. should soon offer its seat on the Security Council of the United Nations to its former colony. Its condition would be that France does the same in favor of the European Union.”

Yes, indeed. Too bad that Mr. Wolf and myself are in agreement that it won’t happen. But still. What does Britain get out of its seat on the Security Council? Countries with rotating seats, like Mexico, have often found it more of a pain than a benefit. (It makes neutrality difficult.) Small countries get a monetary benefit as the U.S. bought their votes (joined in the old days by the USSR, and probably the PRC in future ones.) And I can imagine that France likes the insurance policy of a veto; after all, it does have a penchant for randomly invading African countries. But the U.K.? Why bother? Sell it to India.

Nice buildings in London, I must say. Even the new ones.

Chile, Haiti, and disorder

 I think that Tyler Cowen makes a surprising mistake here when he compares the lawlessness in Chile and Haiti. Cowen:  “Haiti, on the other hand, remains fairly orderly and there have been reports that police corruption has gone down significantly ... Haiti is so orderly because a) looters would be killed on the spot, and b) the entire fate of the nation is at stake and thus every small event is taken very seriously.” He links to a CNN story and a tweet from somebody in Santiago reporting secondhand about Concepción. (God, I hate Twitter.)

I dispute the stylized fact. I am peripherally involved with (well, hearing about) a U.N. survey design in Port-au-Prince: the lawlessness is out of control. Kidnappings, assaults, and rapes are endemic. Concepción, on the other hand, has a looted shopping center. These are not the same thing!

Haiti seems orderly because expectations were much worse. Chile seems chaotic because expectations ... well, actually, Chile doesn’t seem that chaotic, given the scale of the disaster. More chaotic than it needed to be, but the state functions and there has been no organized violence. Minute-to-minute reports here.

The post perturbs me a bit, since I know many people who rely on Marginal Revolution for information, and I am afraid that the false comparison is going to mislead some of them. It is also a bit ironic, since the main point of the post was “context-dependence, context-dependence, context-dependence.” 

Yes. Context-dependence. By any absolute standard, Haitians reacted far more violently than Chileans to the earthquake, because the destruction was far greater and the state basically collapsed, even if it is now getting back on its feet. Apples and oranges, context-dependence.

Build it and they will come

 Dubai received a boatload of oil money. Still, that boatload wasn’t quite enough to float the immense edifice that is the modern city. (I take a perverse delight in metaphor mixing.) It needed to be leveraged.

 
There were two ways to do that. The first was to leverage. More on that in a later post. The second was to build the city the same way the United States built the railroads: ahead of demand, and financed by land grants.

The idea was fairly simple. The emirate sat in a great location and had a first-mover advantage over its competitors. As of 1971, Abu Dhabi and Qatar had chosen to move slowly, Bahrain faced Iranian hostility, Oman had to fight off the Popular Front for the Liberation of the Occupied Arabian Gulf, and South Yemen had gone Communist. Everyone had been held back by the British, especially poor South Arabia ... geographically-speaking, Dubai (as a transshipment port) should probably be in Aden or Djibouti. So the government built the transportation infrastructure, which increased the value of the land around that infrastructure. It then started to rent land to ancilliary enterprises. The profits from land development went to build more infrastructure and subsidize the overhead costs of running the city. They also went to subsidies for international businesses, which received cheap rents and tax abatements.

 

The above chart shows the government’s income in constant 2009 dollars using UAE price deflators. (Since the UAE had a fixed exchange rate over the period, the calculation is fairly straightforward. The use of a deflator matters, however: UAE inflation has far outpaced American over the period.) The “other” category is made up primarily of land sales, rent taxes, user charges, and other fees. To give an example, in 2009 road tolls generated 17% of all government revenue, and airport charges an additional 6%.

What did the government spend it on? See below the fold.

Oiled up and ready to go

 Barry asks about the labor system and oil, Randy wonders about the Iranian presence, and Peter asks if there is any worry about Saudi Arabia going kablooie. Let’s start with oil. Dubai was built on oil.

You’d be surprised at the number of people who don’t realize that. Yet it’s the truth. The Emirate of Dubai may never have been an oil producer on the scale of its neighbor in Abu Dhabi, but the Maktoum family got the initial income it needed to realize all of its massive development plans from the discovery of black gold.

In a sign of the ongoing decline of the British Empire, London failed to prevent Dubai from giving an offshore exploration concession to an Anglo-French consortium in 1952. They weren’t very successful, so the Emirate granted a second concession to Conoco in 1963. Conoco formed the Dubai Petroleum Company (DPC) to operate their concession, buy a half-interest in the earlier Anglo-French one ... and sell further interests to Texaco, Sunoco, and a German company you’ve never heard of. Three years later DPC struck oil about 55 miles off the coast.  Production started in 1969. (The coolest thing was the giant half-million-barrel underwater open-bottom tank that they used to store the stuff. You woulda thought somebody might have realized that oil and water don’t mix before then.)

In addition to royalties, the Emirate acquired a 32.5% share in the company, and its revenues skyrocketed. By 1975 it earned $1.7 billion (in 2009 dollars, using the UAE deflator) from oil and gas. At its revenue peak, in 1981, it earned a hair over $7.5 billion. That is a hell of a lot for a place with a national population of ... either 25,000 or 100,000, depending on how you define it. The green line shows revenues income, while the orange line shows production.

 

The oil revenues income financed the investments that turned Dubai into the trade hub of the Middle East. The Arabian peninsula is very well placed for a place to transfer cargoes from Asia into Europe-bound ships and vice versa. Similarly, it is a good place to hub flights. Emir Al-Maktoum channeled the oil money into building Port Rashid — against the advice of the emirate’s British advisors — and then Jebel Ali, an even bigger Bronx-sized port complex big enough to service a Nimitz-class aircraft carrier. Dubai built an airport in 1960 (also against British advice), but it was debt mortgaged by oil money what expanded it to accomodate jumbo jets in 1968. Ditto, it was oil what financed the creation of Emirates Airlines in 1985 and all the rest of that good stuff.

Of course, as you can see from the graph, the oil money started to run out in 1981, and the actual amount of oil being pumped out itself started to fall a decade later. So what was Dubai’s business model after that? A subject for another post … and a way to get to the other questions. Keep ‘em coming.

In Dubai

 I have just spent the bulk of the last two days writing approximately 3,526 words about Dubai’s recent economic travails. Dubai, as none of you will be surprised to hear, is a deeply strange and somewhat disturbing place. I will be putting up a few posts as the moments of procrastination seize me over the next few days, during which what I really need to do is write about 7,000 words on Mexico’s oil expropriation.

