The Power and the Money

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:

Internet censorship in the UAE

 I just arrived in Abu Dhabi from the Caribbean. It seems as though the UAE government has decided to censor all Typepad blogs. Posting will be sparse around here, until I get to Bahrain on January 12th or the government changes its policy.

Unless this attempt at a workaround succeeds.  I can't read the blog ... did it?

Consider this an open thread.

1.6 percent!

  Happy 2010, all!

 
It turns out that over the past five years, we have earned an annual return of precisely 1.6% on our savings and investments.  Hooray! 

Coincidently, that number is how much the IMF believes the Caribbean’s economy to expanded in 2009. Hopefully 2010 will be better. The Eastern Caribbean countries have just taken a proactive step forward, strengthening the OECS with the new Treaty of Bassaterre.  The treaty basically does three things.  First, it gives the OECS the authority to legislate on the creation of a full common market.  Right now, the OECS is a customs and currency union, but there are barriers to internal factor mobility between the islands.  Second, it gives the OECS the authority to enforce the legislation ... basically via national courts and, ultimately, the Eastern Caribbean Supreme Court.  Third, it creates a quasi-executive  E.U.-style Commission headed by a Director-General to run the organization.  I say “quasi,” because the Director-General won’t have the ability to directly issue orders to the executive agencies of the various OECS governments, let alone act directly upon the citizenry, but he or she will have the ability to use the courts to take governments to task.  So as long as the OECS governments are in fact under the rule of law, the head of the OECS will indeed have quite a bit of de jure authority.

(Some time ago, Doug Muir and I had a debate about the E.U. that ran along these lines.  I think I convinced him, but it can be very hard to know.) 

So it isn’t quite a federation.  And the new OECS Authority (basically, an assembly of heads of government) will make legislative decisions only by unanimity.  But it takes the Organization about as close as you can get without crossing that line.  (Their security forces also bump up against the same limit, sharing training and commands.)  But it is a step forward for a group of islands that were already rather strongly united.

In theory, Trinidad is supposed to join in 2013.  Or maybe 2011.  It isn’t clear. I also doubt that it will happen.  Although it would be interesting if it did!

Thoughts on integration?

The friendly society

 Governor Carter refused to limit emigration because the remittances sent back to Barbados from the Panama workers had markedly improved the economy, especially for poorer tenant farmers.  In a country that had recently been on the brink of collapse, he was not going to tinker with that.

 
The direct impact of the remittances was not that large.  In 1906, when Carter declared their importance, they came to 73¢ (U.S.) per inhabitant per year; call it three days wages.  That is not nothing, but it is also not an economic revolution.  Over time remittances grew, peaking at $2.39 per person in 1913 — a bit more than a week’s labor for a male worker at 1910 wage rates.  Not nothing, but not the millenium, either.

But the indirect impact was huge.  First, it bolstered the growth of smallholders.  In 1897, an estimated 8,500 small proprietors held a bit less than 10,000 acres.  By 1912, 13,152 smallholders owned plots.   Assuming that the average size of holding remained constant, this represented an increase in smallholder ownership of 5500 acres, or over 22 square kilometers, five percent of the land area of Barbados.  By 1929, the number of smallholding households had further increased to 17,731.  Land ownership on the island remained astoundingly concentrated, but the percentage of Barbadians who owned property rose from 18% in 1897 to 40% by 1929.* 

Second, it supercharged the Barbadian banking system.  Barbadians opened 16,094 new accounts in government savings banks between 1906 and 1913, and deposits increased 88%.  In 1920, deposits per person surpassed $11.  That was a level of financial penetration about half of contemporary Spain and two-thirds of Italy; very high for a country as poor as Barbados.  It prefigured the island’s emergence as a regional banking center a half-century later. 

Third, it prompted the emergence of a Barbadian social insurance state.  The “friendly society” served as a form of insurance pool.  For a weekly fee of 10 to 12 pence, the societies provided their members with sickness insurance, unemployment insurance, death benefits, free scholarships to household members, and an annual “bonus.”  In 1901, there were 101 societies; between 1907 and 1910 a further 110 were founded, peaking at 260 in 1920.  Their membership grew from 13,933 in 1904 to 46,207 in 1920.  The 1921 census found that 156,312 people lived in households belonging to a friendly society.  That was 94 percent of the population.  Alongside the friendlies were the “landships,” which provided similar services along with ceremonial drills and uniforms modeled on the Royal Navy. Infant mortality continued to lag the rest of the Caribbean until the 1950s, but the societies aided a huge increase in literacy, to 93 percent by 1946. 

In the Zone

  The Panama Canal Agency took charge of picking the workers and getting them to from Barbados to the Canal Zone. Recruiting took place in Trafalgar Square, in Bridgetown, conveniently near the main police station.  Today the place is called National Heroes Square (although a lot of people use the old name) right outside the Parliament building. 

