The Power and the Money

An admonition to Micheletti supporters and an admonition to his opponents

  In a previous post, I mentioned Mexico in 1936 and Argentina in 1945 as possible parallels for what the Honduran military was thinking when it exiled President Zelaya instead of simply arresting him.  Steven Taylor mentions a third parallel, a cautionary tale:  Colombia in 1953. 

He raises a good point:  breaking the law in order to save it is always risky and often stupid.  But the specific parallel doesn't apply.  General Gustavo Rojas Pinilla took power in 1953 and established a dictatorship that lasted four years; Roberto Micheletti ascended to the interim presidency with a vote of Congress and seems to be waiting until the November election to hand over power to either Elvin Santos or Porfirio Lobo. 

In other words, the typical historical parallels really don't apply in this situation.  An inability to recognize that is the main reason why the OAS is botching the diplomacy.  (As opposed to the U.S., which is playing it very well ...  but very much in the national interests of the United States and nothing else.)  They keep seeing Pinochet when what they've really got is an unelected Liberal government marking time until they can hand over to an elected government ... preferably also Liberal.  If the OAS diplomats can recognize that, then they can get inside the other guy's head (and his decision loop) and start brokering compromises that will allow everyone to win.

But I have my doubts that insisting on constitutional purity and making absolute demands will accomplish anything.  Demanding that some soldiers be punished, or agreeing that Zelaya should be tried while remaining titular president, those could get somewhere.  But so far that isn't the tack the OAS is taking. 

See also my comment and Steven's response here.  The short version below the fold.

Bad politics at the OAS, updated

  It strikes me that the diplomats trying to reinstall President Zelaya, particularly Secretary General José Miguel Insulza of the Organization of American States, are employing a lousy strategy.  The problem is that Honduras is a still a democracy.  The new government is conducting everything with an eye to the November elections, and unless the diplomats recognize that, they won't succeed.

You can't understand the coup in the context of a military takeover, because the military has not taken over and does not appear to be calling the shots.

The interim government needs to be persuaded that any compromise or backdown on their part will be a vote-winner.  There are a number of ways that could be accomplished.  The government could agree that Zelaya's expulsion was unconstitutional, give one of the military leaders a slap-on-the-wrist, and invite Zelaya back to reassume the presidency while facing trial.  (The same way, say, President Clinton faced trial.)  They could have Zelaya reassume the presidency after issuing a public apology for violating the Supreme Court order.  They could sit down and hammer out a third compromise.

The problem right now is that the OAS seems to have only sticks.  Getting hit with sticks, however, might just increase Liberal support at the polls in November; nationalist sentiment tends to work that way.  Delegitimization is a good prod, but Micheletti can't only be offered a choice between admitting his party is undemocratic and running out the clock, because he'll choose the latter.

Instead, we have Insulza in Tegucigalpa refusing to negotiate with anyone.  The military has admitted that it screwed up in banishing the President, and the OAS can't figure out a way to broker a compromise.  Instead, we've got a tragedy:  the death of an innocent. 

Anatomy of a coup

  The op-ed for Forbes is up. 

 I co-authored it with Steve Haber of Stanford University.  When I say we co-authored, I really mean co-authored:  Steve and I write by continuously tossing ideas past each other, dissecting them to death (and usually rejecting them) scribbling and re-scribbling versions, reading out loud to each other, and then finally finishing.  It's a lot of fun.  

The more expanded analysis is below the fold.  It takes into account some (surprisingly heated!) discussions with colleagues, Steven Taylor's blogging, and several of the comments on this blog.  I don't think I'll be dropping this issue anytime soon, so more comments and questions are highly welcome.

The importance of form

  The heat is turning up on Honduras’s new government.  Ambassadors are leaving, the borders are closed, World Bank money is gone, as are the U.S. military’s training programs.  Meanwhile, the hemisphere is united against the new government.

There would seem to be three lessons here.  (Note my weasel phrasing!  It isn’t accidental, as all three regular readers know by now.)  First, form matters.  Steven Taylor alluded to this point, and I think he’s correct.  Now, I don’t think that he’s correct about the underlying legality.  The Honduran constitution makes no provision for calling a second constitutional convention.  The Supreme Court, therefore, was completely within reason to tell Zelaya to knock it off with the referendum. 

Nor (given the facts so far) am I sure that Taylor is right as a matter of domestic political strategy.  If it was simply a matter of domestic calculus, a Supreme Court order followed by a quick bundling of the president out of the country might have been the best way to avoid worse conflict.

But Professor Taylor is completely right that hustling the President out of bed at 3am looks terrible. In retrospect, it was certain to produce a bad international reaction, even though I wouldn’t’ve predicted how bad beforehand.  (Hey, I was wrong.  Yes Bernard, I’ll get to Ecuador one of these days.) 

What the Honduran military and Supreme Court and I missed was the reverse Chávez effect.  Once Hugo (inevitably) started tub-thumping and threatening war, the best way for the United States to undercut him was to walk back its initial position and bandwagon on the international opprobrium.  And man, has the United States been successful.  Nobody seems to note that Washington was behind the international curve. 

In short, Honduras has gotten itself into a pickle.  The Supreme Court and military should have thought more about the politics.  The confused messages about resignations and drug-dealing and all the rest did not help; it was propaganda aimed at five-year olds, people who watch Glen Beck, not serious observers.  Now, it would have been damned risky for the Court to issue an order removing and arresting the President, but it would have been much better to have done that (preferably with a concurring Congressional vote ) and hope that Zelaya would be a little slow in mobilizing support, giving you time to bundle him off to Costa Rica after having crossed all the constitutional T’s ... or at least having seemed to. 

Form matters, even when the substance is uncertain and impossible to determine.  Perhaps especially so.  And that goes double in a hemisphere where electoral democracy enjoys the contradictory status of being simultaneously hegemonic and fragile. 

More on the Honduran constitution

  Hmm.  My opinion of the coup is moving back towards legal. 

In November 2003, the Honduran government (still under President Maduro) amended the constitution.  (You can find a history of all Honduran constitutional reforms here.)  The reason, ironically, was that they wanted to repeal the traditional absolute immunity held by high government officials in both the executive and legislative branch.  Thus, they repealed Article 205, clause 15, which had read: 

[Congress has the power] To declare if there is cause against the President, presidential delegates, Congressional deputies, Supreme Court justices, members of the National Electoral Tribunal, Chief of the Armed Forces ... and Subdirector of Administrative Probity.

They also altered Article 313, clause 2, as follows:

Original:  [The Supreme Court of Justice has the power] To begin initial proceedings against high state officials, when the National Congress has declared cause.

New:  [The Supreme Court of Justice has the power] To begin initial proceedings against high state officials and deputies.

The implication, I think, is that the Supreme Court has the power to remove officials from office when it determines that they have broken the law.  President Zelaya pretty clearly broke the law when he refused to obey an order from the Supreme Court to call off the referendum, and as I pointed out earlier, the Honduran constitution clearly (if stupidly) bans any consultatory referenda touching on presidential term limits. 

So my new version is:  Zelaya broke the law, the Supreme Court called him on it, and the military took the initiative in enforcing the Court's order.  (Maybe too much initiative.)  That interpretation will depend on how closely the armed forces and the Supreme Court cooperated in the ouster.  (The more it looks like the Court got the ball rolling, the more legal the coup will seem.)  Given the legal fog, the Obama Administration seems to be taking a pitch-perfect tone here.  Some other governments, like Brazil and Colombia, may have walked themselves into positions that they are going to regret. 

Be sure, though, to take my positions with a grain of salt.  I change them as the facts change, and as radically as necessary.  For a subtler discussion of the implications of the coup, go here.                            _{(Photo courtesy of Steven Taylor.)}

UPDATE:  The whole mess is filled with judgment calls.  Zelaya wanted to call a constitutional convention, which he publicly admitted would be intended to change the constitution to allow for re-election.  The referendum question that the Supremes kiboshed, however, only called for a convention, with no other stipulations.  So ... were the Supremes justified?

It all comes back to the problem that a constitution which declares procedural matters to be forever inalterable is a badly-written constitution.

An Andrew Jackson moment

  “The decision of the Supreme Court has fell still born, and they find that they cannot coerce Georgia to yield to its mandate.”
                                                                        —President Andrew Jackson

The common misquote of the above is much sexier:  “John Marshall has made his decision; now let him enforce it!”  Which is not a bad summary of Manuel Zelaya’s throwdown when his country’s Supreme Court told him that he could not go ahead with his planned referendum on repealing term limits.  Zelaya’s “No one will stop Sunday’s vote!” is on a par with Jackson’s aphorism.