So, is there anything in particular that you, gentle readers, are curious about regarding the place?

 
Yes, that is a Christmas tree.

The parliamentarization of the Democratic Party

 The early signs are here. One of the major tools that the GOP uses to discipline its caucus is the threat of a primary challenge financed by (say) the Club for Growth. Well, now the Democrats are starting to do the same thing, financing primary challenges via Act Blue. Blanche Lincoln, a very conservative Democrat, is now facing a very serious challenge from Bill Halter. Halter is openly running at Lincoln from the left.

It will be important to realize that parliamentarization doesn't necessarily mean radicalization. Support for the Afghan War or nuclear power could easily remain in the party platform. Similarly, the parliamentary GOP could move back towards the center. But parliamentarization does mean increasing party discipline ... and an ever-decreasing importance of the individual versus the party.

No, one vote by Senator Scott Brown for a teeny tiny $15 billion jobs bill, quite literally watered down by an order of magnitude from what the President initially suggested, does not count as rebellion. Vote the letter, not the person.

Agreement, and more failure mode

 There is nothing deep or new here. But it succinctly accounts for why I'm less than fired-up, and it's why I really have to take a deep breath and refrain from punching anybody who mentions “socialism” or “radicalism” or “lack of compromise” in my presence.  Center! Right! President!

Also, some serious effects of Senatorial gridlock here and here and here. Unless checked, it certainly seems to me to rise to the level of a failure mode. After all, I also think it would be a very bad thing if a single legislator could unilaterally decide to hire tens of thousands of workers or raise reimbursements for doctors ...

Chile is a great country

 I have many reasons to like Chile to the point of taking out dual citizenship. Democratic government, great climate, good music, nice roads, and a flag that reminds me of what is still my favorite country on the planet. (You know, the one that got the silver in men’s and women’s hockey.) And to all that you can add a sensible response to looting after a natural disaster.

Matt Yglesias got this wrong. Here is the correct story:

“A day earlier in Concepción, the police fired water cannons and tear gas to disperse hundreds of people who forced their way into shuttered shops. But law enforcement authorities, heeding the cries of residents that they lacked food and water, eventually settled on a system that allowed staples to be taken but not televisions and other electronic goods. Ms. Bachelet later announced that the government had reached a deal with supermarket chains to give away food to needy residents.”

The issue he raised is a real one, but Chile should not be impugned, when in fact the government is responding with alacrity and good sense. ¡Felicidades! ¡Viva Chile!  Take it back, Matt! Chile awaits an apology.

Nuclear power in the UAE

  The below picture does not show a nuclear power plant.

 
While cooling towers can bear a resemblance to the onion domes, I suspect that the nuclear reactors that Korea will build in the UAE will not be as pretty.

The Korean victory in the UAE bidding process came as a huge surprise to Areva, the French nuclear conglomerate. They had the EPR design ready to be rolled out. President Sarkozy had pulled out all the stops. France had a military base in the country and was training Emirati troops. The President had visited Abu Dhabi. Areva could offer a long-term fuel contract, delivering fresh uranium from its mines in Niger (enriched, of course, in France). Moreover, Areva could accept used fuel and reprocess for reuse it at its plants in La Hague and Mercoule. France meant nuclear. It had to happen.

Yet suddenly the South Koreans came out of nowhere. Huh?

I’d been wondering that myself. So I asked some fellows I know in the Abu Dhabi government. They gave me a simple answer. The Koreans offered a cheaper price, guaranteed that price, and offered a long-term service contract. The Korean price came to $3.64 million per megawatt for a 1400 MW reactor. The French offered something similar, but they refused to take on the risk of cost overruns. When pushed to offer a fixed-price turnkey project, they came back with a price of $5.45 million per megawatt for the 1650 MW EPR design.  Now, Areva’s ability to guarantee fuel for a decade or two is a big advantage ... but Areva will sign such contracts with anyone. No need to buy one of their reactors. In fact, the Koreans already have a 10% stake in Areva’s new mine in Niger, which guarantees supplies to their domestic plants under long-term contracts.

Does the deal make sense for the UAE? The UAE government takes a rather long-term view, so a 5% discount rate seems reasonable. (For comparison, EDF uses an implicit discount rate of 13% in its investment decisions.) Assuming that the reactors manage to reach the 89% capacity utilization reached in the United States, the Korean price implies a capital cost around $23 per megawatt-hour. Fuel costs about $4. Operation and maintenance costs are harder to know, but the word is that the Koreans offered to run the plants for their useful lifetime (presumably 40 years) for roughly $5 billion each. That implies a cost around $11 per megawatt-hour, which is in line with the $8 estimated by the OECD for South Korean reactors. Total cost, $39 per megawatt-hour, assuming that Kepco absorbs the inevitable cost overruns.

What about the other options? At those prices and discount rates, nuclear is competitive with coal. Coal costs quite a bit in peripheral areas — $19 in Finland, for example, and $20 in Japan (per megawatt-hour of electricity produced) — and in a world where the United States has begun exporting the stuff to China via the Panama Canal those costs are unlikely to decrease.  The capital costs of your typical coal plant come to about $11 per MWh, but political pressures would almost certainly drive the UAE to purchase the most advanced “clean coal” technology, which would push the cost up to $20. (No, it isn’t that clean, but it emits less carbon by dint of burning the stuff at higher temperatures.) Adding in the O&M costs from the Japanese coal plants (which use high-temperature furnaces) drive total coal costs up to $50 per megawatt-hour.

The rub is gas. Gas is cheap. Capital costs are tiny; less than a quarter of nuclear. Fuel costs are relatively high in most of the world, except the UAE, where Qatar stands poised to export endless amounts of the stuff via the Dolphin pipeline.

Why choose nuclear over gas? Abu Dhabi is making a strategic calculation, not an economic one, at least not in the short term. Perhaps they think that the local price of gas will rise, either due to increasing demand or because the cost of making LNG for export will fall. Perhaps they are making some sort of inexplicable calculation about foreign exchange. Perhaps they are taking a long-term bet on nuclear power. Or they might simply think that Qatar will be unable to supply them with the quantities they will eventually need for electricity generation at any price, considering that the UAE isn’t their only GCC customer.

I honestly don’t know, although I am trying to find out. What I do know is that they aren’t making a political calculation ... otherwise they would have gone with the French.

Should I add some graphs and charts?  