 
Agents went out into the crowd to interview and select potential workers. A doctor then checked the potential workers, selecting those who would receive a contract.  In 1907, Arthur Bullard described the scene as follows:

Several policemen kept the crowd in order and sent them up into the recruiting station in batches of 100 at a time.  As the men came up, they were formed in a line around the wall.  First, all those who looked too old, or too young, or too weakly, were picked out and sent away.  Then they were told that no man who had previously worked on the canal would be taken again.  Then the doctor told them all to roll up their left sleeves and began a mysterious examination of their forearms.  He saw that a few men had been vaccinated by him already, and these were sent away.  One protested that a dog had bitten him there.  Then, he went over the whole line gain for trachoma, rolling back their eyelids and looking for inflammation.  Seven or eight fell at this test.  Then he made them strip, and went over them round after round for tuberculosis, heart trouble, and rupture. About 20 of 100 were left at the end.

The selected migrants reported back to the docks a few days later.  After a second medical examination and a check to insure that every emigrant had a number that matched the one on their contract, they boarded the steamers, where they had to find deck space and food for themselves during the 12 day voyage to Colón.  According to a report presented to the Barbados Legislative Council, the atmosphere on the docks was fairly hostile towards the ruling class.  The crowds would “abuse whites and aggressively denounce them” before boarding. 

 
The anger was understandable, given the situation the emigrants were leaving.  Ironically, the departure of so many angry young men gave plenty of leverage to those who stayed behind.  One prospective emigrant was heard telling his co-workers, “Why you don’t hit the manager in the head and come along with we?”  His co-workers refrained from assaulting the manager, but there was a wave of plantation labor disputes, and the following song became fairly common:

We want more wages, we want it now
And if we don’t get it, we’re going to Panama
Yankees say they want we down there
We want more wages, we want it now

And what do you know?  Wages went up.  By 1910, the American consul in Bridgetown reported that agricultural workers received 30¢ per day, a 25% rise in nominal wages over the 1900 level.   More importantly, unpaid labor — remember the located labor laws? — basically disappeared.  Planters reacted to the new environment.  First, they started to employ tenant women in the fields.  Second, they modernized production.  In 1910 there were no modern sugar centrals on the island — intead, windmill-powered presses wasted upwards of 30% of the raw material.   By 1921, in contrast, 19 modern sugar centrals had entered operation.  Third, they mobilized politically to halt emigration.

Barbados had seen the emigration movie in the 1870s, when Guyanese and Trinidadian labor brokers began recruiting on the island.  That time around, it ended with the Emigration Act of 1873, which effectively prevented labor recruiters from operating in Barbados.  (My wife’s grandfather is from Barbados, but he left for Trinidad in the early 20th century.)  Emigration fell from 2,676 in 1873 to only 613 by 1876. 

This time the movie ended differently.  In 1906, the Barbadian parliament passed a bill giving Governor Gilbert Carter the power to halt emigration.  Two angry public demonstrations convinced the Governor to take the then-extraordinary measure of publicly proclaiming that he had no intention of using his new powers.   The parliament then demanded that he appoint a commission of inquiry into emigration; he refused.  Five years later, in 1911, Carter retired and returned to Britain.  The new Governor, Leslie Probyn, appeared to bow to planter pressure by declaring a ban on labor recruiting for Panama ... but he took no action to enforce it.  Barbadians continued to leave for Panama. 

Emigration, then, had palpable economic effects on Barbados.  It raised wages (albeit to still-low levels) and prompted the renewal of the sugar industry.  That is not nothing.  But there was another effect.  In fact, that other effect was why Governor Carter refused to appoint a commission of inquiry ...

Where is the inflation in China?

 I have been resisting it, mostly because I don’t want to have to go back and reclassify all the China-related posts, but I have to add a China tag to this blog.  Ugh.

A few years ago, before I started my second-year course on geopolitics and the energy business, I taught in HBS’s first-year required political economy course.  In it, we had two cases on the collapse of Bretton Woods.  One of the teaching points of the Bretton Woods cases was that small countries effectively give up control of monetary policy when they fix their exchange rate.  During the class, I put up the following 1970 quote from Time magazine, which sums up the economics pretty well:

Foreign central banks have no practical alternative but to support the value of the dollar by absorbing any surplus dollars that are offered in their own market places.  If the Bank of France, for example, failed to do this, the resulting glut of dollars in the hands of French bankers and businessmen would cause the value of the dollar to fall in France and the value of French francs to soar.  This would raise the export price of Citroëns, Camembert and other French products, hurting sales abroad.  To avoid all that, the Bank of France buys up surplus dollars. But in order to make those purchases it must increase the supply of French francs in circulation. Thus, France and other foreign governments correctly complain that they are forced to adopt inflationary policies to cope with the dollar flow.