In fact, it is worth considering what was in Zelaya’s televised speech on Sunday, after the Honduran Supremes slapped him down.  “The Court of Justice, which makes justice only for the powerful, the bankers and the rich of this country, has declared illegal the people’s participation in a legitimate and constitutional poll ... What a shame for all Hondurans, this Court of Justice!  We’re in the presence of a technical coup d’état.  It’s a swipe at Honduran democracy.  I want to appeal to the commanders of the Armed Forces, the officers and the soldiers.  They are part of the people, they should not play this game of the media elite and economic oligarchy, of a deviant bourgeoisie.”

Why is this significant?  Because Honduras could have avoided this crisis with a better constitution.  The Honduran constitution had two major flaws.  First, it took re-election off the table forever.  I mean that quite literally.  Read: 

Article 5:  Voting in advisory plebiscites is mandatory.  Projects intended to reform Article 374 of this constitution will not be objects of referenda or plebiscites.

Article 373:  The National Congress can alter this Constitution in ordinary session with two-thirds of the votes of all members. 

Article 374:  In no case can be reformed the previous article, this article, the constitutional articles that refer to the form of government, the national territory, the presidential term, the prohibition that no citizen can again be president who has carried out the role under whatever title, and the one referring to those who cannot become president of the republic for the subsequent period.

It is a bad bad idea to declare any procedural part of a constitution to be forever inviolable.  The U.S. constitution does this in respect to the apportionment of the Senate, and that is a bad idea that may yet come back to haunt us. 

The Honduran constitution then added insult to injury with its second flaw:  a complete lack of procedures by which the courts, legislature, or popular opinion could remove a sitting president for breaking the law.  The closest is Articles 321-327, which lay out the responsibility of public servants and organisms that break the law and cause civil damages to individuals, or Article 233, which lays a pretty draconian anticorruption law.  But neither really apply in this situation. 

In short:  Zelaya broke a stupid constitutional clause.  Twice, in fact, first by firing an officer who refused to administer an unconstitutional referendum and second by proceeding with the referendum anyway.  Congress could not do anything.  At that point the increasingly-angry military, acting in concert with the Supreme Court, decided to extraconstitutionally remove the president from office. 

I do not like it.  But I am also not sure that this is an abrogation of democracy either.  Judging by their statements, the Obama Administration is equally torn:  they would like Zelaya back, but they aren’t going to wade into another country’s Andrew Jackson moment. 

What do you think?

P.S.  I am not a fan of Andrew Jackson.

Coup in Honduras, updated

  It seems as though the Honduran military just deposed President Manuel Zelaya.   That said, this is not a stereotypical South American coup:  Congress appears to have ratified the Army's action, and a civilian is taking control. 

In an unsurprisingly pointless move, Hugo Chávez put his military on alert.  (Or at least he says that he did; it would not surprise me to find that no official orders have been given.)  He went on to declare, “The people of Alba are in combat, because this does not end today.”  The leaders of the Alternative Bolivariana have condemned the “coup” and its leaders will hold a summit in Nicaragua today. 

But Alba's declaration is less political than it sounds.  Unasur, the OAS, and the United States have all condemned the ouster, although the U.S. is not calling for Zelaya to be reinstated.   

I don't know why the military moved before Congress did, or why the new leaders are going through this charade of pretending that Zelaya resigned before he actually resigned.  But I do know that Zelaya ignored a Supreme Court ruling on June 25th that ordered him to reinstate the general that he had fired because the general refused to use to the Army to organize an unofficial referendum on abolishing term limits.  (I met Zelaya's predecessor about a year ago;  he didn't have a lot of good to say about his successor.)   I'll add here that Article 374 of the Honduran constitution, stupidly, declares that the ban on re-election can not be reformed in any way, no how, forever and ever.  A dumb provision, however, is still a provision. 

For what it's worth, my guess is that the coup will stand.  There is enough of a fig leaf of legality about it to allow OAS governments to walk back their condemnation.  Now, escalating street protests could force the U.S. to pressure the Honduran congress into reversing its vote.  But if I had to bet right now, based on what I've heard from Tegucigalpa, Zelaya will remain out of power.

UPDATE:  The legality of the situation is shakier than the above implies.  Hell, it seems to be blatantly illegal, a good old-fashioned coup.  Why have I changed my mind?  Well, as far as I can figure, the Honduran constitution has no provision for the congressional removal of the president.  The closest provisions are as follows:

Article 205, Section 12:  [Congress has the power to] accept the constitutional oath of office of the elected President and Vice-president of the republic, and other appointees they select; grant them permissions and accept or reject thier resignations and fill vacancies in the case of the complete absence of one of them;

Article 205, Section 20:  [Congress has the power to] approve or disapprove the admistrative conduct of the executive branch;

Article 242:  In the case of a temporary absence of the the President of the Republic, the Vice-president will carry out the functions of the President.  Should the Presidency be permanently vacant, the Vice-president will exercise the powers of the executive branch for the remainder of the constitutional term.  Should the Vice-presidency also be vacant, the powers of the executive branch will be exercised by the president of the National Congress.

Thus, the need to declare that President Zelaya had “resigned” before giving the executive powers over to Roberto Micheletti.  (The office of Vice-president is currently vacant, so having the power pass to Micheletti is kosher ... it's the whole removing of Zelaya what appears to be illegal.)  Note that while Micheletti says that everything is constitutional, this article from the Honduran press cites no clauses or precedents. 

The whole thing looks much shakier upon skimming the text of the constitution in the light of day, or least what passes for it in this, the fourth straight week of rain in New England.  I'll go ahead and call it a “coup.”  It's chances of standing are less than I originally believed.

More Doug in Senegal, and why you shouldn’t worry about the deficit

  It seems as though I start a lot of posts with the words “it seems.”  I will try to rectify this in the future. 

Ditto, “so,” a verbal tic I blame on my unbridled admiration for Doug Muir, who has, by the way, written a little more about Senegal.  He tells us about the Mourides, a powerful Muslim sect of which I am embarrassed to say I knew nothing.  He bemoans the crappy state of Dakar’s airport, and receives in turn a useful warning from Bernard.  Finally, he wraps his trip with a discussion of W, railroads, France, birds, the CFA franc (e.g., France yet again, although he doesn’t say so), the weather, the expats, and the clothes.  I am pretending not to be annoyed at not getting a shout-out on the France tip, which means that pique is not the reason why I am not explaining the story of the Senegalese railroads under French colonial rule. 

Which brings us to the U.S. federal deficit.  You hear a lot of worring about how interest rates are going to rise from all this wild borrowing.  Where will the money come from?  We are doomed, doomed!!  No links, because I actually like and respect many of the people doing the worrying.  But they need not.

I just had a colleague in my office with the latest BEA numbers, worrying about just that.   Where will the money come from?  So I pulled out a spreadsheet and showed him.  In the first quarter of 2009, annualized personal savings came to $620 billion, or 5.7% of personal income.  Total savings (again, annualized) came to $1,273 billion, or 9.1% of GDP. 

Personal savings is only going up.  If we assume that nominal GDP growth is flat in 2010 (meaning, most likely, that real GDP keeps falling), a rise in the personal savings rate to 10% will produce $468 billion of additional savings.  Retained earning are also likely to rise, say from 4.6% to 5.0% of GDP.  That’s another $47 billion.  Total of $515 billion in new savings ... just as the federal deficit is projected to fall by $393 billion.  Plenty of wiggle room should private investment rise (one can hope) or the current account deficit fall (which seems likely).  A rise in real interest rates does not seem like something we need to worry about.

Rather, what we need to worry about is a continuing shortfall in demand.  What if Americans don’t substitute domestic consumption for imports?  Final demand will fall.  What if domestic investment doesn’t quickly rebound?  (It was $2 trillion in 2008, a full 25% higher than in the beginning of 2009.)  Final demand will fall.  In that situation, we might be wishing for another round of stimulus, rather than worrying about the deficit. 

UPDATE:  The May numbers just came out from the BEA.  Looks like the personal savings rate hit 6.9% that month.  We are on track to exceed 10 percent in 2009, and in my opinion the country will permanently return to 1970s savings levels.  That said, past performance does not always predict future results.  Any counterarguments?

A real anti-imperial triumph

  It seems as though the Argentine ambassador in France will no longer need to pay embassy expenses out of his own pocket.  A French judge lifted the freeze imposed on April 3rd.  More importantly, a German judge released the funds that German companies owed Argentine tax authorities.  Interestingly, Judge Wölber did not base his decision on sovereign immunity.  Rather, he ruled that since the tax payments were owed by the companies’ Argentine operations, German courts had no authority.  It remains to be seen if this precedent will be followed by other European courts, but the Argentine government is optimistic.