Natural disasters and and wealth

 I’ve checked, and everyone I know in Santiago seems to be all right. The earthquake has been incredibly severe, but the state is responding.

Here is a brief overview of what we know about the economics of natural disasters. Here is another paper by one of my favorite economists. (He has been really helpful to Kris and I in our ongoing work on Crown Agents.) Yang’s paper looks at hurricanes, not earthquakes, and finds something interesting: in very poor countries, foreign aid plus increased remittances helps recovery along. In richer countries, however, increased inflows from abroad are more than offset by huge declines in private investment. Paradoxically, richer countries take longer to recover than poorer ones. (Places like Puerto Rico and Martinique are not in his sample; I doubt that the result would apply to places that are parts of larger political units.)

Then again, there is economic recovery and there is death and destruction. These are very different. So even if it is the case that richer nations take longer to recover from natural disasters, far fewer of their citizens are likely to die.  Moreover, citizens of functioning democracies are also more likely to make it through, even after adjusting for income.

Chile is both relatively rich and a functioning democracy. Today is a nightmare; but nothing along the lines of what is going on in Haiti.

American Airlines, I should say, is running flights for relief workers out of both Miami and Fort Lauderdale. Kudos.

A modest Greek proposal

 Greece may be facing a serious debt spiral. Governments of the Eurozone appears concerned for two reasons. The first and smaller reason is that many of their financial institutions may be exposed to Greek sovereign debt. A Greek default could therefore have repercussions across the Continent. In that sense, European governments are concerned for the same reason that the U.S. was concerned about Latin American defaults in the 1980s. This reason does not seem to be enough to account for all the concern.

The second reason is that they are terrified of contagion. We have a lot of evidence that investors panic and do bad things to good countries. (Consider the Argentine experience in 2001.) The Europeans might be terrified that a Greek default will drag down Portugal and Spain, possibly Italy and Ireland, countries that might muddle through in the absence of a panic-inducing shock. Large defaults would have two very bad effects. First, financial institutions in northern Europe are very exposed to their bonds; the risk of a super-1982 would be huge. Second, all of the PIGS right now are dependent on current borrowing to finance their government spending. If they defaulted, they would have no way to finance their deficits. Demand would collapse, plunging those countries into depression and dragging their trade partners down with them. (There may be a third reason to worry that I am missing.)

I will admit, however, that I am not entirely clear as to why these worries for northern Europe would be less in the absence of a currency union. Presumably the model is that (1) a country with a depreciating currency is less likely to default on its debt; (2) the loss in value from a default will be higher than the loss in value caused by depreciation; (3) foreigners would have held less sovereign debt in the first place in the absence of single currency; (4) the country would have been able to borrow in its own currency; and (5) the hit to the net exports of the other eurozone partners will be less in the case of a big depreciation followed (hopefully) by recovery than it would be in a depression caused by Hooverism. That seems reasonable to me, but I am not sure that I have it right.

So what to do?  Bail Greece out, obviously, with some sort of temporary low-cost finance. The problem, of course, is whether Greece’s fiscal problems can be solved. Well, it does seem as though tax evasion and inefficiency are a big part of the problem. Even without the crisis, these were bad things, as the linked paper demonstrates.

Well, there is an organization with expertise in managing tax-collection ... Crown Agents. They have an entire department dedicated to it. It would certainly be more palatable to Athens to have the Crown Agents denationalized (if somewhat British-heavy) workforce managing Greek tax collectors than it would be to bring in, say, Germans.

It is time for the E.U. to call them in.

Really bad war propaganda

  Look, I’ll cop to supporting the invasion of Grenada. It is true that the New Jewel Movement consisted of a bunch of authoritarian thugs. It is true that they became even more authoritarian when they ousted Maurice Bishop. It is true that they signed secret military agreements with the Soviet Union and Cuba and received $24 million in military equipment from Moscow, including 10,000 assault rifles, 4,500 submachine guns, 11.5 million rounds of ammunition, 294 portable rocket launchers, 16,000 rockets for said launchers, 84 mortars with 8,400 shells, twelve 75mm cannon with 600 shells, 60 crew-served AA weapons with 600,000 rounds of ammunition, 15,000 hand grenades, 7,000 land mines, thirty 76mm field guns with 10,000 rounds, fifty howitzers with 1,800 projectiles, sixty APCs, four coastal patrol boats, and 20,000 uniforms.

Moreover, the Barbadian prime minister, Grantley Adams, tried to persuade the U.S. to intervene on October 19, six days before the invasion. Military casualties ran to only 24 Cubans, 21 Grenadians, and 18 Americans, and the invasion killed only 24 civilians (21 of which in a tragic attack on what turned out to be a mental hospital). The intervention was and remains popular among Grenadians. Plus, it really honestly did restore democracy. Heck, considering the nature of the Gairy regime, it wouldn’t be unfair to say that it introduced democracy.

Would standing aside and letting Grenada collapse into civil war (or be intervened by Soviet-backed Cubans) have cost less in lives and resources? Probably not. Veterans of Operation Urgent Fury should hold their heads up high; you would have to go back to World War 2 to find a case of a more just war. 

That said, the CIA went on to distribute comic books across the island that would have turned me into a gibbering opponent of the intervention:

 
Clicking on the picture will take you to the full comic book. It only gets worse. Christ, man, I worked with psy ops production people ... this is just terrible.

Really bad campaign slogan contest

 Courtesy of Nora Preece, I would like to start the bidding with “Get on the Raft with Taft,” for the 1908 U.S. presidential election.

William Taft, you may recall, weighed a little over 300 pounds.

The Commonwealth Realms of the Caribbean and the end of the British Empire

 This post has been substantially expanded. It was about nothing; now it’s about the slow withering of the British Empire, Margaret Thatcher notwithstanding.

 
Trinidad and Tobago was the first member of the Commonwealth Caribbean to become a republic, in 1976. After the Black Power disturbances of 1970, the government set up the Wooding Commission to review the clauses of the 1962 constitution. All sides of the political spectrum supported constitutional revision: some thought that its conservatism contributed to the instability; others worried in the aftermath of the Williams government’s powerful response to the riots that the pure Westminster system didn’t provide enough checks on the Prime Minister’s power. One solution to that problem was to strengthen the position of Governor-General ... but that caused a problem, since the Governor-General served officially as the Queen’s representative, and “among young people in particular the British Sovereign has no symbolic meaning.” The report did state some advantages of the monarchy — namely, a head of state “above the clash of race and class and ideology which makes up politics” — but they rejected them as inappropriate in the context of a head-of-state with actual executive authority, no matter how weak.* Williams did not accept all the recommendations of the Wooding Commission, but Trinidad got a new constitution ... and an elected President replaced the Queen as head-of-state.