People forget this now but it was actually France, not Germany, what blew up the system.  (Which is not to say that Germany would not have blown it up, if France hadn’t taken the lead.)  It was De Gaulle who said, “There can be no other criterion, no other standard than gold.  Yes, gold ... which has no nationality and which is eternally and universally accepted as the unalterable fiduciary value par excellence.”

A fixed exchange rate is (outside Venezuela) a promise by a central bank to swap one currency for another at a fixed price.  If that promise is credible than nobody has any incentive to make a deal at any other price, for the simple reason that one of the parties could always get a better deal at the central bank.  In France’s case, back in the day, everyone wanted to buy its exports.  So they took their dollars, and swapped ‘em for francs at the Banque de France.  Where did the Banque de France get the francs?  It printed them!  That is what central banks do; they cannot hold their own currency as an asset, any more than a company can buy up its own debt and book it on the asset side of the balance sheet. 

Well, the People’s Bank of China (PBC) today is piling up bajillions of dollars in its vaults.  In theory it would have to print bajillions of yuan for that.  In practice, the Chinese government sterilizes the inflow by forcing the banks to buy government bonds.  In essence, a Chinese exporter turns over his or her dollars to the PBC for yuan accounts at a Chinese commercial bank.  (They have to do this, by law.)  The government, however, forces the commercial banks (which are mostly state-owned) to use the yuan deposited in them to buy central bank-issued bonds.  An utterly stylized way of thinking about it would be:

1. The central bank prints yuan in exchange for dollars.
2. The yuan are deposited in commercial banks.
3. The commercial banks lend the yuan back to the central bank in exchange for bonds.

And voila, inflation is kept under control. 

The point, however, is that the inflationary pressure is caused by the fixed exchange rate.  Only now the Chinese are claiming that their fear of inflation is a reason to keep the fixed exchange rate!  Whaa?  Paul Krugman and Dean Baker point out allowing the yuan to appreciate would reduce import prices, and thus lower inflation.  This post is reinforcing their arguments by pointing out that the pileup of reserves — which an appreciation of yuan would slow or stop — also causes inflationary pressure.  In short, Chinese policy makes no sense in terms of inflation.

I am coming around to the unfortunate conclusion that it may be time to credibly threaten to slap some pretty significant tariffs on Chinese goods.  Right now, that country is acting as an international demand suck, earning foreign income and then sitting on it.  Sure, it is nice that they invest those reserves in Treasury bonds ... but with American savings rates rising and interest rates as flat as they can get, now is the time for them to start buying less. 

I find this sort of thing irritating.  I found it irritating when the Chinese government, which quite successfully engages in massive buy-Chinese policies (google “State Council Document 18”) criticized the buy-American provisions of the stimulus.  That was small beans, however.  The Chinese government right now is playing with fire in refusing to allow its exchange rate to appreciate.  During the Great Depression, countries imposed tariffs in lieu of devaluation.  The U.S. can’t unilaterally devalue the dollar against the yuan without Chinese cooperation.  The implication is left as an exercise for the reader. 

(To be fair, the Eichengreen and Irwin paper makes a very different point.  Unlike the countries hit by the Great Depression, the U.S. is a gigantic economy, and the fixed exchange rate with China does not impose deflationary pressure that the Fed cannot fight.  But it does reduce aggregate demand, and it is a growing problem.  I hope the Chinese see the light before we slap tariffs on ‘em.)

Thoughts?

Trills, warrants and kickers

  This post is not about organized crime.  This post is about a proposal from Robert Shiller and Mark Kamstra featured in today’s New York Times.  (Sanchez got the first down!  At the opposing 46.)  The idea is for the government to issue bonds whose payout is linked to GDP.  (Sanchez sacked!  Commentator yells, “Are they trying to kill Sanchez?”)  In the case of Shillers proposed “trills,” the payout would be directly linked:   each one would yield one-trillionth of quarterly GDP every three months.

It’s a fine idea, although I suspect that the benefits would be, well, limited.  They protect against inflation, but so do inflation-linked bonds, and investors would presumably demand some sort of equity-ish premium.  That said, they’d offer an easy way to diversify ... you get to buy a security linked to the income of every single income-earning entity in the country!  On the other hand, the income stream won’t come directly from those entities, but via the tax revenue that they generate for the federal government. 

(Holy s--t!  Did that just happen?  Challenge.  Why yes, it did.  Two-point conversion, 18-15.)

But that is not what this post is about.  This post is just to point out that Argentina issued something not unlike the trill back in 2004.  The “GDP kicker,” pronounced “keek-air,” aka a warrant, offered creditors payments equal to one-twentieth of the dollar value of all GDP growth above a threshold of 4.2% per year.  Bosnia, Bulgaria, Costa Rica, and Singapore have issued similar securities.  None of them are as simple as the trill, of course, but still.  When have you heard of Argentina being a financial pioneer, in a good way?  (Field goal! 21-15.)