Interestingly, U.S. courts have taken the same position.  In 1999, the New York-based Leucadia National Corporation sued Nicaragua over $26 million in defaulted debt that it had purchased for $1.14 million.  A New York court granted the company $87 million.  (No, I don’t know why.)  It tried to collect by attaching Nicaragua’s share of the ticket and landing fees paid by U.S.-based airlines that flew to that country.  U.S. courts, however, refused to uphold the judgment.  But don’t cry for Leucadia.  Eventually the World Bank paid off the debt at 4.5¢ on the dollar, including accrued interest.  By my calculations, Leucadia received about $7.8 million, for a nice return of 584%. 

I am increasingly unsympathetic to Argentina.  But I am also relatively unsympathetic to the vulture funds that try to use the judicial system to impose sanctions on defaulting governments.  I may change that position if we start seeing more ploys like President Correa’s brilliant gamble, but that’s still a hypothetical fear, not a real one. 

P.S.  It seems like I was wrong about Ecuador.  I’ll discuss why, but only if there’s interest.  No reason to admit error if nobody cares ...

Philippine economy watch

  The latest figures indicate that the Philippine economy has started to shrink.  Truth be told, I'm surprised that it took so long.  The Philippines may be relatively less dependent on exports, but 38% of your economy is still 38% of your economy.  Meanwhile, the country is highly dependent on remittances sent home.  Latin American countries have seen such inflows plummet.  In the P.I., though, they've held up. 

Luckily for the Philippines, there isn't too much evidence that the place suffers from the strictures of emerging-market Keynesianism.  The yields on Philippine bonds rose at the bad economic news, presumably on anticipation of more government debt issues to combat the downturn, but only by 5 basis points.  That really is not a lot.  So, not much sign of crowding-out so far.

The peso fell, but that's probably a good thing.  It's good because it gives exports a filip and increases the domestic value of remittances.  It's bad because as of 2007 the Philippines owed to foreigners $23 billion in debt securities and $40 billion in other debts. 

We will see how it shakes out. 

High speed rail in Brazil

  I spent last week frantically writing about imperialism.  I need to spend this week frantically writing about nuclear power.  Instead I'm here writing about ... well ... high speed rail.

As our regular readers know, high-speed rail is dead in Argentina.  But it seems as though Brazil plans to have a line running between Rio de Janeiro and São Paulo by the time the 2014 World Cup rolls around.   Now, it isn't immediately a bad idea.  It will take about 80 minutes to cover the 258 miles between the two cities on the express train, which is competitive with the 55 minute flight, especially given the São Paulo airport mess.  Congonhas is overcrowded (when I lived in Brazil, I lived right next to the airport, with planes roaring right overhead) and Guarulhos may as well be on Mars.  In addition, unlike Rosario, Rio de Janeiro is a major metropolis and the traffic between the two places is massive, about 7 million transits per year, with an additional 11 million going between São Paulo and Campinas. 

So even given all the other infrastructure needs that Brazil has, this project can't be dismissed out of hand.

The catch?  The cost keeps skyrocketing.  The initial estimate was $11 billion; a new more-detailed report just upped that to $15 billion, with a worst-case estimate heading over $20 billion.  The financing will be via a public-private partnership, but they typically involve very large explicit or implicit government outlays. 

What do you think about the idea?  Should a country like Brazil build an HST?

Observatorio Argentino 12: Flag of protest?

  The annual protests against the Botnia paper plant on the Argentine-Uruguayan border have started.   Of course, the annual protests don’t mean much, in the sense that the nearby bridge has been shut to traffic since November 2006.  But the protestors did two new things (AFAIK) in this demonstration.  The first was to hang an 80-foot banner proclaiming, “Botnia go home.”  (Mercopress did not get the translation right.)  I kind of like that, along with the Finnish flags adorned with a skull-and-crossbones.  Piracy and poison from our Finnish overlords!  Very slick. 

The second was to wave flags like this one with the red stripe:

Which caused me a bit of startled recognition.  You see, that flag doesn't proclaim “Stop Argentina,” which is what an uninformed observer might think.  Rather, it’s the banner of the Federal League (also known as the League of Free Peoples), an insurgency led by José Artigas that waged a long war against Buenos Aires between 1813 and 1820.  (The Wikipedia entry is essentially unreadable.) 

For a while the League ruled both modern Uruguay and several littoral provinces of northern Argentina.  As usual for the period, it wasn’t always clear what the fighting was about.  Artigas’s early demands were for federalism, although he was a bit vague on commercial issues.  He rejected secession, even when Buenos Aires offered it, but he also rejected a federal compromise with Buenos Aires that would have met most of his early demands. 

Artigas became more radical as time went on, and in 1815 he redistributed land from political enemies (whom he amusingly called “bad Americans”) to “free blacks, mixed-race of this class, Indians, and poor creoles.”  

Artigas also later became the symbolic founding father of Uruguay ... even though he rejected the idea of Uruguayan independence.  What I did not know was that the Federal League still possessed enough historical resonance that angry Argentines would carry its flag in a protest against the Uruguayan government’s decision to approve a big paper mill on the other side of the river. 

It must mean something, but my pop sociology is failing me.  Surely our Canadian and Kiwi readers must see some parallels, no?

Not-so-secret prisons at Bagram

  This, if accurate, is un-American and must be stopped.  I was not aware that the U.S. held prisoners at Bagram who were captured outside Afghanistan.  That is wrong.

While I think the decision to keep the torture photos under wraps is a mistake, I am not so sure of my position as to become upset about it.  No laws are being violated, and the administration's propaganda rationale is quite valid.  In addition, I also think that it would be a bad idea to extend habeus corpus to prisoners taken in Afghanistan as long as there is an active rebellion under way.  Denying those rights during a rebellion does not violate American law nor American tradition nor a decent respect of the opinions of mankind.  Finally, I have no problem with American forces swooping down and arresting somebody outside the United States, even in violation of the jurisdiction in which the swooping occurs.  After all, even now, two decades later, and despite all the gray, it still seems to me that Bush the Elder's decision to invade Panama and arrest Manuel Noriega was the right thing to do. 

But I have a serious problem when the swoopee is not transferred to an American federal court but rather transported to an extraterritorial outpost and held with no judicial protections whatsoever.

I understand why the President wants to punt on the Bagram issue.  I am supremely cynical, and unlike many of his early supporters I found the man an attractive candidate early on because I beleived that he was even more supremely cynical in the sort impersonal way that makes for successful presidencies.  But cynicism has its limits.  He does not have my support on the fate of the Bagram detainees captured outside the Af-Pak theater, and they should be tried in American courts or released.   

The fear of populism and populism to fear, or at least chuckle at

  I am at a bit of a loss to understand why the congressional Democrats are afraid of GOP populism on the Guantánamo issue.  We all know that the U.S. is perfectly capable of locking up dangerous individuals at no risk to the surrounding community.  We are, in fact, quite good at it.  Now, there are issues that can be demogogued, regardless of the facts, but the idea that there are any dangers in moving the detaineers in Cuba to the continental United States does not seem to be one of them.  Neither polls nor my general sense of the public atmosphere (judging from, well, crappy bars in Norfolk, Philly, and the greater Miami area) indicate that the demogoguery would have any tangible effect.  So why are the congressional Democrats running scared?  It makes no sense.

On the other hand, if you want some real populism, you go to Venezuela.  I'm telling you, a subsidized electric car called the “M----------r” would be a big hit in the United States, and get anybody re-elected.

Gotta be a marketing case in there somewhere.

Venezuela cede

  The Bolivarian Republic just settled with the Argentine owners of Ternium over Sidor, its Venezuelan steel unit.  The Venezuelan government nationalized Sidor in 2008.  Chávez offered $800 million.  Ternium scoffed and asked for $4 billion.  They just decided upon $1.97 billion.  Is that a fair price?

Ternium bought Sidor for $1.79 billion in 1997 and subsequently invested a lot of money, but that doesn't really tell you anything.  On the other hand, Sidor enjoyed revenues of $2.4 billion in 2007.  At a discount rate of 10 percent, the agreed-upon price implies a Sidor profit margin of 8 percent, which is consistent with the steel industry's average margin during the 2001 recession.  Conversely, at a profit margin of 16 percent, about what the industry earns in a boom, the implied discount rate is 19 percent ... which seems reasonable for a high-risk area like Venezuela.  (Bernard?) 

Upon announcement of the deal, the price of Ternium shares jumped 49 percent, to $15.67.  That said, the stock peaked at $45.18 on July 2, 2008, before sliding to $34.01 on August 8, and then collapsing to $4.65 by November 20.  The problem with interpreting that price collapse as evidence that the offered price isn't fair?  President Chávez announced the nationalization in April. 