Dominica followed Trinidad into republican status in 1978. One would have expected Grenada to follow.

In 1979, the New Jewel Movement shot its way into office. That came a surprise to nobody: the man who had ruled Grenada for the previous 12 years, Eric Gairy, was little more than a slightly more colorful version of Fulgencio Batista. His opposition knew this; they went so far as to unsuccessfully try to annex the island to Trinidad in order to prevent him from coming to power. (Unfortunately, Indo-Trinidadians were not particularly keen on bringing more African voters into the polity, so the idea failed.) After 12 years of increasingly corrupt Gairyismo (including a bizarre attempt to steal a Miss World competition) nobody was surprised when a small group of Marxist revolutionaries overthrew what was left of his government while Gairy was out of the country.

The rebels proceeded to issue a number of “people’s orders.” They mostly read like something out of an old Monty Python skit. People’s Order Number 1 declared, “The People’s Revolutionary Government now formerly enacts the Constitution of Grenada as hereby, has been suspended.” People’s Order Number 2 said that the People’s Revolutionary Government “shall be vested of executive and legislative power and the People’s Revolutionary Government shall appoint a Prime Minister.” People’s Order Number 4 went on to end all appeals to West Indian or British courts, People’s Order Number 7 established the People’s Revolutionary Army, People’s Order Number 8 created “preventative detention,” and People’s Order Number 10 reiterated the fact that the PRG was, in fact, issuing people’s orders: “For the time being, all People’s Laws shall become effective upon oral declaration and/or on publication of Radio Free Grenada by the Prime Minister or in the official Gazette under the hand of the Prime Minister.”

The weird thing was People’s Order Number 3. “The Head of State shall remain Her Majesty The Queen, and her representative in this country shall continue to be the Governor General who shall perform such functions as the People’s Revolutionary Government may from time to time advise.”

This became a problem when the U.S. was groping around for a legal rationale to intervene. They found a Governor-General, Paul Scoon, ready and waiting to provide them with one. In one of the stranger episodes in the long slow replacement of Britain’s empire with America’s not-empire, the British high commissioner to Grenada carried messages to the Governor-General on behalf of the United States and OECS, without London’s knowledge.

David Montgomery met Scoon on the Sunday before the invasion and asked him, “Would you welcome intervention?” Scoon replied that he saw it as the only thing that could prevent a civil war. He then agreed to issue an oral request for intervention, followed by a written order as soon as it was safe. A written letter to the Prime Minister of Barbados followed on Monday, October 24, 1983.

You are aware that there is a vacuum of authority in Grenada following the killing of the Prime Minister ... I am requesting your help to assist me in stabilizing this grave and dangerous situation. It is my desire that a peacekeeping force should be established in Grenada to facilitate a rapid return to peace and tranquility and also a return to democratic rule. In this connexion I am also seeking assistance from the United States, from Jamaica, and from the OECS through its current chairman the honorable Eugenia Charles (Prime Minister of Dominica) in the spirit of the treaty establishing that organization to which my country is a signatory.**

The Marines’ helicopter assault began at 5:00am on Tuesday.

The story gets stranger when you take into account Margaret Thatcher’s uncharacteristic reaction:

If you are pronouncing a new law that wherever Communism reigns against the will of the people, even though it's happened internally, there the United States shall enter, then we are going to have some really terrible wars in the world.

Who knew?

Why would a self-proclaimed socialist government, willing to ally itself with the Soviet Bloc, keep the Queen as its head of state? Especially when two nearby Commonwealth states had shown themselves completely willing to chuck her out? My guess would be that attachment to the monarchy must run very deep in the smaller islands. But that deep? Or perhaps they only played out two steps along the game tree. They knew that Britain almost certainly would not intervene under any circumstances, but it never occurred to them that the United States could as easily take advantage of the fact that the personal representative of Grenada’s head-of-state was not an appointee of the People’s Revolutionary Government.

Maybe so. I honestly do not know. The evidence is confusing. What is the role of the monarchy in the Commonwealth Caribbean? What should be its role? Does it persist out of popular sentiment, or simple inertia? 

Don’t ask don’t tell

 From a friend:

It is my long- and deeply-held belief not only that baseball is more important than religion, but also that it is an abomination to support the Red Sox. I am not alone, either. In fact I think that is the majority view in the armed forces.

And yet, I still am required to serve with those openly supporting the Red Sox. I have to write their FitReps with a completely blind eye to what I see as a glaring lack of judgment and morals. I am forced to share living quarters and shower facilities with them, even though I find “Red Sox Nation” tattoos to be patently offensive. I don’t want the government to tell my children it’s OK to be a Red Sox fan.

This is a real morale and unit cohesion issue. My beliefs are constantly being steamrolled and ignored to accommodate a slim minority of service members. But I still show the tolerance that I am required to by law.

Don’t try to sweep aside or marginalize my views, or diminish my legitimate faith by saying it doesn’t count or shouldn’t matter. The services were founded on the principles of baseball. Just look at Yankee Stadium on a Sunday.

The decolonization that wasn’t

 Spain holds two small enclaves on the Moroccan coast.  The twin cities are currently heavily-fenced enclaves of the European Union. Their presence causes occasional minor spats between Madrid and Rabat, but in general relations are very good. Neither government would gain any internal advantage from risking a conflict. The two countries had a brief spat over Perejil island in 2002, but war was never in the cards. (For a rather silly exploration of a 2002 Spanish-Moroccan war, go here.) If I had to bet, I would bet that Spain will still have control over Ceuta and Melilla 93 years from now, in the year 2103.  

It turns out, however, that if things had gone slightly differently 93 years ago, in 1917, the territories might indeed be Moroccan today. The British Foreign Office wrote a memo suggesting that it would make strategic and diplomatic sense to swap Gibraltar for the North African enclaves. The General Staff and the Air Ministry concurred; the Royal Navy, unsurprisingly, did not. Foreign Secretary Arthur Balfour concluded that “the difficulty of negotiating such an exchange (of Gibraltar for Ceuta) would be great, and that to raise the question at the Peace Conference would, therefore, only be justified if the naval and military advisers of His Majesty’s Government were in complete accord on the subject.” So nothing happened. Seven years later, in 1926, the Spanish government raised the possibility of making the swap, but this time the U.K. rejected it.