Of course, there are some people who think that Argentina gave away the store with the kicker.  And they may be right!  Which is what worries me about the trill.  It might turn out to be a rather expensive way to finance the borrowing needs of the government ... and that, ultimately, is what I tend to think government debt is for.  Although Alexander Hamilton would not agree.

Teddy Roosevelt and Spanish labor unions save Barbados, hate Barbadians!

  I don’t have a whole lot of emotional attachment to the madre patria, not where it counts.  After all, the parliament has passed a law giving the descendents of Civil War refugees the option to apply for a passport.  Yet I have zero desire to do it.  No, I have a negative reaction to doing it.  But sometimes I can’t resist borrowing a phrase from my good friend Carlos Yu:  “Oh, my peoples.”

 
In 1904, the United States began construction of the Panama Canal in earnest.  Problem was, it needed laborers.  Lots of laborers.  Preferably cheap laborers, which ruled out hiring Panamanians.  (The Canal labor force would peak at more than a quarter of Panama’s economically active population.  Wage rates would have skyrocketed, even had that many people been interested in killing themselves to dig a big ditch ... which they were not.)  So the U.S. turned to the same place from which the earlier French canal effort had got its workers:  Jamaica.  Problem was, the Jamaican government remembered the disaster that was the repatriation of Jamaican workers after the French canal effort collapsed in 1889.  The Crown Colony government insisted that the Americans guarantee repatriation costs for any and all workers.  That ended the idea of using Jamaican labor; ultimately, only 47 worked on the Canal.

At this point the Barbadians, and later the Spanish, enter the story ... the rest of which is below the fold.

Why is Barbados such a nice place?

   Barbados is a very nice place.  The water is wonderful, of course:  the limestone makes it a turquoise color that simply doesn’t look real.  But it isn’t just the water that makes it so nice:  Quintana Roo and Yucatán also have very nice limestone-saturated water.  No, what makes Barbados especially nice is the society inhabiting the island.  Crime is low, human development is high, institutions seem to work.  It terms of ex-colonies, it is the anti-Congo.  The question is why the place is so nice.  

 
One answer, which I find unsatisfactory, is good macroeconomic policy.  In that view, Barbadian governments managed the economy particularly well after independence, and thus the island grew (relatively) rich.  The problem with that view is that many of Barbados’ unique qualities emerged well before 1966.  In 1960, for example, real primary school teacher salaries in Barbados were 31% higher than in Jamaica, educational spending as a % of GDP was 52% higher and real per student primary school spending was 2.3 times higher.  In 1950, its GDP per capita was the third-highest in the British Caribbean, after an off-the-charts already-developed Bahamas and oil-rich Trinidad.  It was a full 60% higher than Jamaica’s.   Barbados and Trinidad were the only two countries in which less than 40 percent of the labor force worked in agriculture.  (32% in both countries; the Jamaican number was 57%.)  Lifespans at birth were five years higher than elsewhere in the Caribbean (except Trinidad) if still only 56 years.   Other statistics are hard to come by, but the general impression is that for all the poverty — and it was widespread — Barbados had already diverged from the rest of the West Indies.

Except here’s the thing:  if you jump backwards from 1950 to 1900, Barbados doesn’t look so special.  In fact, the place was a disaster, close to becoming what we’d today call a failed state.  In 1902, facing riots, assassinations and economic collapse, the U.K. would take the unprecedented step of approving the 2008 equivalent of a £164 million relief grant (measured as a percent of Britain’s GDP) ... or in purchasing-power terms the modern equivalent £125 per man, woman, and child in Barbados. 

What had gone wrong?  A brief history of the Barbadian collapse below the fold. 

Failure modes of the United States (part 1c) goes mainstream!

 For all the snarky comments of some my favorite participants on this blog (in truth!) it seems as though some of the heavyweights of the internets are beginning to worry that the recent routinization of the filibuster may, in the future, cause the United States to come to a cropper.  One of these worryworts is, in fact, also a heavyweight of the real world, the Heaviest Heavyweight, in fact.

Then again, he would think that, wouldn’t he?

Merry Christmas, everyone.

The President and a question for Doug Muir

  I’ve been avoiding posting about American politics, but I can’t avoid it anymore. Via Johnny Pez, political analysis from a parallel universe:

In this version of events, Joe Lieberman is not acting on his own to make the bill as unpleasant to liberals as possible. Instead, Lieberman is simply doing what Obama wants him to do: stripping out the parts of the bill that the health-care industry doesn't like, while keeping in the parts that the industry does like. Greenwald notes that Lieberman has received no criticism from the White House for doing this. Rather, the White House has reserved its criticism for Howard Dean, who has pointed out just how corporate-friendly the bill has become and who has publicly called for the defeat of the bill.

This is politics the DLC way: a big wet sloppy kiss for corporate interests and a flip of the bird to the party’s liberal base. These are the principles that Obama's Chief of Staff, Rahm Emanuel, has espoused throughout his political career, and presumably that's why Obama made him Chief of Staff in the first place.