In other words, the price appears to be fair.  Another demonstration of the power of ICSID?  Perhaps. We don't know if the Venezuelan government offered more money out of fear of an adverse arbitration result, or if it offered more money at the urging of the “semi-dictator” of Argentina, or it offered more money because the President of the Bolivarian Republic decided that it was simply the right thing to do. 

But we do know that the foreign oil companies can go to ICSID, and that Caracas seems to be a bit worried about the prospect.  We also know that Cemex is pursuing the ICSID route.  So we will see if the empire strikes back at the Revolution.

P.S.  FWIW, Argentine embassy accounts in France remain frozen.

Bolivarianism and Mercosur

 The Bolivarian Republic is seeking to join Mercosur.  Brazil's government supports the idea, but the Congress is a bit wary.  Foreign secretary Celso Amorim defended Venezuela's accession in a stormy committee meeting the day before yesterday.  In it, Amorim had to point out, loudly, that there is no evidence that the Venezuelan government stole elections.  A few days earlier Amorim was in Caracas attempting to persuade President Chávez to eliminate Venezuelan tariffs on 500-odd products before the Brazilian senate votes on the accession treaty, so as to reduce opposition. 

The thing is, I'm having trouble understanding how any of this matters.  Mercosur has a parliament, with members appointed from national Congresses, but it doesn't do anything.  (Which isn't surprising, but Brazil hedged its bets anyway:  as of 2011, Brazil will appoint 75 of the parliament's 154 members.  That kinda makes it unlikely that the other members will want to give it any serious power.)  Mercosur has a tribunal, but it doesn't do anything either.  Private individuals, unlike in Europe, can only bring suits by acting through their national governments.    Anyway, its decisions are regularly ignored.  In fact, its first decision was ignored.  And it failed its really big test, the Argentine blockades against an Uruguayan paper mill.  There's really nothing about investor protection or property rights in the founding treaties; the decision against Argentina rested on the fact that the blockades were in fact blocking trade.

In short, Mercosur is neither much of a confederation nor an effective tool for an informal Brazilian empire.  Which explains why Chávez wants in.  Why not?  But does not fully explain why Brazil wants him in, or why Brasilia insists on effective control over a powerless parliament. 

There is something going on here that I don't understand.

UPDATE:  The picture comes from Jussi in comments.  It had to be posted.

Supreme court vacancy

  So, Justice Souter is retiring. 

Me, I vote for Sonia Sotomayor.  Why?  C'mon, it's obvious.  First, she's from the Bronx.  Second, she ended the baseball strike back in '95.  Third, I need a third?

I reserve the right to change my opinion should I discover that she does not have a New York accent of the modern type.

But I'd sure love to have a guest post about the Court from somebody who, you know, actually knows something about it.  Hint.

A curious reaction to the Mexican flu

  “The Philippines’ health department urged people to avoid kissing and hugging in public.”

This led a colleague to ask me, “Is kissing and hugging in private somehow safer?????”

Observatorio Argentino 11: The new broadcasting law

  OK, I've been making a lot of fun of the idea that Argentina is run by a dictator and an enemy of the United States.  Obviously, neither is true.  

But a new law proposed by President Cristina Fernández raises some interesting issues.  She proposes to limit the the number of broadcast licenses that a single firm can hold, and allow telecoms companies to operate cable television networks.  The law would also reserve a third of broadcast frequencies for nonprofit groups such as universities, and set minimum quotas for Argentine films, music and programs.  (Her meeting with the movie-makers is pictured.)

I don't have any ideological problem with limits on the number of media outlets that any one person or entity can control ... but I might be wrong on that.  Are there dangers that I don't see?  This proposal seems pretty openly aimed at Grupo Clarín, which is a big critic of the president.  In addition, about a year ago she proposed to establish a government watchdog that would call out media bias, although nothing appears to have come of it. 

What do you think?

Newsflash: Mexico flu

  I'm in Los Angeles, eating breakfast.  As in, that's what I'm doing right now.  And all the people at the table next to me are saying, in Spanish, that the Mexican government just shut down the school systems in the D.F. and Mexico State after 16 people died.  Apparently two people in the their 20s passed away, leading the government to decide that the outbreak was serious enough to close the schools and organize mass vaccinations.  People are urged to go to a hospital immediately if they detect symptoms.

I would like to take the opportunity to repeat that failing states do not react to flu epidemics in this manner. 

Oh no he di’n’t

  Well.  One of the leaders of the Republican party, a former Speaker of the House, and a plausible presidential candidate, goes to the Bronx and calls Cristina Fernández a “semi-dictator.”   

No, seriously.  Chávez, though, got to be a full dictator, while poor Danny Ortega got lumped in with Cristina among the “semis.” 

Now that is funny.  Ortega, who unlike the other two has in fact engaged in election fraud, becomes the same as Fernández.  Now, it is true that about a year ago she tried and failed to make an end-run around Congress in order to impose an agricultural export tax.  But our last president tried and succeeded to make an end-run around Congress in order to detain suspects indefinitely and monitor all communications crossing the country's border ... and while George Bush the Younger was many things, a “semi-dictator” was not one of them. 

Meanwhile, I really do need to repeat that Venezuela is not a dictatorship.  Most of the anti-Chavista opposition recognizes that.  And even should Chávez turn it into one, Venezuela poses no threat to the United States.  Let him slosh money around!  He gets nothing for it.   

Still, I can understand how he makes a useful foil for American conservatives.  I've heard lefties say stupider things about President Uribe ... although never anyone as prominent as Newt Gingrich.  But making Argentina into an enemy of the United States?  Huh?  Argentina??

So I've really got to wonder.  Can somebody explain what's going on with the GOP and the crazy pills?  I'm at a loss.

I guess I must reluctantly come around to the position that it is time to eliminate the filibuster. 

What's the matter with Texas?

  Nothing, really.  Oh, the governor seems to have gone a little crazy, but that's because his party has decided to do its damndest to commit suicide, and he's got to be crazy in order to win the primary.  Have you read its platform? 

But Texans aren't crazy.  First, the percent who support secession is less than the Crazification Factor.  Second, if you'd asked the question in November 2004, I think you could've easily gotten a similar percentage of Californians or New Englanders to say they support taking up their marbles and leaving.  Remember the "United States of Canada"?    Finally, unlike most of the red states, Texas does in fact generally pay more to the federal government in taxes than it gets back.  Red are payments, blue are receipts, all data in 2008 dollars.

Now, these figures are rough estimates.  Pre-2005, the data are from the Tax Foundation; for 2006-07, they come from me using the same methodology.  And they leave out a lot.  Frex, a lot of federal spending comes from borrowing, rather than taxes, and these figures have made no attempt to allocate the future tax liabilities generated by borrowing.  They also leave out a chunk of federal spending:  mostly interest payments, which aren't allocated to states (and much of which goes to foreigners), but also foreign aid and imports purchased by the federal government. 

In addition, of course, joining a fiscal federation gets you more than just net tax payments.  It makes Keynesian policy much easier:  European countries, for example, have trouble using this tool because so much of any stimulus will leak away to the neighbors.  It adds insurance against asymmetric macroeconomic shocks:  if something bad happens to the economy of your jurisdiction, your residents will pay fewer federal taxes and get more federal benefits.  Finally, it allows for economies of scale in the provision of public services.  All three are why it probably makes economic sense for Iceland to become a Commonwealth, even at a fiscal cost of $109 million per year. 

In short, (1) Texans are no crazier than anyone else, and (2) the Republican Party is really going off the rails.  It isn't just Governor Perry; it's state legislatures in Georgia, Oklahoma, and South Dakota, which have taken to voting in favor of secession.  In another country, these might be worrying in terms of national unity.  In this one, there's no worry about national unity.  (Although I recommend these comic books anyway.)  Rather, there is a worry about the emergence of a de facto one-party democracy.  I know I've got readers who still aren't sure that the GOP isn't in on the road to suicide, but even they have to admit that the Tea Parties and aftermath are a big step down that path.  Right?

Greece in recession

  The Greek economy is slowing, but it is not in recession.  Yet Athens looks like a city in the midst of a severe recession. 

Not in this picture, of course.  This picture is lovely.  Albeit not really because of Athens.

But on the drive in from the airport, you pass myriad empty storefronts, abandoned buildings, and what appear to be stopped construction sites.  

Downtown, you see much of the same.  Even brand-new construction looks empty.  When the storefronts are filled, you can spot tell-tale signs of empty offices.  And then there's the petty vandalism that haunts downtown:  graffiti on private structures, cracked windows, run-down buildings.  All the telltale signs of property owners who have decided for whatever reason that proper maintenance does not pay a sufficiently high return.  