So what if Ceuta and Melilla became British in either 1919 or 1926? Well, given the history of British imperial retreat in the 1960s and 1970s, I’m having trouble imagining that London wouldn’t return the territories to Morocco. Why not? It buys goodwill with a strategic ally at no political, strategic, or economic cost. The Spanish inhabitants might or might not drift back to Spain (Britain certainly would not have allowed them entry) and that would be that.

OK, this is not a big change, as these things go. And it’s hard to see how the Royal Navy would have been convinced to change its position, or why Balfour would have decided to overrule the R.N. But it is an amusing little wrinkle in history; something I only noticed because of the earlier discussion of Britain’s proposal to “buy” an Indonesian island during the 1979 Vietnamese refugee crisis.

Thoughts? Not that I’m expecting any, but surprises are always welcome.

Failure modes of the United States, part 4a

  “The U.S. population might become apathetic and gullible to the point of civic dysfunction.”

 
At first glance, polls like this recent one of self-proclaimed Republicans makes one wonder. (Is there an equivalent poll for Democrats?) The rhetoric at the Tea Parties has been a little, well, out to lunch, not to mention the deliberate use of, uh, falsehoods by major Republican personages, like Senator Grassley. Fox News, meanwhile, is a national disgrace, and every recently Keith Olbermann has drifted in a similar direction, to the point where my wife hates his show. (Jon Stewart recently reigned him in.)

But then you just need to sit and think about it for a moment. With just a little bit of historical perspective, the fear drops away. Consider the history of health-care-related rhetoric in the United States.  (Click the link.)  Pretty crazy stuff, no?  Then consider the stuff the New Left used to say, at much higher volume than the marginal and muted lefties of the Bush Administration era.  Yet the Republic survived. Meanwhile many people worry about the decline of civic participation, the 2008 election uptick notwithstanding. It is something to be worried about ... but when you think about what real high-participation elections were like back in 19th-century America, it isn’t something to inspire nostalgia.  Consider:

On the morning of November 2, 1859 — Election Day — George Kyle, a merchant with the Baltimore firm of Dinsmore & Kyle, left his house with a bundle of ballots tucked under his arm. Kyle was a Democrat.  As he neared the polls in the city’s 15th Ward, which was heavily dominated by the American Party, a ruffian tried to snatch his ballots. Kyle dodged and wheeled, and heard a cry; his brother, just behind him, had been struck. Next, someone clobbered Kyle, who drew a knife, but didn’t have a chance to use it. “I felt a pistol put to my head,” he said. Grazed by a bullet, he fell. When he rose, he drew his own pistol, hidden in his pocket.  He spied his brother lying in the street. Someone else fired a shot, hitting Kyle in the arm. A man carrying a musket rushed at him. Another threw a brick, knocking him off his feet.  George Kyle picked himself up and ran. He never did cast his vote.  Nor did his brother, who died of his wounds. The Democratic candidate for Congress ... lost to the American Party’s Henry Davis.  Three months later, when the House of Representatives convened hearings into the election ... Davis’s victory was upheld on the ground that any “man of ordinary courage” could have made his way to the polls.

Apathy has its charms.

That said, I see two problems, one potential and unlikely, one with us right now. The potential and (IMHO) unlikely one is that the internet and cable news will somehow interact with America’s ideological cleavages to produce a dysfunctional electorate. I really have my doubts that there is anything to worry about here, but I can of course be convinced otherwise by a good argument.

The other problem is that too many voters do not realize that America’s constitution has shifted over the past few decades. We now live in a world of parliamentary parties. Yet too many Americans persist in believing that the candidate matters in elections for the federal legislature.  Even Doug Muir believed this. (I doubt that he still does, but Doug doesn’t admit error much. Partially because he’s rarely wrong.) More discussion here.

I had a very worrying discussion along these lines with family members at my niece’s recent wedding. (No, not a long discussion. There was dancing! With my wife! And little kids, lot of! For her to play with! Which she liked! A lot! Erm, gulp.) Americans want to believe that the person matters more than the party, which is simply not true.  If it were, the GOP would not have been able to muster the quite odd unanimous party-line votes that it recently did in favor of defaulting on U.S. debts and removing all limits on Congressional spending. The WTF-moment those votes inspire clarifies itself and makes perfect sense when you realize that we live in a parliamentary republic these days.

There seems to me a large risk that the disjunct between voter perceptions of the political system we live under and the reality of that system could lead our government to go off the rails. Especially with the recent emergence of the Senate supermajority norm.  Will voter perceptions catch up? I mean, if even Doug Muir was reluctant to abandon the idea that the Senators from Maine were different, we might be in trouble.

(BTW, for the record, on the thread linked to above?  Faeelin right, me wrong.)

Thoughts?

Failure modes of the United States, part 3

 Carlos Yu proposed five possible failure modes for the American system of governance. We have discussed the proliferation of veto points and the glorification of the military on this blog. Since we began, worry about veto points has gone mainstream.  The best (or at least most entertaining, while remaining intelligent) piece about America’s political dysfunction is by James Fallows; I highly recommend it. Meanwhile, nobody worries about a military coup ... although it is a little worrying that somebody as grounded as Mr. Fallows felt the need to discuss the possibility.

The third failure mode was, “The monetary and regulatory agencies might be too slow or too unwieldy to deal with unexpected changes in the global economic system.”  It would be hard to find any sign of that in the last year.  I sat through a number of seminars where all we did was try to figure out what was going on with the Fed’s balance sheet as it tried creative way after creative way to rescue the financial system.  The regulators fell down before the crash, but that was the fault of a bad administration following bad legislation and the general zeitgeist. I won’t go so far as to exculpate them, but it wasn’t like they were sitting down as the world crashed down.

That said, I would not discount the possibility of this failure mode. Consider that the Federal Reserve under Chairman Bernanke appears to have ruled out raising the target rate of inflation. He also seems to have ruled out further quantitative easing. (Which is, I think, trying to do the same thing without making an explicit announcement.) One can make a very good argument that this decision is going to prolong the Great Recession and ruin millions of lives.

OK, that isn’t a failure mode. Not yet, at least. But we have seen the movie before (in 1929-32) and in other times of trouble I could easily see it becoming one yet again. At the very least, it could worsen the effect of other political failings.  It certainly isn’t helping now.

Thoughts?

UnMENDed

 Gah. MEND is back. For those of you who don’t know, MEND stands for the Movement for the Emancipation of the Niger Delta, another well-acronymed rebel movement, if not quite as well-acronymed as the MILF.