If this is what's really going on, then Obama is a DLC Democrat, and always has been. Those who defend Obama, saying that he was helpless to influence events, and that it was all Rahm’s fault, or all Joe’s fault, are in denial. It's no use crying, “If only the Tsar knew!” because, as always, the Tsar has known, and approved, all along.

The Tsar?  Okay.  Either way, it is an interesting post from a world where the Democrats had 65 seats instead of sixty, or cloture required less than sixty votes, or the Republicans had less internal discipline, or Howard Dean was a Senator, or the Senate did not exist.  Or something.  Of course, we live in a world in which the Senate does exist, cloture requires 60 votes, Republican opposition is unbreakable, and Howard Dean is not a Senator.  In which case none of the above makes any bloody sense at all. 

I really get a little crazy when people assume the President has power that the office does not convey.  The bill we have is the best bill that could pass, regardless of the President’s preferences.  So stop it already with the preference parsing.  Who cares? 

Now, the President might have been able to get a bigger stimulus had he been willing to forget about the possibility of Republican votes.  (Of course, Arlen Specter was not yet a Democrat, which poses some problems.)  He could have gone to mattresses on financial reform.  He could have dumped health care in order to go to the mattresses on financial reform.  Heck, maybe he should still go to the mattresses on financial reform; it is a policy field in which liberals can fail without, you know, allowing people to die of preventable illnesses.  And there is slowness on Guantánamo, the backpedalling on detention, and other stuff. 

Analyses should, you know, make sense.  Which means that they should take political realities into account.  The whole Tsar metaphor, well, it doesn’t make any sense, not in this universe.  Sure, yeah, people are disappointed.  And people are disappointed because they thought the Senate would be more progressive, or the Republicans more divided, or because they didn’t think about legislative politics at all.  But that’s where it ends ... unless you want to fault the President for wanting to, well, pass stuff into law.

On July 2008, Doug Muir read a New Yorker article about the President’s early career in Chicago.  Doug then wrote:  “What the article does is, it gives me a much clearer notion of how President Obama may disappoint.”  I asked him at the time to elaborate; he did not.  But I’d like to ask now:  Doug, has President Obama disappointed his supporters in the way that you expected he might, or is he disappointing them in a different way?

The Rwandan empire in Congo

  A “stylized fact” is a fact accepted as true for the sake of argument.  Good stylized facts are true statements that have been simplified in order to allow the creation of tractable arguments.  Bad stylized facts are oversimplified at best, and false at worst. 

One stylized fact is that Rwanda extracted great economic resources from its control of eastern Congo in 1998-2004.  It is accepted.  But is it true?  The answer is not as clear as you might think.

The Rwandan-backed RCD collected fees from local producers.  In Bukavu, merchants who commercialized peasant production were forced to pay a $1,300 fee, in addition to a $3,000 deposit.  In addition, the RCD used military planes to export palm oil to Kisangani.  The rub, however, is twofold.  First, there is not any evidence that the RCD taxes on commerce flowed to Rwanda ... although they did obviously reduce the subsidies that needed to flow the other way.  Second, according to merchants involved in the trade (HBS is very well plugged in to Rwanda) palm oil exports were barely able to cover their costs during the period; Rwanda in fact subsidized the RCD’s profits by providing the planes.

Following the general pattern of the Mexican Revolution, Ugandan and Rwandan troops did not destroy the Sotexki textile plant during their invasion and occupation.  On the other hand, the plant did basically shut down.  The gave an advantage to Rwandan exporters, but it is hard to believe that the additional profits were significant, even in an economy as poor as Rwanda.   

The Sominki gold mines (which also produced coltan and cassiterite) would have been, well, a gold mine, had they not gone bankrupt in the 1980s.  The mine holding company was renamed Sakima, and wound up in the hands of a Canadian corporation, Banro.  In 1998, the DRC expropriated the mine.  (Banro sued Congo at the all-powerful ICSID ... the panel wisely decided to use the fact that Canada had not signed the Washington Convention to punt and let the DRC get away with the expropriation.  Otherwise ... ugh.)  The RCD took over the mines in 1998 and quickly requisitioned 312 tons of coltan and 190 tons of cassiterite.  The DRC gave the concession back to the Canadians in 2003, but the RCD continued to pick over the bones until 2004.  Still, they really were bones, at least in terms of gold; the mines were dead, even by Central African standards. 

So far, so little.  Rwanda “let them [the RCD] exploit the sub-soil for their survival,” and that certainly made it cheaper to maintain control of the area in an international environment that precluded formal annexation.  (There is some evidence that Rwanda wanted to annex the region, which would have completely altered the game, quite possibly for the better.)   That, however, was not a reason for Kigali to continue its occupation; it merely made it cheaper to continue a policy that it wanted to pursue for other reasons.