If it had just been the central city, we would have concluded that Athens suffers from a European version of the American disease.  Or that it was just the after-effect of the December riots.  The thing is, the signs of economic distress are worse in the suburbs.  It honestly looks like someplace that suffered from a real estate bubble that has now collapsed. 

Of course, the central city doesn't look so good either.  It looks like someplace where rioters might indeed attack businesses with petrol bombs. 

That said, downtown Athens is not out-of-control the way much of New York City was in the 1970s and 1980s.  For example, when we got off the bus, the first thing that greeted us was a police raid against African street merchants selling counterfeit luggage.  Yet the prevalence of graffiti also suggests that the police (and the public) is fairly lax about enforcing standards; it's not something you see in Boston or London or Paris, not to the same extent, and not on private property.  (Although, once again, much of New York's outer boroughs looked like this back in the 1980s.) 

In other words, while the Greek economy might not yet officially be in recession, our careful powers of observation lead us to predict that the numbers are going to get much worse very quickly, as the statisticians catch up with reality.

So what's happening?  And what is to be done?

Observatorio Argentino 10: French lawyers declare war!

  It seems as though some French lawyers have decided to do a Rogers on the Argentine Republic. 

A few years ago, in 2005, Argentina repudiated a big chunk of its foreign debts.  Since then, the jilted bondholders have been trying to get it back.  On April 7th, the famous NML-Elliott announced that their lawyers managed to get a French bailiff to put a stay on all Argentine accounts in the country.   “The frozen assets in France are not diplomatic, and therefore are not protected by sovereign immunity,” said an Elliott spokesperson. 

Well, Buenos Aires wasn't going to take this lying down.  Elliott had already tied up funds held in France by the Banco Hipotécario and Banco Central.  The Argentine embassador to France, Luis Ureta, complained to the French foreign ministry.  The French diplomats were not happy to hear the news.  “On Monday night, a bucket of cold water landed on the heads of the diplomats at the Latin American Desk of the French foreign ministry,” was how La Nación described it.  The Argentines asked France to unfreeze the accounts “by any means necessary.”  (Argentines are not Filipinos:  I don't think the phrasing was deliberate.)

The French response?  Well ... it was rather American, actually.  A spokesman expressed support for the Argentine position, and then told the Argentine government that if they didn't like it, it was up to them to appeal.  In the interim, the Argentine embassador is paying for burnt-out light bulbs and the like out of his own pocket.  I suppose the embassy employees are getting paid back in Argentina and withdrawing their salaries out of ATMs, or some such.  The account itself is only a million euros or so, but man is it a pain to have to run a big office without any access to, you know, modern finance. (Although many Argentines have some recent experience of doing exactly that.)

Anyway, it's a bit of mess.  Argentina has already lost access to several hundred million dollars worth of bank accounts and all of the nationalized pension funds held abroad.  About the only bright light in the legal firmament is that a New York judge just declared that the recently-nationalized Aerolineas Argentinas is “not an alter ego or agent of the Republic, and the recognition of Aerolíneas’s independent status won't serve as a fraud or injustice against the Republic’s creditors.”  So that's one bright spot.  

In other news, I've added an “empire” tag to this blog.  I'm still not sure what I mean by it, but once I figure that out, I'll try to reclassify past posts appropriately.  Suggestions?

Oh, and go listen to Will.  I need help with this stuff!

Ross Douthat

  Who reads my blog?  Nobody reads my blog.  Do I avoid certain topics anyway?  Of course I do; I don't have tenure.  But I do believe that my liberal progressive credentials are fairly secure.  So I would like to ask Brad Delong, on the off chance that he is reading this, to go here.  These arguments exactly reflect my thinking when I first read Brad's posts on the Douthat appointment.  I think that Douthat will be a fine columnist, albeit one that I will usually disagree with and often be infuriated by.

Let me add that as someone who between 1988 and 2000 managed to go from a bizarre Reagan Democrat phase into dumb-ass radical libertarianism before becoming a sort of Democratic-voting Rockefeller Republican in the 1990s ... only after 2001 did I drift further left under the weight of, well, facts ... I am seriously glad that there was no internet to preserve my more adolescent opinions.  You gotta forgive people their past opinions.  Even George Wallace reformed.  So I can't hold Ross Douthat's sillier college columns against him. 

People usually change their opinions when the fact available to them change.  Albeit not always. 

P.S.  If I haven't said so already, Ganchoblog is worth putting on your regular blogroll, for all news Mexican and quite a bit else besides.

Keep on trucking

  A while ago, I wrote that I was fairly sanguine about the Buy-USA provisions in the stimulus bill.  I prognosticated that they would probably not be applied to our NAFTA partners, and even if they were, the NAFTA dispute-resolution mechanism would limit the damage.  Now along comes another dispute, this time over trucking, that poses a greater threat to trade ... although I am still confident that it will end well.

What's the story?  In 1994, NAFTA passed the U.S. Congress.  It mandated that all three countries open up their long-distance trucking markets to the others.  The U.S., however, punted when it came to Mexico, claiming that Mexican trucks weren't safe.  In 1998, Mexico took the U.S. to NAFTA arbitration.  On February 6, 2001, the U.S. lost ... partially.  The panel ruled that the U.S. couldn't issue a blanket ban on Mexican trucks, but that it could assess their safety on a case-by-case basis.  The Bush administration pushed Congress to issue enabling legislation that would bring the U.S. into compliance with the ruling, and with the political capital gained from 9-11, finally succeeded in November 2001.  (Not everything the Bush Administration did was wrong, although much was botched ... keep reading.)    Congress authorized the FMCSA to inspect Mexican trucks, and the Bush administration issued the required regulations to implement the law. 

Problem solved!  Not quite.  The Bush regulations had some, well, holes big enough to drive a truck through.  More below the fold.

Observatorio Argentino 8: Se disparó el tren bala

  Well, it's old news, but it looks like the tren bala is on hold.  Or at least so says Alstom, the lead contractor.

Under normal circumstances, I would say that this is not a bad thing, although Argentina probably needs all the fiscal stimulus that it can get.  Then again, I doubt the project was all that shovel-ready.

Below the fold is a not-safe-for-work profanity-laced rant about the project.  It's in Spanish, and had me chuckling, but seriously, every other word is a curse.  So listen at your own risk.  The weird thing, though, isn't the cursing, it's that El Gato Negro seems to be cursing in a Spanish accent.  Why is a Spaniard so upset about Argentine politicians?

¡Hasta la reelección siempre!

  I am starting to miss Anonymous.  He was obnoxious, abrasive, and arrogant, but I am now realizing that this blog is lesser sans his commentaries. 

But anyway, great news from Venezuela!  It looks like we just might have Hugo Chávez to kick around for a while more.  And I'll admit that I am in fact generally opposed to term limits.  What have they ever gotten the United States?  Eisenhower and Reagan were unlikely to have run again for health reasons, and a third Clinton term would have spared us ... you know.  All the stuff. 

Of course, Hugo isn't Ike, Ron, or Bill.  And there are circumstances under which term limits might make sense, especially in countries with histories of patronage politics.  But still.  In addition, the Bolivarian republic placed term limits on all elected offices, which is why Venezuelans voted on the following somewhat turgid question to change five different constitutional articles:

Do you approve the amendment of articles 160, 162, 174, 192 and 230 of the Constitution of the Republic, as approved by the National Assembly, that increases the political rights of the people by allowing any citizen holding elected office to be nominated as candidate for the same office for the constitutionally-established period of time, depending upon his or her possible election, exclusively by popular vote?

I like the “increases the political rights of the people” part.  Clever framing.  And, well, true. 

In short, as unenthused as I am with President Chávez, I can't view the outcome of this election as some sort of great loss for Venezuelan democracy. 

Plus, I'd bet against his victory in the next election.

Aaaaaaaugh!!!

  I'm on record as predicting three years ago that China's boom would come to an end within five years, as the country lost competitiveness either because the yuan shot upwards or domestic inflation raising dollar wage rates. 

I didn't expect China's boom to come to an end like this picture from Brad Setser:

Man oh man.  Looks like they really did make only high-elasticity commodity-like manufacturers. 

And read the link.  The combination of an increasing trade surplus with falling exports and imports bodes quite ill for the world economy.  Especially if it give evil people like me more pernicious ideas.

But still.  What's causing the export cliff dive?  China isn't alone; international trade everywhere outside the eurozone seems to be falling.  Can it really all be a lack of trade credit?  Help!