Two things are not clear. First, why MEND’s command has decided to go back to ground. I don’t know, obviously, but there seems to be little sign that the Nigerian government has decided to back away from its cease-fire promises. For those of you who don’t follow Nigerian politics, President Umaru Yar’Adua has been sick in a Saudi Arabian hospital for a little over two months. This announcement may be nothing more than an attempt at warning shot over Acting President Goodluck Jonathan’s bow, although it sure is phrased in a crazy-threatening way for that. It is also something that MEND leaders have denied. Nonetheless, MEND has been saying for a while that they were dissatisfied with the way talks were proceeding, and there was a “warning” attack on a pipeline in December.

Second, whether MEND still has the ability to limit Nigeria’s oil production the way it did back in 2005. Most of its commanders accepted the cease-fire. They haven’t reneged.

That said, it is hard to see an upside in this news. Does anyone know more about what exactly happened in the negotiations? I honestly thought it was a done deal.

How to talk to a MILF

 A few years ago, 2005 in fact, I got in trouble for accidently allowing a section heading in my case on the Philippines to be called “Wooing the MILF.” It was about the Moro insurgency in Mindanao, of course.

 
Now Foreign Policy jumps on the same low road, and this time it is deliberate. Even so, it is an interesting article about the state of the current negotiations with the MILF, well worth reading.

Any interest in Philippine labor migration?

How to speak Mexican in 197 easy lessons

 I swear a lot in Spanish. My wife doesn't like cursing — public swearing is illegal in Trinidad, and her extensive time in Queens did nothing to change her (most excellent!) preferences — but I can't abandon the practice.  But what I can do is change languages.

Now, the groserías that I picked up as a kid came mostly from Spain (at home) or Puerto Rico (hundreds of different people and places). But my Spanish swearing really didn't come into its own until I lived in Mexico City. That town has developed it to a high art.

Now, courtesy of my old friend Tania Martínez, comes an excellent guide to swearing in Mexican, or, more properly, Chilangese.

I have had to insist that my wife not call me “güey” when she's talking to me, even though that's how she refers to her Mexican friends. When you understand why that sounds wrong, then you will be ready to advance to the next level. When you can explain the proper use of “cagado,” then you will be an expert. Until then, enjoy, learn, and feel free to exercise the Nicoll Doctrine of English language expansion.  You will be doing your country a mitzvah.

And it will come very much in handy while watching sporting events in certain parts of North America and most of Europe north of the Pyrenees. If not a Yankees bar in Boston. Trust me, and I speak from highly embarrassed experience, somebody will understand you.

Customs receiverships and Crown Agents

  So Doug is in Tanzania, working on something mysterious designed to make the world a better place. On a previous excursion to Congo, Doug discussed the general malfeasance of the Congolese government. He also thought hard about the administrative competence of the Belgian bureaucrats who ran the colonial government. They ran that government to little purpose, but they ran it efficiently. 

One way to stylize Congo’s dilemma is that the government can’t control its own agents. To which there may be a solution: get foreigners to do it.

Kris Mitchener and I have just written a brief piece for Paul Romer’s Charter Cities blog that summarizes our work on customs receiverships and Crown Agents. The piece draws from the early 20th-century experience of circum-Caribbean countries with customs receiverships, where countries relinquished management of their customs services to a small group of American managers, and the early 21st-century southern African experience of doing the same thing with a small group of British managers. There was a failure — the fellow who was able to run customs in Haiti found the more sophisticated Panamanians running rings around him when he became the fiscal agent there — but in general corruption went down and collections went up. Crown Agents, the organization that took over in the 21st century, had an earlier cameo on this blog.

Politically feasible? Well, Angola and Mozambique did it. So did several eastern European countries (in a slightly disguised form) when customs corruption looked set to hold up their ability to join the E.U. Long-term benefits or spillovers to other parts of the government? Well, at best the jury is out. But sometimes peoples need their governments to do certain things well right now.

Read the piece and tell us what you think.

Black people and the GOP: a road not taken?

 “Dewey beats Truman” is an iconic headline. The election was close (arguments otherwise smack of hindsight bias) and could have gone the other way. What if it had?

Well, the Republican Party might have become the party of civil rights. Why do I say that? Well, this 1947 memo from Clark Clifford to Harry Truman (courtesy of Matt Yglesias):

Since 1932 … the northern Negro has voted Democratic, with the exception of 1946 in New York. A theory … is that the northern Negro voter today holds the balance of power in Presidential elections for the simple arithmetical reason that the Negroes not only vote in a bloc but are geographically concentrated in … New York, Illinois, Pennsylvania, Ohio, and Michigan.

This explains the assiduous and continuous cultivation of the New York Negro vote by Governor Dewey and his insistence that his controllable legislature pass a state antidiscrimination act. 

There are several straws … that the northern Negro is today ready to swing back to his traditional moorings — the Republican Party.  Under the tutelage of Walter White, of the NAACP, and other intelligent educated and sophisticated leaders, the Negro voter has become a cynical hardboiled trader. He believes the rising dominance of Southern conservatives in the Democratic councils of Congress and of the Party makes it only too clear that he can go no further by supporting the present Administration. 

Republican politicians … make no great secret of their intent to try to pass a FEPC Act and anti-poll tax statute in the next Congress.  The Democratic Party can only point to the obvious — that the really great improvement in the economic lot of the Negro of the North has come in the last 16 years only because of the sympathies and policies of a Democratic Administration.  The trouble is that this has worn a bit thin with the passage of the years.  Unless the Administration makes a determined campaign to help the Negro (and everybody else) on the problems of high prices and housing … the Negro vote is already lost.  Unless there are new and real efforts (as distinguished from mere political gestures which are today thoroughly understood and strongly resented by sophisticated Negro leaders) the Negro bloc, which certainly in Illinois and probably in New York and Ohio, does hold the balance of power, will go Republican.

Yup

 This about sums it up. I understand the reaction, but I am incredulous that professional politicians would fail to realize how they are shooting themselves in the head. I mean, the abortion issue is tough, and there are fearful congressmen in swing districts, but Frank and Maloney and Weiner get the vapors? Congressional Democrats already voted for the bill; even if insurance-reform is the cause of the reaction (which is by no means true), the political damage is already done. Now all they do is cook the base. 

I am still not entirely sure what will happen if my sister gets sick ... I guess she could quit the job she just got and go on Medicaid. In addition (AFAICT) my wife and I have insurance that probably won't fail to be there if we need it. Plus, I suppose there is some model in which no attempt at cost control is superior to insufficient attempts at cost control. So, substantively, it isn't that bad. Failure to get a second stimulus, that was the that bad part, and that ship sailed a while back.  (Although there is that smaller bill with the TARP funds.)