But that isn’t quite right either.  The U.N. argued that the Congo Desk of the Rwandan Patriotic Army came up with a number of schemes to extract resources from its Congolese territories.  There is even an unconfirmed report of Kagame calling the war “self-financing.”  Thing is, theU.N. report really seems a bit dodgy.  Its estimate of $320 million a year comes from one unidentified source.  It also comes to 20% of Rwanda’s GDP, an four times its official military budget, an enormous sum.  The report gives percentage breakdowns of coltan exports, without mentioning either prices or quantities.  As social science, it is really really bad, inexplicably so.  I could have done a much better job ... but I don’t have reasons to want to find evidence of massive resource extraction. 

I don’t have reasons not to find such evidence either.  In fact, there is solid data regarding diamond profits.  The RPA and RCD apparently set up a powerful monopsony, using force to insure that exports went through their hands.  In 2001, the RCD even studied how their designated tax farmer was performing.  The quota was about $500,000 per month, and the fellow was meeting it ... but the market value of the quantity exported was over $2 million.  The U.N. concluded that the Congo Desk diverted the difference, but in the absence of data on how much was paid to producers and middlemen (and harder price and quantity data) that conclusion is dodgy.  In addition, the maximum estimate of diverted funds comes to a little less than $17 million per year.  That is a lot of money by Central African standards, but it is not $320 million.

In short, it is undeniable that the RCD financed itself from local resources.  It is also undeniable that the RPA got something from the occupied territories.  What we do not know is whether it was anywhere near enough to provide an incentive to prolong the occupation in the absence of security concerns. It really depends on the coltan numbers, which AFAIK we do not have.  Inexplicably.  Here is a pretty bad journalist’s report.  It has numbers, though, and it might be possible to use it to ballpark Rwandan coltan profits, if any. This report seems better, and it might be possible to tease out some real numbers.  I am sure that there is other data available, for anyone with the time and the interest.  (I have only the second at the moment.)

The really interesting counterfactual is whether the Second Congo War and its aftermath would have been as prolonged or as destructive in the absence of an effective taboo against de jure border changes.  And that counterfactual, of course, depends on the amount of resources that could be extracted and the security concerns faced by the relevant parties.  But it is food for thought:  do our post-1945 institutions really contribute to peace and well-being?  I honestly think that they do — but like all stylized facts, it bears the occasional reconsideration.

So ... I ask you all for two things.  (1)  Hard evidence on Rwandan extraction; and (2) thoughts on the impact of the effective end (with a few exceptions, here and there) of de jure annexation?

The Democratic Republic of Congo

  These are honestly the best series of posts from Doug yet, and that is setting a rather high bar.  All they lack are representative photographs.

Here Doug visits Katanga.  The post details the province's problems, covers some colonial history, and shows why visits to Africa often produce wistfulness and confusion regarding the European empires even among people who hold no emotional attachment to them.  In Doug's case, quite the reverse.

This post explores a practical question:  how do central banks manage to get currency into the hands of people who need it?  Money as a unit of exchange is worthless if people with wealth can't convert their stores of wealth into units of exchange.  But that turns out to be much more complicated than it might seem.  Latin American countries have at times encountered problems of small change --- Argentina recently went through one such episode, and I lived through another in Mexico in the early and mid 1990s --- but I know of nothing on the scale of the problems Doug describes.  He also describes a minor miracle in which millions of dollars in cash sits undisturbed and barely protected in a place where one would not expect it to last.

Doug also investigates past and present plans to dam or make navigable (these are different) the lower reaches of the Congo River.  Mobutu, it turns out, built a massive long-distance power line to move electricity from one of the dams on the Congo (the last of which was built in 1958) to Katanga, in order to make the province dependent on the central government.  It didn't work out too well.  The whole mess makes me wonder.  Did decolonization in Congo have to be such a mess?  Was a better outcome at all possible?  I know not.  But Mozambique suggests that it might have been better.

And in the latest, he asks the question:  how bad is Congo's government?  You won't like the answer, nor the paradoxically Pollyannish (but almost certainly correct) explanation.

Also, in recognition of my co-blogger, we now have a Finland tag!  Enjoy. 

Dubai bailout, nothing to see

  No, really.  Here’s the opinion of a Saudi Arabian banker on the Dubai default, dated November 27th:  “We believe that Abu Dhabi will come to the rescue… but like all rescues it would have a price. In that case it may well be first of all a political price.” Why did they believe that Abu Dhabi would rescue it’s neighbor?  Simple:  ADIA, Abu Dhabi’s sovereign wealth fund, has enough assets that if it seemed like bailing out Dubai world might preserve market values, then ADIA had enough of a stake in those markets to make the bailout a paying proposition.  Saudi did too, but Abu Dhabi, unlike Saudi, could more easily extract political gains in addition to the economic returns from a bailout.  

Thus, the bailout.  Stocks still seem to have reacted well, despite its wholly predictable nature.  Ni modo.