Yet another modest proposal, in which I outrage my friends by advocating protectionism but please Canadians and Mexicans by saying it shouldn't be aimed at them

  The new stimulus bill requires that all steel be purchased domestically.  Brad Delong is unhappy:

“If there's little excess capacity in the U.S. steel industry — so that the price of steel is high enough to induce people to look outside for suppliers — then a stimulus won't be much needed. If there's a lot of excess capacity so that a stimulus is needed, then steel customers should be able to bargain prices down to marginal cost — in which case foreign producers will have an extremely difficult time competing on price given that steel is heavy and distances are great.”

Well, maybe.  Marginal cost can vary a lot, and there are two steel-producing nations whose companies enjoy almost as good access to American markets as their American competitors:  Canada and Mexico.  The price of the same product imported from the two countries varies between 14% and 65%.  (December price data below the fold.)  Meanwhile, China has achieved significant import penetration, despite prices which exceed Canadian ones by 40% on average, and by 11% in the chief product category China exports to the United States.  The implication is that American firms are high cost.

Normally, the fact that U.S. firms are high-cost wouldn't change anything.  It would make sense to buy the cheapest steel from wherever.  American consumers would save by going to the lowest cost producer, and Americans as a whole would be better off, even if American steel producers would suffer. 

Under depression conditions, however, I'm not sure the above logic still holds.  Under depression conditions, using public money to buy from domestic high-cost producers has three advantages that don't mean anything in normal times.  First, domestic high-cost producers will spend more of their revenues, not park them as saved profits ... after all, they have high costs!  Second, the workers and suppliers of American steel companies (who make up the chief costs of the domestic producers) are far more likely to spend their wages and earnings on American goods and services than their foreign counterparts, keeping the multiplier higher than it would be otherwise.   Finally, having steel mills shut down in American towns and American workers thrown out of work will have psychological costs for American consumers and businesses.  They could worsen the downturn.  Such costs will be much less if the workers being tossed on the dole are in Ontario or Hebei.   In short, when American resources are unemployed and their unemployment looks set to last, buy-USA provisions can make the country better off as a whole.   

More below the fold.

Another modest proposal

  What, no interest in annexing Iceland?  Ni modo.  Let's turn instead to the stimulus plan winding its way through Congress.

To this observer, it seems quite brilliant as Keynesian countercyclical spending.  Such a stimulus works best when all the money is spent on labor-intensive stuff and spent quickly.  That's why the recent Republican lie that a CBO report indicated that only $45 billion would be spent in the first two years got so much traction.  Sadly for the Republicans, the CBO didn't say what they said it said.  (What did you expect?)  The report is here; it covered a now-withdrawn $61 billion bill proposed in September.  Getting $45 billion of a $61 billion full of big infrastructure projects out the door in two years ain't bad, but like I said, H.R. 7110 is moot. 

So how does the new bill, the American Recovery and Reinvestment Act of 2009, stack up?  I went through its $543 billion in line items and grouped them as follows:

1. An Army of Roofers: people doing stuff like weatherizing homes, retrofitting office buildings with energy saving windows, or replacing old car engines with new ones.  Plus some building of small-scale stuff like schools and army housing.  $91 billion.
2. An Army of Programmers:  people redoing computer systems across government bureaucracies and the health care system.  $24 billion.
3. An Army of Hardhats:  people building bigger cooler stuff like new electrical transmission lines or freeways.  Or, yes, sewers, lots of sewers.  $60 billion.

That comes to $176 billion spent pretty quickly on stuff that's already pre-approved or pretty simple to ramp up from scratch.  Call it 2.0 million jobs for an outlay of 1.2% of GDP.

But there's more:

1. Keeping bureaucrats employed:  $173 billion in temporary aid to state and local governments.
2. Handing out cash:  $116 billion in various types of temporary aid to individuals.

That's an additional $289 billion that will do a lot to maintain demand, since the governments getting the aid will have to pay the associated salaries (instead of laying people off) and the individuals getting the cash are all people in serious economic trouble.  (There's another $79 billion in there that I couldn't classify, mostly R&D and educational spending of various types.)

Anyway, as a Keynesian stimulus, the package seems pretty brilliantly designed to this observer.  A lot of it will even have long-term payoffs in terms of lower energy use and higher administrative efficiency.  No high-speed trains, no universal health care, but a lot of money out the door very quickly in a way designed to maximize the chance that it will be spent.  Not bad, new Administration, not bad at all.

Recoupling

  Andrew asks me to say something about “decoupling.”  (I am going to resist the temptation to embed an image of an infamous Economist cover.)  The idea was that the U.S. was now a smaller part of the world economy than before, and thus U.S. trouble was unlikely to spread.  Why, he asks, did it turn out to be wrong?

My temptation is to take issue with the premise.  Was the world ever really coupled?  The research on business cycles is mixed, but the upshot appears to be that business cycles were never all that synchronized.    Even when limited to the big economies, there isn't much sign of coupling.  The implication is that although economic troubles do seem to spreading worldwide, they could have spread a lot further and a lot faster. 

You can also take issue with the premise from the other side.  Could it be that emerging markets are holding up well given the scale of the troubles?  After all, Brazil (and elsewhere in Latin America) are certainly coping a lot better than they would have a decade ago; even Mexico is experiencing a slowdown rather than a collapse.  (And you don't get more coupled than Mexico, do you?)  It used to be that when the U.S. sneezed, Latin America caught cold; now Latin America seems to just start sneezing as well.  That's some sort of decoupling.  The same could be said for China and India:  hit but not clobbered.

Finally, there is a third way to take issue with the premise:  “decoupling” was always a hypothesis, and never an accepted part of the conventional wisdom.  That's why the March 2008 Economist article on the subject has the phrase “even if it is the source of a great deal of controversy” in its second sentence.

But I quibble. The decoupling optimists were wrong. Basically, they missed three things.

1. World business cycles have always been more correlated than the underlying trade linkages would suggest. 
2. Lots of financial institutions overseas had exposure to the U.S. market.  There was this bizarre (but explicable) flow of capital from the poor world to the great United States over the past decade.  The good part was a build up of reserve cushions.  The bad part ... well.
3. Lots of financial institutions started borrowing in currencies with low interest rates and lending in currencies with high interest rates.  Whoops.

A fourth may be added soon:  the drying up of trade credit leading to far bigger falls in trade than anyone would have expected. 

Thoughts?

Brooklyn is not expanding, and the Mexican state is not failing

  “He’s been depressed.  All of sudden he can’t do anything.”

“Why are you depressed, Albanito?”

“Tell Dr. Parpadeo!  It’s something he read.”

“Something you read, huh?”

“The Mexican state is failing.”

“The Mexican state is failing?”

“Well, the state orders everything, and if the state is failing, then one day it will break apart, and that will be the end of everything.”

“What is that your business!  He stopped doing his homework!”

“What’s the point?”

“What has the state got to do with it!  You’re here in Iztapalapa!  Iztapalapa is not failing!” 

Seriously, people, the Mexican state is not failing.  The Mexican state is weak compared to the United States or Canada.  But it is incredibly strong compared to the places in Africa or Central Asia that are generally called failing states.  Garbage is picked up.  (In more places than Afghanistan, anyway.)  Uniformed children go to school.    Middle-class families take weekend getaways, and do so on motorways better than the ones north of the Río Bravo, with no fear of IED attacks. 

Let's put some numbers on this.  In 1997, the Mexican federation had a murder rate that made it, in per capita terms, about as dangerous as Puerto Rico is today.  Over time, that fell, so that by last year Mexico's homicide rate had fallen within striking distance (or statistical error) of Maryland's.  In 2008, murders appear to have spiked by at least a quarter ... making the country almost-but-not-quite as bad for your health as ... Louisiana.

Crime is the major problem in Mexico; its government's failure to control it is a blight, and Mexican voters should judge their leaders accordingly.  Kidnappings, express or otherwise, should not regularly occur in a country with a halfway professional investigatory service.  In the seven ... practically speaking, eight ... years that I lived in Mexico City both my downstairs neighbor and my best friend suffered carjackings, I lost the entire front end of my 1990 Mercury Cougar when I left it unattended for 15 minutes on a highway access road, and I myself got mugged by cops in Tlalpan. 

That's a lot of crime.  In comparative terms, I managed to traipse around East Harlem, Prospect Heights, Washington Heights, Manhattan Valley, the Lower East Side, and the South Bronx during the 1980s with less experience of mayhem.  (Although I never actually saw any dead bodies in Mexico City, as opposed to three during my youth in Brooklyn and Manhattan.  And no one ever attacked me with a knife on a metro train in el D.F. for no apparent reason.  Nor was my house ever broken into and ransacked.  But the point holds.  Crime is worse in Mexico City than NYC in the bad old days.  I think.)  

In other words, crime is the major problem in Mexico.  And it doesn't help that the cartels have made steps in turning themselves into a Mexican version of the Camorra in states like Sinaloa, or that displaced cartel hitmen have started opportunistically engaging in small-town crime. 

But the Mexican state is not failing.  Mexico is not failing.  Iztapalapa is not failing.  Iztapalapa (and Mexico) has problems, but it is not failing, and little Albano better do his homework.

America returns, with a New York accent

  Below is an example of intellectual heroism.  It was strange to see Senator Cornyn (R-Texas) ask a question that boiled down to: “If you concede that my argument is correct, then isn’t my argument correct?”  Do you think he noticed the chuckles?

Data I'd like to have

  Where can I find time series on:

1. Gazprom's revenue, by market;
2. Russia's transit fee revenue, by originating market;
3. The average wholesale price per standardized unit for Russian gas and other gas, by market.

Get me that data, and I might be able to make some sense out of Russian policy.  I will say that current events make me think that Russia doesn't want to snarfle off bits of Ukraine.  You can extract a lot more surplus out of a neighboring vassal than you can out of your own citizens.

Correa lo hizo

  “Hay gente que rectifica lo que dice, hay mucha gente que se contradice.”  —René Pérez

Well, it appears that Ecuador just went and defaulted on its foreign debt.  I think that this is a bad idea.   The problem, of course, is that I am on record as supporting the U.S. decision to allow its financial protectorates in Latin America to default in 1931.  The only reason that I think Britain’s subsequent decision to default was bad is that is prevented the union of Trinidad and the United States.  I have also argued that Argentina’s much later default was a good idea. In fact, I have even implied that I think there might be good arguments in favor of an Argentine default right now.  (Really.  Read the linked post closely.  I more than imply that.) 

So why do I think that this move is stupid?  After all, Ecuador is suffering from a collapse in oil prices.  What’s the problem? 

First, Ecuador does not have to default.  Debt is around 21% of GDP, and debt service is only around 1%.  A balance-of-payments crisis this is not, even with the crash in oil prices.

Second, Ecuador is vulnerable.  I don’t know how vulnerable.  Why don’t I know?  Well, I haven’t been able to find Petroecuador’s balance sheets, so I don’t know how many American assets it holds.  Nor do I know how many commercial assets the Ecuadorean government may hold.  And I certainly don’t know how many payments to the Ecuadorean government pass through vulnerable payments centers.  But the fact that I don’t know these things make me think that the country is very vulnerable.  Call it a hunch, but a lack of transparency often means that there is something to hide.

I should point out that I have met the fellows from Greylock and Elliott who will be going after the country.  They are very very good at what they do, and they are very motivated. 

Third, Ecuador could use access to the World Bank.  It will probably lose that.  It has already lost access to Brazilian development funds. 

It could still be a bluff.  This is just a default; many stand to profit from such a thing.  The Ecuadorean government may just be engaging in a complicated political redistribution, and it will restart payments once the relevant parties have taken their profits.  Alternatively, should a second Great Depression really emerge, then early default will seem like a brilliant move. 

But short of those two possibilities — a short-term move or a prediction of disaster — it just seems unwise to me.

Pirates and convoys

  I clearly need a new tag.  What should it be?  “Pirates” is too specific for my taste.  “Failed states” is a possibility, but seems a bit, well, anodyne given the rather horrible reality of just what happens when a state fails in the modern world.  “Empire” is another, but might be too ... whatever the opposite of anodyne is.  I'm looking for a short pithy one or two-word phrase that covers places and situations in which the writ of the local state does not apply (or at the very least is not the sole source of authority) and in which other states or institutions might have to substitute for the local government.  Ideas?  Reasons to pick either “failed states” or “empire”?  C'mon, help me out. 

Returning to the topic of the day, in theory there is a way to make policing the sea lanes leading to the Suez Canal much easier.  For reasons which I do not yet fully understand (help?) the Suez Canal authority organizes transits in three daily convoys.  The implication is that, in theory, such convoys could be organized not at the Canal entrance, but at some point in the Indian Ocean.  Naval vessels could then shadow the three daily convoys.  This would require far fewer ships than the impossible 180-vessel armada. 

The organizational details, however, seem rather daunting.  Still, it might be possible for an enterprising contractor to organize convoys around their protective vessels.  It would be more expensive than simply hiring out a security vessel, because the convoys would need to be managed, but it would allow the security firm to enjoy economies of scale from the point of view of the companies that hired its services:  the more clients, the less cost-per-client. 

Thoughts?

More thoughts about pirates

  Pirates attacked 11 vessels in the Gulf of Aden in November.  They attacked an additional 6 in the Indian Ocean off the Somali coast.  Of the 11 incidents in the Gulf, all occurred right outside Yemenese territorial waters, which passing ships have taken to hugging as they head to and from Suez.  Of the 11 attacks in the Gulf, the pirates took their targets six times.  NATO warships stopped three and a tanker crew managed to avoid the tenth.  Of the attacks in the Indian ocean, the Indian navystopped one (sinking the pirate vessel involved), the crews involved evaded three (two by outrunning the pirates and one by turning firehoses on them as they tried to board, knocking their shoulder-held RPGs into the water), and two took their targets. 

I can't link to the source; it's what I was told by intel officers in the U.S. Coast Guard.  Don't worry, it's unclassified.  Another good data source is here, and a third here.

So what is the scale of the problem?  Well, in 2006 roughly 51 vessels passed through the Suez Canal each day.  Given the length of the Gulf of Aden, the fact that the pirates seem to be able to range about 450 miles beyond that, and an average ship speed of 22 knots, that would mean approximately 90 ships within pirate range every day.  (This assumes that vessels headed around Cape Horn could fairly easily re-route to remain out of pirate range.) 

The implication is that a rotating flotilla of 180 armed vessels could probably deal with the problem.  Djibouti may no longer be a French territory, but it hosts several thousand French troops and at least 450 American ones at Camp Lemonier, and it has a (relatively) modern port.  In other words, it isn't right to think that stabilizing Somalia is the only solution.  Of course, the pirates use swarming tactics, where they attack with multiple boats, which poses a very serious tactical problem for the escort vessels.  (Under the current rules of engagement, there is maybe a 15-minute window to attack a pirate ship.)  Alternate strategies are possible; the real point is that the problem is manageable even without any attempt to stabilize Somalia or, alternatively, a smash-up of the pirates' coastal havens.  (The human cost of the latter would not be low.)  One could imagine alternative operations involving continuous aerial patrols of the effected areas, although speaking as someone with some experience, managing such a thing would not be easy and the chance of a major cock-up would be high. 

The big problem?  See below.

The empire's demise has been prematurely reported

  The United States just announced that the the Millenium Challenge Corporation will suspend $60 million in grants to the government of Nicaragua.  The reason?  Rigged local elections.  Now, I don't expect the aid suspension to accomplish much.  It's important to bear in mind that the U.S. still provides more aid than the Bolivarian Republic to most putative members of the Bolivarian alliance. 

In other Revolutionary news, the Bolivarian summit in Caracas announced that the alliance would consider establishing a common currency.  That is rather weak brew, and I will be very (albeit pleasantly) surprised if it happens.  Why pleasantly?  Well, a common currency spanning Venezuela, Nicaragua, Cuba, Honduras, Bolivia, Dominica and possibly Ecuador would be a fascinating monetary experiment to watch.  Sadly, I feel pretty confident that it isn't going to happen. 

Sealing the alliance

 Argentine-Mexican relations were rocky under former presidents Néstor Kirchner and Vicente Fox.  I was in Argentina during one of their more famous spats, and it was very amusing to watch.

All that is over now.  President Calderón met with President Fernández in Buenos Aires to cement a series of pacts between the two countries.  The pacts covered everything from nuclear technology (Mexico to Argentina), agricultural techniques (Argentina to Mexico), information-sharing (particularly in regards to crime), and mutual recognition of advanced degrees and an extradition treaty.  The two presidents also created what they called a “Strategic Association Council,” which would serve to insure both a permanent high-level diplomatic link between the two governments and make it easier for lower-level functionaries outside the foreign ministry to communicate with their equivalents in the other government.

And then they sealed it with a ... uh ...

Around the Revolution

  “You know, I’ve always wondered what South America would look like if no one gave a damn about coca or Communism.  It’s always impressed me the way you boys have carved this place up.”

“I’ll take that as a compliment, coming from a Brit.” 

Now that the U.S. election is over and James Bond is officially a friend of Evo Morales, it's time to take a trip around the Bolivarian Revolution.  How is the red banner faring around the continent? 

Observatorio Argentino 7: Argentina’s inexplicable pension nationalization

 I’ve been asked to discuss what's going on in Argentina.  So what’s going on in Argentina?  The short answer seems to be simple:  President Fernández just made a huge political mistake.  She’s nationalized the pension accounts funded by mandatory contributions in a most unwise fashion for a rather unnecessary reason, and probably sealed her political doom in the process. 

Hat tip:  Leticia Arroyo Abad. 

There are two ironies.  The bigger one I’ve already mentioned:  AFAICT, it’s bad politics, rather than just bad economics.  The smaller personal irony is that I am not a fan in general of “privatized” pension schemes in general (although they can, if designed right, increase savings) and I am certainly not a fan of the Argentine scheme in particular, yet I find myself thinking that ending the scheme the way the government wants to do it is simply insane.

And the weirdest thing is that it seems politically insane.  Weren’t the Kirchners supposed to be excellent politicos? 

As often, though, it gets a little complicated.  And so, more below the fold.

Uh oh

It appears we are experiencing a wonderfully bipartisan effort from Congress to test the predictions of modern macroeconomic theory. 

We're in for a ride.  I am not looking forward to it, and neither should you.

A new constitution

Rafael Correa is the president of Ecuador.  He has a Ph.D. in economics from the University of Illinois.  Anti-Chávez well-educated high-earning professional Venezuelan women told me on multiple occasions that they consider him very attractive.

That, however, is not why he's in the news.  He's in the news because Ecuadorean voters approved a new constitution today.  Opponents call it “Bolivarian.”  Even non-opponents have called it “socialist.” Both are silly.  Correa is far from Bolivarian.  (Update:  It has been pointed out in comments that he declared himself Bolivarian in 2006, although he is generally considered to have distanced himself from Venezuela.)  Those same professionals who called Correa handsome also called him sensible, and I tend to agree.  Correa is relatively radical.  But he's also sensible and clearly a democrat. 

Which doesn't mean that the new constitution is a good thing for Ecuador.  More below.   

Postmodern commentary

Here is some excellent commentary on recent commentary on the events in Bolivia:

Two different takes on Bolivia’s political crisis, one from Larry Birns and Jessica Bryant, and the other from Marcela Sánchez. The first argues that the escalating tension is a result of a pattern of American disrespect to Latin American democracy. The second argues that Latin America showed a great deal of maturity in resolving the problem themselves, neither waiting for Washington nor using the crisis as a pretext to take pot shots at the Bush administration. I find Sánchez’s argument about ten million times more convincing.

Not everyone who blames the U.S. at every moment should be accused of blaming America first, but Birns and Bryant certainly seem predisposed to pointing the finger at Washington. Evo Morales kicks Ambassador Philip Goldberg out of La Paz, and its Goldberg’s own fault because “he failed to be helpful.” That’s a pretty high standard. Why is it in incumbent on a foreign ambassador to help in an internal political crisis? Any time there is a crisis in a foreign capital, should the American ambassador be tossed if he fails to be helpful? Also, how could the U.S. help by inserting itself into a complex and longstanding local political issue? Hasn’t that usually been a recipe for problems? Short of endorsing Morales, what could Washington do to satisfy Birns and Bryant? It essentially avoided stepping on Morales’ toes publically, which shows admirable restraint, given the number of times Morales has thumbed Washington in the eye, and that Washington is ideologically more closely aligned with the opposition than with Morales. At the risk of supporting W, it seems like the U.S. played this one right. It’s better to let Latin America solve its own problems without U.S. mediation.

The Birns-Bryant piece is also needlessly (and bizarrely) wordy. For instance, the phrase “the baleful consequences of the inherent disrespect the U.S. historically has exhibited toward the region” has about a third more words than necessary. Later, they refer to the need to “architect a new relationship with the region that can be deemed credible.” Architect as a verb? Why, when the Queen’s English offers us build, construct, create, develop, erect, carve out, and many other possibilities that are, in fact, verbs?

By the way, after the scare from the marches, it looks like things are calming down in Bolivia.  Evo deserves props for putting his constitution on the table and agreeing to sit down and talk with the opposition governors about the new constitution. 

(Semantic note:  the Bolivian title is in fact “prefect.”  A symbol of the crisis was, in fact, the self-promotion of the Santa Cruz “prefect” to “governor.”  That said, they've already got more power than the English “prefect” implies, so I'll be sticking with “governor” as my translation of “prefecto” until convinced otherwise.  I'll also stick with “province” as my translation of “departamento” because it sounds way way better and less confusing than “departament” in American English.)            

Yankee go home

Human Rights Watch published an unflattering report about civil liberty under President Chávez.  As these things go, the report isn't all that damning.  It basically accuses him of, well, setting up a political machine:  (1) using the executive power of the state to go after political opponents; (2) undercutting the independence of the judiciary; and (3) denying resources to independent or opposition organizations.  It doesn't accuse him of tossing opponents in jail or ending freedom of expression. 

The reaction of the Bolivarian Republic?  Expel the authors.  The irony needs no comment.

Here is an English-language response to the report from the Venezuela government.  Here is an explanation of the expulsion.  Let me point out that the expulsion is entirely legal under Venezuelan law, and that many fully-democratic nations have similar (if seldom used) provisions. 

The HRW report is an interesting read, if you have the time.   

Old news from Santa Cruz

So Hugo declared on September 12th that he was prepared to intervene militarily if Bolivia's constitutional government came under threat.  The reaction in Santa Cruz?

As a patriotic American, I can't tell you how much it warms my heart to see demonstrators burn somebody else's flag.

UPDATE:  It gets better!  When the commander of the Bolivan troops sent to Pando arrived at the Cobija airport, he had to insist to an angry mob that he was not heading a Venezuelan invasion force.

No, it gets much better.  Chile's foreign minister, Alejando Foxley, publicly complained that President Chávez's antics nearly wrecked the Unasur summit.

Thankfully, Evo realized that Caracas wasn't helping him, albeit belatedly, and told his defense minister to reject Venezuelan overtures.  (It obviously would have been a bad idea for Evo to have done it himself.)  So far, negotiations with the Media Luna provinces seem to be going well.  Here's hoping. 

Cooler heads prevail

  An agreement has been reached to settle the conflict in Bolivia, at least for the time being.  The “Great National Agreement” is, IMHO, a thing of great beauty.  Basically, everyone involved realized that they were all going to lose if the violence escalated and decided to take a deep breath and calm down. 

Judge for yourself.  The text is below the fold.

Full moon rising?

Cooler heads may be prevailing in Bolivia.  The Army has taken control of Cobija, the capital of Pando province.  Governor Leopoldo Fernández has fled, accused of masterminding a massacre of government supporters.  Meanwhile, the National Democratic Council, which consists of the five governors of the Media Luna provinces (including Chuquisaca), announced that it will call off the roadblocks, although their supporters still occupy government offices outside Pando. 

Council representatives met throughout last night with Vice-President Álvaro García and the Vice-minister for Decentralization, Fabián Yaksic.  They seem to have arrived at an accord, which while not a resolution of the dispute, is at least an agreement to sit down and talk about it. 

Hugo Chávez, unfortunately, is being his own typically helpful self.  He's declared that Venezuela will intervene if Morales falls.  He's hurled accusations of treason at the head of the Bolivian armed forces, General Luis Trigo.  “I am willing to die for Bolivia,” said the President of the Bolivarian Republic. 

The president of Uruguay, Luis Alberto Lacalle, had an interesting response.  “Careful.  We've got Chávez, who suffers from verbal incontinence.  It could occur to him tomorrow to send a soldier to Bolivia, and that could cause a horrible conflict in the region.” 

Half moon at bay

The consequences of persistent inequality are with us today.  They appear to be pushing Bolivia towards civil war in slow motion.  Today there was a brief flutter of news about the situation because Evo expelled the American ambassador, and the U.S. followed suit, but in general you've got media silence in America.  The split is between the central government and “autonomists” in the “Media Luna,” which is marked off in dark green in this map taken from Mark Weisbrot: 

Things are bad.  How bad?  American Airlines just stopped flying to the country.  Autonomists in Santa Cruz have seized control of most federal offices in the province.  Tarija — which produces 60% of Bolivia's natural gas — experienced bloody riots yesterday, where autonomists seized the customshouses and airport and federalistas (my term, not a Bolivian one) blew up the governor's parking garage.  Meanwhile, the nightmare that my Brazilian and Bolivian colleagues discussed in Venezuela?  Well, it came true for about 12 hours. 

Brasilia is reacting in a manner that could best be described as confused, but understandably so.  On Tuesday, the Brazilian foreign minister committed a Kinsley, when he stated that if Morales can't secure the pipeline, then his government will be forced to open relations with the Media Luna.  Today, however, the Brazilian national security advisor reiterated Brazil's position that Bolivia has but one government and intimated that his government might send troops to support Evo. 

So what's it all about?  I'm sure you all can guess, but a rough overview is below the fold.