Anyway, it is very strange politics. Instead of blighting your long-term chances by pandering to the base, you blight your long-term chances by over-triangulating on whatever you think the median voter of the minute is thinking. I am surprised, I must say.

Interesting to watch, in a train wreck kind of way. Which party can destroy its electability quicker? After all, in a two party system, somebody will have to win. It will make for exciting campaigns, in which nothing is at stake. That would have been fine ... in 1998.  2010, not so much.

I could say more, but won't.

When Staties talk, you should listen

 My wife called it a few days ago, saying the lunchroom talk at the hospital was super-negative. I usually have my breakfast coffee with a bunch of cops and contractors (be happy to share the place with anyone who asks), and they were less than thrilled, save the one guy who claimed that Martha Coakley let him off some sort of alcohol-related misdemeanour.

 
Airport talk coming back, same story. See above. (I seem to spend an inordinate amount of time making small talk with cops.) This election is profoundly about Ms. Coakley.

Although I am surprised (even if I honestly do understand) the rapidity with which the progressive base has abandoned the President. Watching the Senate do its thing will do that to you. Plus Dean, Olbermann et al, calling for the defeat of the reform initiative, and Mr. Brown's ability to rehabilitate the GOP brand. But I do have to admit that I was wrong; otherwise I wouldn't bother to comment here at all.

I'm still with all the other so what? people on the Internets. What do people go to Washington to do, anyway? Plus, it is still better politics than the alternative. But if not, and Congress panics, then they will get what they deserve in November.

Inflation-fighting credibility!

 So the Bolivarian Republic recently devalued the bolívar. As you might expect, there were some fears that the move might cause inflation as import prices rose.  IMHO, those fears are simultaneously unfounded and irrelevant. “Unfounded” because the difficulty of getting foreign exchange at the old official price of 2.15 bolívares per dollar meant that imported goods were relatively scarce, and their domestic price correspondingly high. “Irrelevant” because inflation in Venezuela is accelerating regardless of the exchange rate, so who cares?

Anyway, the government worried that the devaluation might cause inflation. So what do they do?  Nationalize a supermarket chain for raising prices!  The President announced the bold move during a seven hour episode of his television variety show, Aló Presidente. The chain will join the other stores of the wonderfully-named Socialist Market Corporation.

That’s inflation-fighting credibility!  Richard Nixon, eat yer heart out.

In housing-related news, the President also gave out 175 socialist apartments, which cannot be rented or sold by their occupants, because that would be capitalism.

Margaret Thatcher and island-buying in 1979: less than it seems

 Did Britain and Australia really propose to create a new Hong Kong in the Philippines to be populated by Indochinese refugees?  The Guardian says yes.  The documents from the National Archives say no.  Unless there is more than the Archives made available, or I missed the juicy stuff in my long skim, nobody seems to have really considered the creation of a new Crown Colony in 1979.  I can’t find any references to an entrepreneurial city or opposition from Lee Kwan Yew; I certainly can’t find any references to an actual transfer of sovereignty.

Judging from the documents, the story does have a grain of truth.  There was a bilateral meeting between Australia and Britain, although little seems to have been discussed other than the possibility of a joint position at the U.N. conference.  (Both countries had already tried and failed to get the main Western powers in for a sit-down before the U.N. meeting.)  The British ambassador to Jakarta did raise the possibility of buying an island from Indonesia for an expanded refugee camp capable of housing up to 200,000 people.  The thing about that is that the report about the British suggestion and the Indonesian response is phrased in vaguest possible terms.  It isn’t clear who exactly would have put up the money.  (I suspect that the British were thinking about the UNHCR, not HMG)  It certainly isn’t clear that the use of the term “buy” meant “transfer sovereignty” as opposed to a simple land purchase. 

The rest of the stuff in the Guardian story is easy to find, from the worries about riots to the weird decision to try to make it harder for immigrants to bring their spouses into the U.K.  But the island-buying and rival Singapore?  Can’t find it. Maybe I’m not reading carefully enough. 

The full story, best as I can tell, is below the fold.

What’s in a decade?

 Here’s a prediction:  the name by which the past decade will be known is the rather boring “two-thousands.”

Why do I say this?  Because that is the only name for the damn decade that sounds natural.  I didn’t come up with it, but it is the only one that doesn’t cause a brief double-take when I read it or hear it; a short moment of “What does that refer to?”  Not zeros, not aughts, not aughties.  Certainly not the “naughties.” 

It is boring. It is vague. It could refer to a century or a millenium. All that is true. But I make the prediction that it is in fact what people will use. “I was in grad school back in the 2000s.”  “When was the second kid born?  Uh, midway through the 2000s, sometime.” Etcetera. It really is the only shorthand for the first decade of the 20th century that sounds neither cute nor pretentious nor confusing nor fake.

The above, I want to reiterate, is a positive statement. The normative implications are left as an exercise for the reader. 

We now return to your regularly-scheduled blog subjects.

Links from parallel universes

  Or, in fact, not.  The first comes from Alex Harrowell.  It seems as though Margaret Thatcher quite seriously proposed to the Prime Minister of Australia that the two countries buy or lease an island from Indonesia or the Philippines in order to house Vietnamese refugees.  In 1979.  Even more astoundingly, Lee Kwan Yew took the idea seriously enough to strenuously oppose it.  Alex gives links to the primary source documents, if you’re having as much trouble believing it as I did.

Truly, the mind boggles.  Ferdinand Marcos was all kinds of corrupt, but he hid it behind a veneer of nationalism ... it’s impossible to imagine him selling part of the country to the U.K.  Leasing, though ... okay, I can’t imagine this.

The second is a commercial currently popular in Mexico, courtesy of Gancho. If you don’t know who the American is, you need to watch more sports.  Enjoy!

Bolivian energy and the neighbors

 The New York Times has an article today entitled, “Neighbors Challenge Energy Aims in Bolivia.”  It is quite informative.  But it gives the wrong impression about the effects of Bolivia’s energy policy under Evo Morales.  The article makes it seem as though Bolivia shot itself in the foot by nationalizing the gas.  That is probably not true.  Rather, Bolivia has shot itself in the foot by refusing to build a pipeline to Chile.

Argentina’s energy policy has nothing to do with Evo.  In fact, inasmuch as Argentina has a coherent energy policy, it currently revolves around importing more Bolivian natural gas. Its roots lie in the peso devaluation of January 2002.  The government froze the peso-price of natural gas, in order to protect Argentine consumers who were already suffering an economic downturn considerably worse than the Great Depression.  The effect was to knock down the residential gas price from $1.88 to 66¢ per MMBTU. 