Magersfontein, December 11th

  Eighty-five years and one-day ago, on December 11th, 1924, the Republic of Finland celebrated a very special anniversary.  The state and the military establishment hosted it at the Officers’ Casino Building in the Katajanokka neighborhood of Helsinki. The celebration commemorated the 25th anniversary of the Battle of Magersfontein, part of the Anglo-Boer War of 1899-1902.

The conservative newspaper Uusi Suomi (New Finland) advertised the event on its front page, and the periodicals of the Finnish Civil Guard published articles on the conflict between the Boer republics and the British Empire.  The celebration opened with the the Finnish Naval Orchestra’s performance of “Kent gij dat volk,” the South African anthem. Among the guests of honor were Lauri Malmberg, the minister of defense, and Per Zilliacus, the chief of staff of the Civil Guard. The Finnish Civil Guard also sent a wreath tied with blue-white ribbons to South Africa, where it was laid at the monument on the battlefield of Magersfontein. 

Why did independent Finland celebrate a battle fought in a British colonial conflict in South Africa?  Simple:  Finnish volunteers had fought in the battle as soldiers of the Scandinavian Corps of the Boer forces.  The Scandinavian Corps was founded in Pretoria on September 23rd, 1899, supposedly as a testimony of loyalty felt by the Scandinavian immigrants towards the South African Republic. It included 118 men; 48 Swedes, 24 Danes, 19 Finns, 13 Norwegians and 14 other miscellaneous nationalities, mainly Germans and Dutch. In addition, three Swedish women served as nurses in a separate ambulance unit. The Scandinavians fought in the siege of Mafeking and the battles of Magersfontein and Paardeberg; of these, Magersfontein was the most significant.

After the war, a special Scandinavian monument was constructed on the battlefield. The monument consisted of four cornerstones, representing the four Nordic countries, each decorated with the Scandinavian valkyrie and national symbols of each country. The verse is from Johan Ludvig Runeberg’s March of the Pori Regiment, these days the ofificial Finnish presidential march: “On valiant men the faces of their fathers smile.”

The names of the fallen soldiers are engraved on the shield. Emil Mattsson died in Magersfontein; he’s buried in the field. The British captured Henrik Hägglöf, who died from his wounds at an infirmary near the Orange River. Johan Jakob Johansson — whose name is mistakenly written “Jakobsson” — died at the prison camp on St. Helena and is buried in grave number 18 at the Knollcombe cemetery. The name of Matts Laggnäs, another Finnish volunteer who died in captivity on St. Helena, is missing.

My very first peer-reviewed academic article concerned this very topic, and it was published in the Finnish Journal of History a few years ago. Afterwards, I was delighted to note that an Afrikaner fluent in Finnish had read my article and discussed it in his own blog. Reading my own text translated in Afrikaans was an interesting experience. The term “Boer War” was translated as Tweede Vryheidsoorlog, the “Second War for Freedom.”  The official term in the Afrikaner historiography for the wars against the British Empire in 1880-1881 and 1899-1901 were the First and Second War for Freedom, and the terms seem to still be in use.  Non-Afrikaner South Africans do not seem to use the phrase, understandably enough.

The history leaves us with three obvious questions.  What significance does the Anglo-Boer War have today, eleven decades after the war broke out?  What is the significance of the Finnish Republic’s 1924 commemoration of its citizens’ participation in that war?  And what are we to make of the fact that an event considered highly significant in 1924 has been almost forgotten in 2009?

Beer, banks, and revolution

  Doug Muir observes that breweries and banks seem to survive civil wars.  Now, Doug would never tell you, because he’s modest, but it so happens that he has a friend who’s a little bit knowledgeable about the effects of political violence and instability on economic activity.  His friend has even written an entire book about banking and instability. 

So, is Doug correct that banks and breweries tend to make it through political instability?  Short answer:  yes. 

Long answer:  well, let’s examine the data from one of the worst bouts of political instability to afflict any country with a substantial financial sector and developed manufacturing, at least outside the benighted continent of Europe.  Between 1910 and 1929, Mexico suffered a revolution, two insurgencies against the winner of the revolution, a counter-revolution, a counter-counter revolution, a civil war among the winners of the counter-counter-revolution, a military coup, another bout of civil war after an attempted coup by the Secretary of the Treasury, a presidential assasination, three more attempted coups, and a third civil war fought by angry Catholic guerrillas with a penchant for dynamiting passenger trains.  Among all that, what happened to the banks and breweries? 

Let’s start with the breweries.  Mexico’s domestic industry was created almost overnight during the last decade of the 19th century, with local monopolies established in virtually every major city by the 1900.  One of the industry’s leading firms (the Cervecería Cuauhtémoc of Monterrey, Nuevo León) came to control 28 percent of the national market.  It went on to spin off a glass bottle making company (Vidriera Monterrey) that quickly established itself as a domestic glass monopoly.  The other two major breweries were the Cervecería Moctezuma (of Orizaba, Veracruz) and the Compañía Cervecera de Toluca y México near Mexico City.  

During the civil wars, armed factions viewed factories as strategic assets that could be used to generate income for the army.  What typically occurred in occupied areas was that a faction would seize the factories and run them for its own benefit, or it would threaten to do so unless the management made a “loan” to the revolutionaries.  In April 1914 the forces of Pablo González took control of Monterrey.  For most of the year González occupied and ran the Cervecería Cuauhtémoc, where he continued to employ the brewery’s workforce.  By November the company’s stocks of raw materials had been used up. 

At that point, having extracted what he could from the operation, González returned the factory, apparently undamaged, to its owners.   

The upshot is that while production dropped during periods of generalized violence — 1914-19 and to a lesser extent 1922-24 — the breweries themselves pretty much came through intact.  In fact, beer was such a good market that the Cervecería Modelo started up in 1925, while the country was still rather unstable. 

So what about the banks?  Well, the banks didn’t fare that well during the civil wars.  They were where the money was. Governments and revolutionary factions plundered their cash reserves, forced them to make loans, and engaged in the unrestricted printing of currency.  It did not do good things for the banking system, which by 1916 ended up in government receivership — although in many cases the Carranza government wound up with little more than a Mexico City branch office and some papers.  On the other hand, the governments that came to power after 1916, however, regardless of their stated ideologies, all recognized that they needed a source of credit in order to restore political order.  

    

It took a while to put humpty-dumpty back together again.  A private banking system came back to life, but a December 1920 banking panic caused most of them to fail.  In 1921, President Álvaro Obregón announced that twelve banks would be returned to their owners; only five were able to reopen.  The government tried to regain access to foreign capital markets by restarting payments on the foreign debt, but the civil war triggered by Treasury Secretary Adolfo de la Huerta’s revolt put paid to that.  On the same day the revolt began, Banamex (the largest private bank, and one that existed before the Revolution) transferred $13.5 million to the International Bankers Committee.   The government simultaneously borrowed $5 million from the Huasteca Petroleum Company against future oil tax liabilities, with the intention of using the funds to make additional payments on the foreign debt.   Instead, the funds went to fight De la Huerta.  The diversion of funds meant that the government had to borrow from Banamex to pay foreign creditors ... on July 2nd, 1924, the government gave up and defaulted once again, this time for good.

In other words, this was not a healthy banking system.  A snapshot in 1917 would have showed it as pretty much dead ... but no matter how you put it, five banks did survive (including the two largest) and the system schlumped along despite the occasional civil war.  The government needed the bankers too much to kill the system dead.  In fact, it went out of its way to reactivate bank lending in 1925.

So how did they reactivate the banking system in 1925?  That’s another story.  The moral of this story is that Doug is right:  banks and breweries can survive even extreme levels of violence. 

Doug in Congo, first days

   My good friend Doug Muir is in Congo, and as usual he has some interesting things to say.  So I’ll post some links below.  The fact that it never ever ever occurs to Doug to do likewise on either of the blogs that he regularly posts on, regarding either this blog or serious academic work, is not relevant.  

Here is a brief discussion of Congo’s bizarre borders, or at least the poor country’s lack of an Atlantic coast.  Congo is effectively land-locked, what with the eponymous river being impassable in its lower reaches.  I am surprised to hear that the railroad from Mabadi still works at all.  Doug tells you why the border was drawn so that Congo cuts the Cabinda enclave off from the rest of Angola, and how this weird geography sparked a long secessionist battle against Luanda. 

The unmentioned wrinkle is that Cabinda rests on a sea of oil, first discovered in 1962, late in the colonial era.  (It says something about the Portuguese desire to get the hell out of Africa that they didn’t set up Cabinda as a separate neocolonial enclave; it’s what Charles de Gaulle would have done.)   Cabinda’s Block Zero produces about 22% of the country’s production.  Block 14 produces another 3%, but it’s production is set to rise from 55,000 bdp to 340,000 by 2010.  Onshore exploration in the portion of Cabinda labeled “CN” on the map is underway. 

Currently the provincial government gets 10% of the oil revenues from its territory, which has done a lot to en ... uh ... lower the intensity of the insurgency.  Or at least get it down to a level where government ministers can credibly declare an end to the organized rebellion.  A Chinese company is supposedly developing a highway-bridge combo that will provide a direct link over Congo to the rest of Angola; I have my doubts, but it will be cool if it gets built.  (Note:  the article at the other end of the link was paid for by the government of Angola; it is not a real news report.) 

Meanwhile, here and here are some of Doug’s early impressions of Kinshasa; the place seems to make Tegucigalpa seem lively, Caracas seem safe, Maputo feel orderly, and Jalalabad seem ... well, it is probably better than Jalalabad.  Maybe.  That secret police story creeps me out, more so since they don’t seem to be a very effective secret police at creating a, you know, police state.  I eagerly await more reports.  Even if the jerk never bothers to link to me.