That wasn’t a problem until the southern hemisphere winter of 2004, when gas companies cut supplies to large industrial customers. After all, they could get much higher prices from exporting the gas to Chile.  Well, the Kirchner administration reacted much as you’d expect:  they banned gas exports. The Interior Minister of Argentina apologized to the Chilean government for the interruptions — but in May 2005 the Argentines once again slashed exports to Chile. The story repeated itself in 2006, when Argentina cut exports altogether for two weeks.  In fact, Buenos Aires added insult to injury when the government raised export taxes from 20% to 45%.  

Eventually, however, as the economy recovered, Argentina stopped being an exporter.  So the Fernández administration began to walk back the policy.  First, she allowed prices to rise to around $2.50 per MMBTU. Second, she created incentives to increase the domestic supply.  Finally, she moved to try to lock-in relatively low gas prices from Bolivia. Argentina imports LNG, but it costs twice as much as Bolivian gas.  The country’s LNG terminal offers a useful hedge against any Bolivian attempts to renegotiate the contract, but both parties would prefer to buy Bolivian gas for $5 instead of Trinidadian gas at $10.  (In fact, the terminal goes unused for long periods.)  

What about Brazil?  Well, what about Brazil?  It is true that the nationalization provided some impetus for the country to become self-sufficient, but less than you might think.  First, the Brazilians pushed back hard, even threatening to dismember Bolivia if it messed with the price or volume terms of the contract.  And Brazil won.  So while Petrobras may have been disillusioned, the situation worked out well from Brazil’s point of view. 

In fact, Brasilia had a good reason to want to allow Bolivia to retain more of the rents from resources, as long as Brazilian consumers weren’t affected.  Simply put, the bet was that a wealthier Bolivian government would result in a more stable Bolivia, and it’s politically easier for Brasilia to aid La Paz by resisting pressure to defend Petrobras profits than it would be to write checks.  The logic is identical to that behind the 2009 renegotiation of the Paraguayan hydropower contract — the primary difference being that since Brazil initiated the hydropower deal, it has been able to extract more political benefits from Asunción than it has been able to receive from La Paz.

Now, many people in Brazil say that Petrobras is upping domestic production in response to Bolivia’s tax hike. It may even be true.  But we don’t know!  Domestic exploration was good business with or without  Evo Morales.  The increase in Bolivia’s government take made it more so, but we don’t have the numbers to say that domestic supply would not have increased regardless.  I’m not faulting the article;  it’s a subtle point. I am faulting them for getting Argentina backwards ... but with Brazil, we just don’t know if Evo really mattered.

Chile is where the article is spot on.  After Argentina cut the taps, the Chilean government attempted to strike an agreement to build a pipeline from Bolivia, but the negotiations ignited a firestorm in Bolivia.  The anger surged over the fact that the pipeline would pass through territory that Chile had seized from Bolivia in 1878.  Horrors!  The Chilean government periodically floated a trial balloon of transferring a strip of land along the Peruvian border to Bolivia, but Lima protested, since Chile’s far far north had been originally seized from Peru. 

Nobody in Peru seriously contested the border ... but accepting a century-old annexation and allowing the annexed land to be transferred to a third country were very different things.  After a brief and goofy Bolivian flirtation with the idea of building an underground pipeline that would surface far out to sea, the idea died. And thus Bolivia lost a natural market, and whatever possibility it had of producing LNG. 

The article makes no effort — not that it should! — to produce a cost-benefit analysis of Bolivan policy for Bolivia. The country lost opportunities in Chile and it may have lost opportunities in Brazil ... but it got a lot more revenue at a politically-dicey time. That, I have to say, is not nothing. 

What should Evo do now?

Finally! The bolívar falls

  So he did it.  Finally.  When I was last in Venezuela, everyone was puzzled as to why the Chávez government hadn’t already devalued.  What was the political gain?  What was the economic rationale?  The consensus seemed to be that the reason was a combination of an ill-thought-out attempt to repress inflation by subsidizing imports and the ability to give rewards to favored political groups by granting access to foreign exchange at the official rate.  After all, it is a hella big reward to be able to buy a dollar for only 2.15 bolívares instead of 5.6. 

Now it looks like the country will have three exchange rates:  2.6 for “essential items,” 4.3 at the new official rate, and something like 6.0 (for now) at the exchange rate that must not be named.  No, seriously.  It is illegal to discuss the parallel market, let alone trade in it.  (Scroll down to “Conversion and Transfer Policies” at the link.)   

Anyway, the move is long overdue, but the continuation of the parallel rates will continue to give the government a nice tool with which to reward its friends and punish its enemies.  Daleyismo, indeed.

I have your Chinese consumer price inflation right here

  I figured out a back way to get in to the account, but it took too much work to post regularly.  I’m here in the UAE on business, and have an impossible amount of other stuff to complete, so adding on hassles with proxy servers and the like was a large disincentive.  The government appears to have let up on Typepad — meaning that they’ve likely identified and blocked the offending sites — so I’m back on board.

Which is why my first post, of course, will be about China.  Why isn’t there more inflation in China?  We looked at that on December 28th.  On January 6th, Brad Delong wrote: 

Every month the People’s Bank of China pays 200 billion renminbi to China's exporters to buy up the dollar-denominated assets they have accumulated and so prevent those assets from generating upward pressure on the value of the renminbi. It gets those 200 billion renminbi by borrowing them from the good burghers of Shanghai. By now the central bank owes the good burghers of Shanghai some 16 trillion renminbi. To them, this wealth is nearly as good as cash. It has been piling up for years — and because it is nearly as good as cash, the good burghers of Shanghai should be spending it.

Here is a picture of the assets held by the People’s Bank of China (PBOC).  It shows fairly awesome growth, driven entirely by foreign asset accumulation.

 

They should be spending it. But the goods that are the counterparts of this financial wealth have been shipped via container to Long Beach. So demand in China should be massively outrunning supply, and China should be seeing strong and rising inflation.

Professor DeLong then links to James Hamilton, who suggests that the reason is that monetary growth in China leads to asset price inflation rather than goods-and-services price inflation.  He concludes:

The fact that our standard models do not appear — so far — to apply to Chinese inflation is yet another disturbing feature of today's world economy.

I’m not so sure that is correct.  Below the fold is a graphical representation of the liability side of PBOC balance sheet: