The Power and the Money

The Brazilian fiscal cap still makes no sense

McDevite is not answering my call. I am sad. 

But I am not as sad as the people of the Federal Republic of Brazil, right across border from here! (“Here” is Uruguay, on my way to Buenos Aires. And while I am in parentheses and can be pedantic, allow me to point out that “federative” is not a word in American English and the proper translation of “federativa” is “federal.”)

Over in Brazil, Michel Temer is mired in a growing corruption scandal. His woes are compounded by his blatant reactionary conservatism. The man worked to keep women and black people out of his cabinet. He also shoved through a constitutional amendment that insures public spending will shrink no matter what over the next decade. All that plus corruption! Brazil is, once again, a mess.

Now come Filipe Campante and Dani Rodrik with a short essay reiterating just how incredibly stupid the fiscal handcuffs will be for Brazil. They draw a parallel with Argentina. By the 1990s, Argentine governments had racked up a long history of irresponsible monetary policy. So they decided that the best way to promise to no longer inflate would be to throw away the printing presses. The Convertibility Act stated that the Argentine central bank could only issue pesos 1-for-1 with the dollars it had on reserve. 

Of course, the fact that Argentina had no control over its monetary policy meant that an otherwise manageable mild balance-of-payments crisis turned into a depressionary nightmare. The country abandoned the link in a moment of political chaos. 

Campante and Rodrik make the point that the fiscal limit is as problematic as convertibility. If it succeeds in bringing down interest rates and sparking growth, then it will no longer be necessary ... but will by its past success be perceived as a vital totem and therefore be incredibly hard to remove even should it start to cause damage. Meanwhile, if it is unsuccessful it will unsuccessful because the limit itself will become an early focus of political conflict. Either way, Brazil will lose, unless it somehow manages to dodge all economic bullets over the next decade.

So I am at a loss as to why the cap might even be remotely a good idea! But I know people disagree with me. So, Lee Allston, Aldo Musacchio, and anyone else in the know, once again, could you please give me the counter-arguments? Surely I am missing something. 

NAFTA and agriculture

There was some interest in this topic but not a whole lot. So I will put up a short post, which will be pretty straightforward. I will discuss U.S. exports today.

The key thing to keep in mind is that agriculture is a global market. So if third-countries displace American agricultural products in the Mexican market, then American producers will be able to export their products to the places the third-country used to sell to. But if Mexico just reduces its consumption of all agricultural imports, then U.S. producers will lose unambiguously.

Mexico takes 8% ($1.8 bn) of American soybean exports. It takes 21% ($2.4 bn) of U.S. corn exports. It takes 11% ($0.9 bn) of our wheat exports.  It turns out that 36% of U.S. corn travelled to Mexico by sea in 2007-10. See page 10. The share is even higher for other products: 55% for wheat and 38% for soybeans; see pages 20 and 23. I used USDA data to calculate costs per ton-mile for soybeans: subtracting out $230,000 per ship Panama Canal tolls for cargoes from the U.S. costs gives you an average cost per ton-mile of 49₵ from the U.S., 43₵ from Argentina, and 39₵ from Brazil; fixed costs come to $5.70 from the U.S., $7.20 from Argentina, and, inexplicably, only $2.70 from Brazil.

With that data in hand, let’s look at those three markets and imagine that Mexico slaps MFN tariffs on the U.S. while opening to the South Americans. 

Soybeans: Mexico could easily supply itself from Argentina and Brazil. Landed costs to Mexico are already cheaper for the Latin American nations, even with higher transport costs; only South American export taxes keep us competitive.

Slap a 4% tariff on American exports (while removing them on the South Americans) and Argentina and Brazil would drive us out of the market. But remember that soybeans are sold in a world market. So more South American exports to Mexico means less South American exports to somewhere else. American production will fill up the gap. When it all shakes out, you would have a small loss for the Americans, a small gain for the Argentines and Brazilians, and about a wash for the Mexicans. 

Corn: The U.S. and Argentina have more or less the same corn production costs. But transport costs from Argentina are quite a bit higher. If Mexico imposed MFN tariffs on corn and suspended them on South American exports, the landed cost of U.S. maize would still be about 13% less than Argentine corn. Americans would lose sales via a general cutback in Mexican purchases, not a switch to South America. 

Lose-lose, although more for Mexican consumers, since U.S. producers would presumably find alternative markets. That said, Mexican corn farmers would gain, and rural voters are a major constituency, about 30% of the electorate. (See page 10. Rural voters punch slightly above their weight in turnout terms: see page 9.)

Wheat: See soybeans. 

Upshot: ending NAFTA would not be catastrophic for American soy and wheat exporters, but both would have to discover new markets right quick or suffer some unpleasant transition costs. It would be a clear boon for Argentine and Brazilian farmers, who could capture a whole new market. Mexican corn farmers will gain; Mexican consumers will lose.

Still, NAFTA probably won’t end.

Fiscal insanity in Brazil

 I have to admit that I do not understand the conventional wisdom that pins Brazil’s current recession on Dilma’s fiscal policies. I kind of understand that profligacy made the situation worse, by forcing the central bank to raise interest rates by more than it otherwise might have done in the face of higher inflation. But that is a second-order effect. I completely understand the argument that most federal spending in Brazil is misplaced and the state serves as a drag on long-term growth. But that is a long-term problem that has to do with the nature of federal spending and not the absolute level. 

In other words, the proposed constitutional amendment to limit the level of Brazilian spending to the level of inflation for the next 20 years seems crazy. But it is actually even crazier than that. The amendment would not include the following:

1. The 61% of all federal spending that happens via federal agencies outside the executive, legislative, and judicial branches;
2. The revenue that the federal government has to turn over to the states under Articles 157 and 159 of the constitution (49% of all income tax revenue, 10% of VAT revenue and 29% of all hydrocarbon revenues);
3. Guaranteed education spending under Article 212 (18% of all revenue);
4. Police and fire spending in Brasilia.

These categories are overlapping, so it is not clear how much total spending is exempted. But it is a lot. Unfortunately, a lot of basic state functions are hit, like, you know, police, courts, universities, public defenders, and most regulatory agencies. But not the fastest-growing ones and not the ones that generate the most waste.

In other words, it is crazy on every level. It is a crazy proposal that gets worse in implementation!

I call on Aldo Musacchio or Lee Alston for help. Help? Why is President Temer pushing this?

Lee Alston on Brazil

Lee Alston, co-author of a great new book on Brazil, has an excellent piece on Brazil’s political crisis. 

He points out that so far the impeachment has been a good thing: markets have risen and Interim President Michel Temer is known as a “dealmaker” who can manage Congress.

But! Temer has a hard row to hoe. He needs to restore fiscal stability while retaining social inclusive policies: i.e., income redistribution that actually redistributes income and gives people a stake in their polity. How can we know whether he can do that? Well, take it from the source:

In Brazil in Transition, my coauthors and I pose three questions to help us assess whether a leader such as Temer has what it takes: does he know what policies are needed to recover from the shock? Can he coordinate a coalition that includes economic and political actors as well as citizens to embrace those policies? And is he trusted and does he possess moral authority?

Lee doesn’t come out and say it, but his tone is negative. (He even briefly feints in the other direction, sardonically pointing out that at least you have to admit that Temer isn’t afraid of controversy.) His conclusion:

His early moves may please markets, but to satisfy Brazil’s diverse citizenry, he will need to demonstrate that he is not abandoning social inclusion. On this as well as his own fate in the ongoing corruption scandals: the jury is still out.

As for me, well ... I think the list of questions is an excellent one. The answers to the three are maybe, probably not, and hell no. The jury is certainly out, but there are a lot of signs coming out of the box. 

Meanwhile, buy the book.

President Temer had to work to keep women off his cabinet

 I don’t have particularly strong opinions about Brazil’s new president, Michel Temer. The scandal accruing around the Rouseff administration certainly merited impeachment, even if the specific charge appears a bit overblown. And while I would be very hesitant to blame her for the recession, her economic management has been poor. This blog, in particular, has excoriated her energy policy, which devastated biofuels while wrecking Petrobras’s finances in order to subsidize gasoline. 

But I want to say one thing about the new president. He has appointed no women to his cabinet. There are country’s and time-periods where that might be understandable, but in Brazil in 2016 you have to work to do that.

Some background. In Brazil in 2004, twelve years ago, women made up 46% of all lawyers, 41% of all doctors, 34% of all judges (18% of high court judges) and 14% of all engineers. Of major CEOs, women ran  19% of all utilities, 15% of all financial and insurance firms, 12% of all manufacturing companies, and 10% of all construction operations. They were less represented on boards (and made up only 16% of highly paid CEOs) but the numbers were not inconsiderable.

In other words: while the position of women in the Brazilian labor market is far from perfect (and worse than in most North Atlantic countries) there are enough high-powered women so that you need to go out of your way not to appoint any to cabinet-level positions. 

Feel free to judge Michel Temer accordingly. Not that the rest of his cabinet would lead you to do otherwise.

Emerging market Keynesianism revisited

 Today Paul Krugman pointed out that Brazilian monetary policy is hamstrung in a way that Canadian policy is not. Canada can keep interest rates at rock-bottom in the face of falling commodity prices. Brazil can’t. Extensive foreign-currency borrowing by private entities means that a falling real would push Brazilian borrowers into insolvency. Cutting interest rates in Brazil as much as in Canada, however, would cause the real to plummet as investors took flight. So Brazil can’t cut as much as Canada. 

I would just like to point out that Brazilian fiscal policy is similarly hamstrung. Canada can (rightfully!) go on a borrowing spree with no ill-effect. Even if it doesn’t prompt a recovery (and I think it will) it will leave Canada with badly-needed shiny new roads and trains. But if Brazil tried the same, investors would run for the hills, causing the real to fall and forcing the central bank to raise interest rates or watch an ugly combination of insolvent companies and soaring inflation make the economy worse.

We mentioned that problem on this blog back in 2008. 

(By the way, the conservative government did a pretty good job with countercyclical fiscal policy. Take that, James Nicoll, you hippie.)

Syrians to South America?

 Here is a question for you: why aren’t flights from the Middle East to South America crowded with Syrian refugees?

On paper, most of the Southern Cone countries have remarkably liberal immigration regimes. Start with Argentina. Refugees are automatically accorded two years of residency and receive legal representation. (See the 2010 Migration Act.) Now, the law is not as liberal as American activists would have you believe: undocumented migrants can still be deported (page 17), but the Argentine government has explicitly opened its doors to Syrian migration. Uruguayan immigration law is even more liberal than Argentine. All you need to do to migrate to Uruguay is demonstrate an income stream of $500 per month. After that, naturalization comes within a few years. Brazil has a liberal new refugee law. 

The problem isn’t cost. A ticket costs around $800, rather less than the monetary cost of making it overseas to Europe. 

But in practice, all three countries are pretty much closed.

Start with the official Argentine program for Syrian refugees. The refugees need to have links to an Argentine sponsor either through family ties (out the fourth generation) or via a “pre-existing personal relationship based on whatever legal, reasonable, and justifiable reason: family, social, educational, work, etcetera.” 

Unless a Syrian in a camp somewhere can demonstrate a tangible documented link with somebody in the Argentine Republic, then they do not get a visa. This policy lets Buenos Aires claim that the doors are open while actually keeping them firmly shut. 

The policy may change, depending on how seriously Argentine authorities take the definition of a family link. Supposedly, 4 million Argentines trace some ancestry to Syria. In reality, no. In the peak years of 1897-1913, net migration from Syria came to about 103,000. To get from that to 4 million you have to assume almost total exogamy, which is not likely. (For the pedantic: if you assume the same birthrates as the general Argentine population, a generation of 35 years, and total exogamy, then about 3.4 million Argentines should have some “Syrian” ancestry by now.)

Moreover, a 1936 census registered only 11.2% of the Syrian-born residents of Buenos Aires as Muslim. (Page 17, once again.) Some of that is surely conversion, but it also implies that the “Syrians” came much more from Lebanon than from Syria.  

Nor is this policy in violation of Argentine refugee law. Article 10 exempts anyone under U.N. protection. Article 11 exempts anyone who has “voluntarily settled inside or outside the country which he left owing to fear of persecution.” Depending on the definition of “voluntarily settled,” that could include precisely every Syrian refugee. It certainly includes anyone in a UNHCR camp. Only a few hundred people have escaped under this not-so-generous regime. 

Uruguay is worse. After the country took in a whopping 42 refugee families, a counterreaction set in, and the door are now firmly shut. In theory, the country has pledged to admit ... wait for it ... 120. Now, Uruguayan law opens up an interesting way from European countries to send their unwanted refugees to Uruguay: give them an airplane ticket and a $500 per month stipend. That said, given what happened with the 42 refugees the law would be changed right quick if a European government tried to take advantage of it. 

Chile, meanwhile, has a liberal refugee law that only considers people who manage to make it to Chilean territory. So no visa for that plane ticket from Dubai. 

And then there is Brazil, which had settled 1,740 Syrian refugees as of March, and 2,077 as of this month. That is nice, but still a very small number. The Brazilian issue is that the bureaucracy is slow, so even without formal quotas few applications get processed. (The Brazilians also exempt anyone under U.N. protection.) It is probably the most open, but still not enough for a mass exodus.

The Brazilian case shows how much bureaucracy can turn an ostensibly open process into a closed one. The Mexican government is coming under a surprising amount of domestic pressure to accept 10,000 refugees. I bet there will even be a bill. And it will sound good.

But the devil will be in the details. Do not wait for Latin America to open its doors in any serious way.

Juan Linz was wrong

 I think I need to spell it out more clearly: Juan Linz was wrong.

(1) There are very few instances of democratic collapse in Latin America which involved partisan gridlock. The only one which clearly fits the bill is the Brazilian coup of 1964 ... except for the fact that Brazil tried a parliamentary system in 1960-63, which did nothing to resolve the country’s underlying political conflicts. Three others fit if you squint hard: the Argentine coup of 1966, the Honduran coup of 2009, and the Chilean coup of 1973. The latter, however, also involves a President who was in open defiance of the Supreme Court as well as Congress.

This is a small subset of the democratic collapses in Latin America. 

(2) Now, Latin America is all presidential regimes, save the 19th-century Brazilian Empire and that brief early-Sixties experiment. But Africa has a mix of presidential and parliamentary systems. And on that continent, both systems are equally-likely to break down.

(3) Postwar Europe has not had a lot of democratic collapses, but there have been a few close calls. They do not fit the Linz formula. Perhaps the coups in Czechoslovakia and Hungary should not count, because they both involved the Soviet Union ... but they nonetheless occurred in parliamentary systems. The collapse of the Fourth French Republic was not a coup per se but it was certainly a constitutional breakdown ... and the Fourth French Republic was a parliamentary system. The 1982 putschists in Spain launched their assault on a parliamentary government. Finally, the 1960, 1971, 1980, and 1997 coups in Turkey overthrew prime ministers, not elected presidents.

The U.S. may go into a crisis. We may develop a political culture most unsuited to our constitutional structure. Jonathan Chait explores that idea here. But if that causes us to go into crisis, it won’t be because of our constitution per se.

Brazil was not a country before 1914, economically-speaking

 In comments, Jonathan asks the significance of the finding that Argentina is not alone in experiencing relative decline after 1914. Rather, it spans most of the Conosur. The fact that Uruguay also experienced decline is well known, so I will not comment more. And I will punt on Chile, since I know not sufficient economic history to say anything sensible ... there is evidence that Chile was in fact quite poor at the time but the headline figures for GDP per capita show a similar relative decline. But I will discuss southern Brazil. 

(Short version: southern Brazil was much richer than most think before WW1. It then experienced relative decline much like Argentina. Any explanation for Argentine decline that cannot also explain southern Brazil, or vice versa, is therefore likely to be wrong.)

Longer version: The popular version of Brazilian economic history is that Brazil in the 19th century was an underdeveloped country, like Peru. It then underwent a period of explosive catch-up growth in the 1950s and 1960s, but growth collapsed in the 1970s, only to pick up again recently.

That picture, however, does not jibe with what we now know of the non-economic history of Brazil or what we know of regional economic development in that country. Molly Ball (Rochester) has done some excellent work tracking down wage data in São Paulo. She collected data from textile firms, gas & electric companies, and the tramways. Ball’s textile wage data do not go back before WW1, but her series for the latter two industries go back to 1891.

It is possible to compare Paulista nominal hourly wages with U.S. wages for the same two industries, taken from Historical Statistics of the United States. (I calculated American hourly wages under the assumption that electric and tramway workers had a 48-hour week, which is consistent with data from the U.S. Postal Service; manufacturing workweeks fell from 55 to 50 hours in 1891-1913.)  I could not easily find data on comparable Italian wages, but is also possible to compare them with the estimates of hourly wages for skilled construction workers generated by Stefano Fenoaltea (University of Rome Tor Vergata). The United States was, of course, the second-richest destination country in the New World; Italy was a major country of emigration in the early 19th-century to both America and Brazil. 

Bearing in mind that these are nominal wages, the results look like this:

The basic image is that Brazilian wages were lower than in the United States, but much higher than in Italy. (They were within striking distance of much of northern Europe and beat Sweden.) It would be hard to call São Paulo underdeveloped the way we think of it today. 

(The Brazilian volatility is almost certainly an artifact of the fact that the estimates come from industries dominated by monopolies in one city in  whereas the American results are a national population-weighted average.)

Now, nominal wages are not real wages. It is possible that high prices in São Paulo meant that living standards were closer to Italy than to America. Brazil was highly protectionist at the time and had lousy internal transportation, so there are reasons to believe that many manufactured goods would have been pricier.

Fortunately, Luis Bértola and Carolina Román (Universidad de la República) have done much of the hard work. They find, rather astoundingly, that the cost of living in Brazil was one-third that of the U.K. before WW1, although it should be noted that their data is from Rio de Janeiro rather than São Paulo. Now, I strongly suspect that their estimates are off by a significant amount and the benchmark was Britain, not America ... but I would also bet that correctly accounting for the net effect of differences in the cost of living would still raise Paulista real wages with respect to the United States.

(I would also submit that for many migrants, who intended only to work and save in the new country for a while before returning home, nominal wages would be the relevant draw.) 

In short, southern Brazil was rich before 1914. Not as rich as Argentina, not as rich as the United States, maybe not as rich as the richest parts of Europe, but rich. 

The reason why Brazil as a whole ranked so poor in 1913 was that the United States of Brazil resembled the French Empire much more than it did an integrated nation-state like the Argentine Republic or the United States of America. Its huge northern hinterland, like France’s African territories, were populated by near-subsistence peasants isolated from the national economy and providing little save some tropical products. They were effectively prohibited from migrating south (or, in the case of France, north) by a combination of extreme poverty, poor transport links, and racial prejudice. 

The problem is that a mass southward migration of northerners masks the relative economic failure of the south after 1913. We know much less about the timing of that decline than we should. We also know much less about the reasons for the decline than we should; unlike Argentines, Brazilians not only do not obsess about their fallen position in the world, they’ve forgotten that they ever had a better one. 

The fact that the relative declines spans Argentina, Brazil and Uruguay means that Argentina-specific explanations are almost certainly wrong. Rafael di Tella may be correct that Argentina was “hit with 700,000 bullets,” but it can be asserted that the ones which did not also go to hit the neighbors did not kill the target. 

Kind of long, but I wanted to make the point about Brazilian relative decline. Did I answer the question?

Is American democracy doomed?

Juan Linz has gotten a lot of well-deserved attention in the blogosphere recently. Linz wrote that presidential regimes tend to break down because of irreconciliable conflicts between the executive and the legislature.

Many observers, not least Matt Yglesias, have interpreted Linz as stating that the problem is that presidential system allow for gridlock between the executive and the legislature, especially when the parties are ideologically coherent and commited. Kind of like, uh, the modern United States. So are we doomed now that our parties have become European-style organizations?

Well, maybe. The cross-country data is mildly supportive of the presidentialism = bad hypotesis, but is by no means a slam-dunk. Moreover, while presidential regimes are more likely to break down there is really rather little evidence that the reason was gridlock between the executive and the legislature.

The closest parallel to the current American situation is Chile in the early 1970s — but it is not very close. In the 1969 election, the People’s Union (Unidad Popular) got 60 out of 150 seats in the lower house. The Christian Democrats got 57 and the National Party received 33.  The next year, Salvador Allende (the People’s Union candidate) won a plurality of the presidential vote, throwing the election to Congress, where he won with Christian Democratic support. (The Nixon Administration tried to prevent his election but failed.) Allende started a program of widespread nationalizations using existing legal authority under a 1932 law that allowed for the temporary requisition of basic goods when in the public interest. (The law also allowed the executive to put companies into temporary receivership should they be closed by a strike.) In October 1972, the Supreme Court ordered the President to obey lower-court orders overturning some of the nationalizations; Allende refused.

In March 1973, the opposition won the Congressional elections. The Christian Democrats aligned with the National Party to form the Democratic Confederation, which took 55.6% of the popular vote and 87 out of 150 seats. (The People’s Union got the rest.) Congress first attempted to amend the constitution, which failed. It then tried to impeach Allende, but could not get the requisite ⅔ majority. In May, the Supreme Court again reprimanded the President. At this point, Congress went on record asking for a coup. The coup happened on September 11, and its leaders proceeded to disband Congress and jail or “disappear” many of the legislators who had called on the military.

In short, the Chilean crisis was caused by a President who overstepped his authority and disobeyed the Supreme Court and resolved by a military that believed itself above the law. Suffice it to say that this does not characterize America’s current situation.

What about Argentina? Well, Argentina has had a lot of coups since the first one in 1930. In 1930, President Hipólito Yrigoyen’s party had comfortable majorities in both houses. The 1943 coup was against a dictatorship. The 1955 coup overthrew the elected Juan Perón — but Perón’s party controlled Congress by overwhelming margins. As in 1930, gridlock was not the issue. In 1962, the miltary overthrew President Arturo Frondizi: in that case, the prompt was Frondizi’s loss of several governorships to the Peronists in the ’62 elections. Again, gridlock was not the issue. The 1966 coup kinda sorta maybe if you squint could be gridlock-related — but really had more to do with President Arturo Illia’s confrontation with American oil companies. And 1976? That one was against President Isabel Perón’s supposed inability to defeat Communist guerrillas. Her coalition controlled Congress; once again, gridlock was not the issue.

What about Brazil? Well, the Revolution of 1930 took down an oligarchical government with an extremely limited electorate. Not really comparable. The 1964 coup knocked out a left-wing government with American support. It is true that Congress did not support President João Goulart. It is also true, however, that for his first three years Goulart presided over a parliamentary system in which power resided with Prime Minister Tancredo Neves. In 1963, a referendum restored President Goulart’s executive power: the result was paralysis. In that sense, the ’64 democratic breakdown is consistent with the hypothesis that presidentialism causes gridlock causes democratic failure. The problem is that the parliamentary system tried beforehand was doing no better at resolving the country’s political conflicts.

Colombia? Well, the 1953 coup happened after President Laureano Gómez seized dictatorial power. Gómez, in turn, won the 1950 election because the opposition boycotted it. Again, gridlock not the problem.

Let’s turn then to Mexico. Uh … no, let’s not. The 1910 revolution got started against a dictatorship. Porfirio Díaz government was many things, but gridlocked was not one of them. (In fact, Congressional votes were all unanimous after 1893.)

I could go on around the other countries of the Western Hemisphere, but the pattern is similar. Divided government is not the cause of most democratic breakdowns in Latin America. Chile 1973 is the closest, but that is one event, with little resemblance to the government-by-crisis currently affecting the United States.

So breathe easy America! We will get through this. How, you ask? Well, if the GOP keeps this up, it will lose a lot of elections, even with our gerrymandered House of Representatives ... and there is a lot of ruin in the United States. The worst-case scenario on the debt ceiling is pretty bad, and I would certainly a 5-10% fall in GDP and the corresponding human suffering a failure of the United States. But in the unlikely event that the Republicans take us there, they will not be in a position to take us there again.

Brazil scares Ecuador into playing nice with Petrobras

There is something I love about South American interstate politics.

In 2008, problems at the San Francisco hydroelectric dam led the Ecuadorean government to cancel its $243 million contract with Odebrecht, a Brazilian construction company. President Rafael Correa of Ecuador sent troops to seize the San Francisco dam along with an irrigation project, a hydropower plant, a highway, and an airport Odebrecht was building. Odebrecht officials fled to the Brazilian embassy for protection.

In a very 19th-century move, Brazil recalled its ambassador in response. Foreign Minister Celso Amorim said, “There are no plans for the ambassador’s return to Quito.”  The Brazilians then threatened to cancel all development loans and credits. The Ecuadorian government backed down, and Brazil’s ambassador returned in January 2009.

It was an unpleasant experience for the Ecuadoreans.

Around the same time as it (not unreasonably) cracked down on Odebrecht, Ecuador decided to get tough with Petrobras. Again, this was not unreasonable. Ecuador had a remarkably easy fiscal regime. When the country mooted the changes in 2008, Repsol-YFP, Perenco and Andes Petroleum all quickly agreed, but Petrobras was, according to the U.S. embassy, somewhat unenthused. 

In late 2010, the Ecuadoreans finally passed a new oil law, transforming Petrobras’s production-sharing agreements into a service contract offering a flat per barrel fee. The changes would reduce Petrobras’s revenue (at 2008 prices) by $25.0 million per year. Petrobras demanded $344 million in compensation. In 2012, Ecuador paid $217 million.

So Ecuador won! Right? Nope.

First, Petrobras wrote in its annual report that the contract shift would reduce the recovery value of its assets by $174 million. $174 million < $217 million.

Second, the talks between Ecuador and Petrobras failed on November 19, 2010. On that day, Petrobras shares traded at a price-earnings ratio of 8.036. Petrobras earned $25 million from its Ecuadorean assets. $25m × 8.036 ≈ $201m < $217m.

If you click the above link about the price-earnings ratio, you will see that it was stable for most of 2010. What it tells you is that if Petrobras considered its Ecuadorean income streams to be at least as safe as its other income streams (which come mostly from Brazil) then Ecuador overcompensated Petrobras. If you believe that Petrobras considered its Ecuadorean assets to be more risky (and seriously, it did) then Ecuador way overcompensated Petrobras.

It’s good to be the king! Welcome to hegemony, my Brazilian friends. As long as none of the states in your backyard go collapse, or go Communist, it’s a pretty good deal. Your tourists will find it less pleasant when they travel, but believe you me, being from the big boss country more than makes up for it. So enjoy it, mis amigos brasileiros. May it last until we all unite in war against the owners of the robots.

Brazil imposes a tax on atomic energy to promote atomic energy

Brazil is about to place a 10% tax on the gross revenue generated by the sale of nuclear electricity.

This is a strange idea. As a revenue-raising device, it is improbable. Nuclear energy is not cheap: there are no ex ante rents to seize. Post hoc, it is possible to grab value from the financiers — capital expenditures are what drive up nuclear’s costs — but that would serve only to disincentivize reactor construction.

As a disincentive, however, a 10% revenue tax is a lousy one. First, most of the costs can be passed on to consumers: electricity demand is not very elastic. Second, regulators can prevent those costs from being passed on, but regulators can also stop nuclear power plants from being built. Heck, almost any policy uncertainty can stop a nuclear power plant from being built. In short, using a tax to disincentivize reactors is either ineffective or unnecessary.

So, why?

The key feature to note is that the revenue from the tax will go to local governments, not the federal authorities. It is actually a way to build local support for reactors.With the tax, localities will have some skin in the game.

In fact, that was how they did things in Japan.

In 1974, Japan created a special purpose tax on electricity. The government funneled most of the revenue into Electric Power Sites Account, which went to local governments that allowed power plants to be built in their jurisdictions. Most of those plants, not surprisingly, turned out to be nuclear. Between 1997 and 2007, 68.4% of Electric Power Sites Account grants went to nuclear power plants, against 27.3% for thermal power and 3.9% for hydroelectric.

To give an example, seven Tepco-owned nuclear re­ac­tors in Kashiwazaki City in Niigata Prefecture in western Honshu generated cumulative amounting to ¥113.3 billion from 1978 to 2009; the combination of central grants and sub­sidies (plus direct taxes on Tepco)], accounted for 34.5% of Kashiwazaki City’s revenue.

The Japanese designed the system to reduce local opposition to new plants. The government front-loaded the subsidies so that most of them went to the local government between the start of construction and five years after beginning operation. That gave localities strong incentives to approve new plants in order to prevent a decline in public revenue.

By 2011, parts of the Japanese business press were calling the subsidy system a “drug” for local governments and plant neighbors. Of course, that was the intent! It took the Fukushima disaster to change public opinion.

It remains to be seen if Brazil will be as successful in creating a constituency for nuclear power. There are a lot of differences between the two nations, not least of which that Brazil plans five new reactors over the next decade (at best!) while Japan rolled out 35 over the ten years following the 1974 law. But it could work. As long as regulators let utilities pass on the cost of the tax — not a certainty in Brazil — then a tax on nuclear power designed to promote nuclear will be an ingenious step in the never-ending battle against NIMBY.

Things happened before the Internet, really

 Enough, already! Now Steven Walt has joined the ranks of the people stunned by the effect of the internets. “A combination of modern mass media (Al Jazeera, the Internet, email, Twitter, etc.) has clearly played a major role in driving the pace of events.” I could handle this kind of thing from 20-somethings who don’t remember when you had to wait for a letter to arrive in the mail. But Steven Walt?

I am at a loss as to why people keep coming back to the Internets. Here is a chronology of recent events:

Dec. 17 - Mohamed Bouazizi sets fire to himself in Sidi Bouzid, Tunisia.
Jan. 04 - Bouazizi dies of his burns. 
Jan. 14 - After days of riots, President Ben Ali flees to Saudi Arabia.
Jan. 22 - Protests in Algeria.
Jan. 23 - Protests in Yemen.
Jan. 25 - Protests in Cairo.

And here is an even more impressive and more rapid chain of events:

Feb. 22 - French government bans protest meetings. Riots break out.
Feb. 23 - Prime Minister Guizot resigns.
Feb. 26 - King flees to Britain.
Feb. 27 - Protest marches in Germany. Governments give into demands.
Mar. 13 - Riots flare in Vienna. Metternich resigns.
Mar. 15 - Mass demonstrations in Budapest.
Mar. 18 - Demonstrations in Berlin.
Mar. 20 - Uprising in Poland.
Mar. 31 - Constitution drafted for Germany.
Apr. 08 - Revolt in Moldava.

The difference? The first group happened in 2010-11, and the second in 1848. But somehow that has gone right into the memory hole. I am flabbergasted that the Brazilian, Philippine, and Chinese events of my living memory seem to have been forgotten. I am surprised that nobody seems to mention 1968. But I really stunned that 1848 has been lost in the frenzy to declare how super marvelicious the internet is for freedom.

I am making a strong argument here: if the internet had been magically shut down on December 17th, events would have proceeded in much the same way. News travels and people organize in ways that do not involve modern electronic communication.

And that is why Egypt’s internet shutdown is not having much effect. Except in surprising the more breathless techno-evangelists.

Tarantino, decoded

 Courtesy of my good friend Helena Lellis, this is one of the most brilliant things I have seen in a long while. Highly entertaining, and almost enough to fill the vasty gap left in my life now that the World Cup is over. Give the two Brazilian guys who came up with it a major movie contract right now.

This plus the Yankees beating Tampa 5-4 on the day the Bleacher Creatures hold off on making the roll call in honor of the death of George Steinbrenner makes for a pretty good weekend. Not last weekend, no, but not bad.

As for the death of the Steinbrenner, see here. It makes being a fan easier. I predict more Yankees dominance in the coming decade. Not that it would be hard to outdo the last one.

Ai spic inglich gud

 English spelling is very difficult. So, as my friend Helena Lellis has discovered, the language metamorphosizes in ... uh ... interesting ways when it hits Portuguese.

 

Now, Spanish and French spelling are not that difficult, so misspelling every single item on the menu was quite the accomplishment.

 

Of course, it isn’t clear that Portuguese spelling is all that easy either:

 
Bienvenidos al régimen de nuestros futuros jefes supremos brasileños.

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?

The clock, unbeaten

  President Arias of Costa Rica just announced that his government will recognize the results of the Honduran election.  President Obama has been saying the same since the half-collapse of the U.S. attempt to broker a compromise, but now that someone of Arias's stature has signed on, it is pretty much over for Zelaya.  The clock will run out. 

 
The U.S. has handled things as well as could be expected.  For all my expressed (and ironic, for those of you who didn't pick that up) frustration at the lack of American power in Honduras, the truth is that Washington could have been much more muscly and forebearing.  It is a good thing (for the United States) that we were not. 

Brazil, not so much.  When it comes to the politics of energy, investment, and cross-border crime, the Brazilian administration has been very good at speaking softly and carrying a big stick.  When it came to a coup outside the country's normal sphere of influence, reverse it.  It wasn't bad until the declaration that they wouldn't recognize the elections, at which point it became pretty clear that Brasilia did not have much of a plan.  Moral stances are well-and-good, but absolute moral stances can do harm to the position that they are meant to support. 

Add the strange decision to invite the Iranian president for a visit to the Honduran imbroglio, and one has to wonder if Lula really knows how to play this game at the level his country has found itself at.  To be fair, he's been very good when his country's interests have really been at stake, so maybe I should stop complaining. 

Brazil annexes Venezuela

 OK, not quite.  But our friend Chávez just did something that will put meat on the bones of his somewhat jokey promise not to expropriate Brazilian investments in his country.  What did he do?  He agreed to plonk around $4 billion into a refinery located in the Brazilian state of Pernambuco. 

Refineries are notoriously hard to liquidate.  The market is thin; prices for similar installations in the United States have jumped around by a factor of ten.  This is part of the reason why the big international oil companies continue to operate them, despite low margins and big liabilities.  It's also why PDVSA has been unable to unload Citgo for a reasonable price, despite the fact that President Chávez would clearly like to do so.  Add in the fact that PDVSA will be a minority shareholder with Petrobras, and there's no way it's going to get out of this investment easily.

Which means that the Bolivarian Republic just gave the Brazilians a big fat $4 billion hostage.  More so since (1) the only other reasonable outlet for Venezuelan crude is in the United States; (2) civil law, unlike common law, allows Brazilian companies to sign contracts that spell out a predesignated list of damages to be paid should the government take certain actions; and (3) Brazil is basically independent of foreign oil, and therefore well-positioned to exercise a threat to embargo Venezuela.  Viva the not-empire!

It is quite brilliant.  I stand in awe.  How did he sucker Hugo in that one?  Is the prize of Mercosur really enough?  Then again, our Bolivarian friend seems to have just signed a contract paying a Spanish company a ridiculous amount of money to build a CCGT plant, so who knows?

Passing the buck

  Most of you probably know by now that Manuel Zelaya has returned to Honduras and taken up residence in the Honduran embassy.  That is unexpected, but neither good nor bad.  What is both unexpected and bad is the reaction from the United Nations:  Secretary-General Ban Ki Moon just declared that the U.N. “does not believe that the conditions exist to organize credible elections that will bring peace and stability.” 

The good thing is that Lula is going to meet with President Obama in Pittsburgh to discuss the crisis.  If the U.S. is smart about this, and I have every reason to believe that our government will be, then we will defer to Brasilia.  It is probably true that our beloved hemisphere still needs a hegemon to preserve stability and insure prosperity.  It is also true that it would be better for my beloved country that said hegemon (a) not be the United States; (b) be a country a lot like the United States; and (c) be at the end of the day somewhat less powerful than the United States. 

Considering the low import of this crisis, I would once again recommend exactly the opinion what probably cost me my shot at a State job that I would not have accepted:  the United States does not need a Latin America policy ... as long as Brazil has one.

Then again, I have been blindsided by the possibility that this crisis might outlast the Honduran election.  So I ask you, gentle readers, what should Washington do about the situation in Honduras?  What should Brasilia do?

Brazilian magnaminity explained

  A while back, we discussed Brazil's decision to grant Paraguay a greater share in the rents from their joint hydroelectric project.  There were a number of excellent hard-headed reasons for the Brazilian government to do this, but we've just discovered another:  persuading the Peruvian government that it is worth getting into bed with Brasilia. 

Brazil is contemplating five hydroelectric projects in Peru that would cost about $15 billion and generate 6 gigawatts of power, 80 percent of which would go to Brazil.  That represents about 4½ percent of the country's current installed capacity.  The expansion will involve Electrobras purchasing Peruvian energy companies, something the Peruvian government won't accept lightly unless it trusts that it can negotiate with Brasilia.   After all, as things stand now, Brazil approaches its neighbors much as Teddy Roosevelt did:  it speaks softly, but it carries a big stick.  That makes people nervous.

By showing grace towards Paraguay, the Brazilian government showed Peruvians that it would be a reliable partner and take their interests into account, rather than using its power to take up all of the surplus.  We'll see if that attitude lasts (power corrupts and all that) but for now Brazil is managing the sudden and surprising emergence of its informal empire in South America with grace, aplomb, and plausible deniability. 

More high-speed rail in Brazil

  More on the Philippines will be forthcoming, but first we have news on Brazil's high-speed rail project, aka the TAV.  It looks like it will probably go ahead, with the first tenders out next month.  The route will connect Rio and Campinas via São Paulo, passing through both of the big cities' international airports.  (I don't know how the TAV will fit in with the planned express train between Guarulhos Airport and downtown S.P.)  The construction cost is estimated at R$34.6 billion, and operating costs are expected to be around R$214,000 per mile, with total running costs around R$1.1 million per mile. 

Currently around 7.3 million people travel between the two cities every year, 60% of them by air.  The planners expect that the TAV will immediately capture 3.5 million Rio-S.P. passengers.  By 2014, they expect that number to rise to 6.4 million, plus an additional 11.8 million travelling intermediate routes. 

Do those numbers make sense?  Let's ignore the S.P.-Campinas portion; if some part of the project is not going to get built, it'll probably be that one.  We have an estimated construction cost of R$27.9 billion.  Brazilian government bonds yield about 13% in local currency.  Inflation is running around 5%, so let's say a quick-and-very-dirty capex of R$2.2 billion.  Add to that an operating cost around R$0.3 billion per year.  So, total costs of R$2.5 billion per year, divided by 18.2 million passengers:  R$138 per passenger ... much less than the R$400 that the plane will cost you.  (On average, of course; you can get deals if you're lucky, but the flying experience in Brazil makes the U.S. feel smooth and comfy.)

For our American readers, R$138 is about $72; not an unreasonable number.  It is also probably an overestimate, considering as our capex estimate is unrealistically high and the Brazilians' own running-cost numbers are off the charts in international terms. The unanswered question, in my mind, is whether the system will attract 12 million people to take those regional trips. 

Even so, the numbers on this project look sensible, especially given the environmental benefits from getting people out of their cars and the economic benefits of freeing up space at the region's big airports.  And then there is the value of saved time.  This is a project that seems to work as a commercial proposition.  The positive externalities are gravy.  Unlike the Argentine tren a ninguna parte, the Brazilian TAV actually travels between two large and interconnected cities in a rapidly growing urban corridor. 

I am a passenger rail skeptic, more so in countries like Brazil, which desperately need things like cargo trains and school buildings.  But this doesn't seem to be just a World Cup prestige project (although there is that) but a fairly smart expenditure of public money. 

Maybe the future really will get to Brazil.  A bit late, but better than never.

Magnanimidade para Paraguai

  Brazil just renegotiated its energy relationship with Paraguay, to the tune of $240 million per year.  The Paraguayans will now be able to sell the excess capacity from the Itaipú dam at something “close” to the Brazilian market rates.  (The concept of a “market rate” for electricity isn't as simple as it sounds.)  The deal also cuts out the Brazilian middleman.  In concrete terms, the price they receive will triple.  Moreover, the Paraguayans will get a new $400 million transmission line, financed by Itaipú revenues.  In other words, the Paraguayans will pay for only half the cost.  Symbolically, Itaipú’s financial offices will now be opened to Paraguayan nationals, at least in theory, and the Paraguayan government will get to look at the books.  The agreement punts on Paraguay’s right to sell electricity to consumers in third countries.

$240 million is a substantial number for Paraguay.  It’s about 2% of the country's total GDP in 2007, 4% of its exports, and 11% of its government revenue.  That ain’t nothing.  On the other hand, it is pretty close to nothing for the Brazilian government. 

And what does Brazil get in return?  Well, Paraguay is has long been to Brazil what northern Mexico has recently become for the United States:  a source of lawlessness and smuggling.  

Given the new administration is friendly to Brazil, and about as trustworthy as any Paraguayan government in decades (heck, since Francia) more resources for it means more to be spent on, say, customs enforcement or law and order ... and yes, Brazil has and will continue to pressure Paraguay regarding law enforcement.  At some point in the future, the Brazilian government may want and need to turn Mercopol into a serious organization capable of operating inside Paraguay, and it will be extremely useful if Brazil is viewed as a helpful neighbor and not an imperialist aggrandizer. 

Plus, it gives Brazil an ally in its continuing attempts to turn Mercosur into a de facto Brazilian empire.  After all, Brazil wants to give the Parlasur more power, and Brazil plus Paraguay would have an incontestable majority in that body.

And it sends a signal to Bolivia:  last time, we warned you that we had a very big stick, and would peel away half your country if you got too obstreperous.  Now, we say there are benefits for cooperation.  Play nice, Evo.  In the inestimable words of Porfirio Díaz, “pan y palo.”

Canada, I tell you, if American governments were half as smart, y’all could kiss your sovereignty goodbye. Finland, aren’t you glad the Russians ain’t nowhere as slick?

Waterloo on the Choluteca?

  This is not helpful.  It isn't that I'd expect thoughtful foreign policy analysis from Senator DeMint, but holding up our ambassador to Brazil in order to try to get the Administration to oppose the policy supported by entire rest of the hemisphere does nothing for anybody.  Is there really a domestic return to this sort of posturing?

In my own fair and balanced way, however, I'll add that the absolutist stance recently taken by the Brazilian foreign minister is also not helpful.  Like Senator DeMint's calls to have the U.S. back Micheletti, Celso Amorim's demand for “the unconditional return of the deposed Honduran to the presidency” is also aimed at some domestic audience.  I suppose that the Brazilians should enjoy their ability to make such statements unworried about their international consequences; with the country's relative power growing, and the U.S. slowly withdrawing, they won't have that freedom much longer.

The Honduran government just expelled Venezuelan diplomats.  It's sort of funny, in a way, since those diplomats didn't recognize the Honduran government to begin with.  That, at least, is comic opera.  What is more worrisome is the recent statement by said diplomats that they aren't leaving.  Meanwhile, Zelaya is in Nicaragua making vague threats and stirring up some anger on the part of that country's beleaguered opposition. 

I think the pressure is going to get ratcheted up.  One possible sanction that the U.S. could quietly impose without tanking the Honduran economy would be to suspend business and tourist visas.  Of course, what we don't know is whether the block to a compromise is on Micheletti's side or on Zelaya's ... and without that knowledge, it's hard to figure out the best way forward.

UPDATE, JULY 22:  The recent compromise talks have collapsed.  The Supreme Court appears to have rejected a proposal put forward by a representative of the Micheletti government.  Then again, the attorney-general has issued a 16-page indictment against Manuel “Mel” Zelaya.  Congress has approved a budget of $5.9 billion, eight percent lower than last year.  It counts on $554 million in foreign financing; it isn't clear how the sanctions on Honduras by multilateral lending institutions will affect that, since they seem to be counting on around $100 million in such financing, and access to other private funds is often contingent on lending by the multilaterals. 

For those of you who want a run-down on what to read:  El Heraldo is the conservative newspaper.  Consider these two simultaneous headlines:    “People’s bloc opts for neighborhood protests” versus “Today, great march for patriotism and valor.”  No points for guessing which favors what.  La Tribuna is a little more fair and balanced, although it is also fairly conservative by American standards.  El Tiempo is okay, I'm not thrilled by its coverage. 

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?

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.

The country of the future

  Randy McDonald pointed out this odd article about Brazil in the Globe and Mail.  The author lauds Brazil as a particularly good exemplar of economic management over the past few years, while blasting Canada: 

“On the other hand, Canada should have done much better too: Our economy grew dramatically, fuelled by a new resource boom, and our banks stayed on a short leash, so none failed.  But for the most part, we were among the champagne-sprayers. Our wealth fund, which shamefully lies in provincial hands, is needlessly tiny. And a decade of lacklustre government spending by both parties has robbed us of the chance to become a world leader: Our measures of equality and poverty are no better than they were at the beginning.” 

To which I respond:  bollocks!  (I like that word.  I don't think I've ever actually spoken it.  I don't think anyone in the United States has actually naturally spoken it since 1892, although I have been known to say “bollixed up.”)  Brazilian economic management has been fine, but not exemplary, whereas Canada has done everything it was supposed to do. 

Point #1:  yes, Brazil paid off its debt to the IMF.  Very nice ... but Canada never had any IMF debt to pay off.

Point #2:  yes, Brazil reoriented its social spending to bring real results in improving public health and reducing malnutrition ... problems Canada does not have.

Point #3:  Between 1998 and 2008, Brazil managed to hold its net federal debt to 25% of GDP.  It also managed to redenominate most of its debt into its domestic currency.  Both excellent accomplishments.  But Canada's debt was already denominated in its own currency, and in the same period Ottawa reduced the federal debt from 63% of GDP to 30%, a much more impressive accomplishment, and exactly what the author accuses Canada of not doing.   

Two more points below the fold.

Senates

 There is a debate going on downblog over the United States Senate. 

Let’s take a brief tour of Senates around the hemisphere. (To which we’ll include the Philippines, due to its political history.) The American example set in 1787 proved very influential, particularly for the larger nations of América. Did their adoption of an upper house with equal representation for federal subunits make sense? Did they keep it? 

Argentina: The Argentine constitution gives each province three senators. That’s obviously undemocratic. Argentina, however, has a historical justification for the practice. Like the United States, the Argentine Republic began as a federation of independent states. Unlike the United States, the states that formed the Argentine Republic had very little autonomous political history; most had been created from city councils that simply declared independence in the wake of the political chaos that enveloped South America after 1808. After a great deal of civil war, including the loss of Bolivia, Paraguay, and Uruguay, provincial forces decisively defeated Buenos Aires in 1852. A convention that excluded representatives of Buenos Aires hammered out a constitution the next year. That same constitution has remained in effect since then, at least juridically. 

The convention accepted equal provincial representation in the Senate in order to limit Buenos Aires’s dominance. It also had senators elected for nine-year terms by state legislatures and required them to be able to show a minimum annual income of 2,000 pesos. (That’s approximately US$67,000 today in terms of purchasing power.) Thankfully, later amendments got rid of those latter features, but equal representation remains. In short, while there isn’t really any good reason to keep the apportionment of the Argentine senate, the institution has deep roots in Argentine political history. The resemblance to the U.S. case is quite strong.

Brazil: The constitution of the Federal Republic of Brazil gives three senators to each state. The historical roots of this institution, however, are rather shallower than in Argentina or the United States. The 19th-century Imperial senate did not provide equal representation for the provinces. When the empire fell to a military coup in 1889, the new leaders had to find ways to convince provincial elites to support the new government. One of the ways that they did so was to provide the provincial governments with equal representation in the upper house, in open imitation of the American example. (In fact, the constitution of 1891 named the country the United States of Brazil.) Brazil has gone through multiple constitutions since then, but the institution of the Senate has remained. Unfortunately. 

Mexico: The constitutions of 1824, 1857, and 1917 all granted equal senate representation to each state. There was never much historical justification for doing so, other than imitation of the United States. (Mexican states gained much autonomy during the 19th century, and several declared independence, but that came about after the end of Spanish rule.) Since the country’s governments rarely ruled by the constitution, however, legal stipulations didn’t matter. Under Porfirio Díaz, for example, all legislative votes were unanimous after 1893. Nor did senators necessarily come from their putative state. Under those circumstances, the number of senators per state didn’t make a difference. The Revolution didn’t change that. Under President Álvaro Obregón, for example, recalcitrant legislators were often shot. Then came the creation of the PRI, with its iron-lock over politics, and ‘nuff said. Constitutional stipulations didn’t become more important than party rules until the 1997 midterm election. 

Mexico, however, is now ruled by a democratic government, and the constitutional rules matter a lot. As part of the transition to democracy, Mexican politicians amended the constitution in 1993 and 1996. In theory, the reforms granted each state four senators, up from two. In practice, the reforms created an upper house selected by a weak form of proportional representation. The winning party in each state receives two seats. The runner-up receives one. The remaining 25% of senate seats are then allocated to each party in proportion to their popular vote share. In effect, the Mexico’s current senate keeps the form of equal representation for each state while abandoning much (but not quite all) of the substance. 

The Philippines: The Philippine Autonomy Act of 1916 created a 24-person senate. The act grouped the country’s 50 provinces into 12 districts, each of which received two senators. The 1935 constitution of the Philippine Commonwealth dumped that crazy system, but selected something even crazier in its place:  at-large Senate elections. That is, every voter writes in 12 names. The top 12 vote-getters then become senators for six years. The exercise is repeated every three years, making for a total of 24 senators. The 1987 constitution of the Philippine Republic retains the feature.

The only polity that I can imagine justifiably imitating the United States, Argentine Republic, and Federal Republic of Brazil in the 21st century is the European Union. Then again, I may suffer from a lack of imagination.

Bolivia versus Brazil

  On May Day, 2006, Bolivian troops occupied the country's natural gas facilities.   

Petrobras, Brazil's national oil company, owned the largest stake in the fields and Brazilian industries depended on Bolivian gas.  Yet Brasilia reacted quite calmly.  Why?

Simply because Bolivia had no leverage.  The “nationalization” raised taxes on the gas companies (Petrobras, Repsol, British Gas, and Total), but changed nothing else.  Brazil wasn't happy about losing the profits, of course (the Federal Republic of Brazil owns a 55.7% stake in Petrobras), but all Brasilia really cared about was retaining access to the gas at a reasonable price.  And that's what they got:  the red line shows the date of the nationalization:  the big run-up in price preceeded it.

Petrobras and Bolivia had a “take-or-pay” contract, in which Petrobras promised to purchase no less than 65% of Bolivia's daily capacity, even if they couldn't use it, at rates based on this (get ready for it):

The price per million BTUs, PGt = 0.475 × [0.5 × (FO1t-1/FO10) + 0.25 × (FO2t-1/FO20) + 0.25 × (FO3t-1/FO30)] + 0.5 × PGt-1, where FO1 is the price in $/ton of fuel oil with a 3.5% sulphur content (aka, “Cargoes FOB Med Basin Italy”), and FO2 and FO3 are the price of fuel oil with a 1.0% sulphur context (aka, “U.S. Gulf Coast Waterborne” and “Cargoes FOB NEW.”

Another way of putting it is that the contract stipulated that if oil prices doubled, it would take two years for Bolivian gas prices to increase 97 percent.  Which doesn't quite seem to have been what happened, since crude oil prices don't quite track fuel oil and Brazil sometimes needed to overpay when it couldn't use all the gas on offer, but close enough.

In other words, the revolution turned out to be something of a dud.  Petrobras kept its assets and its contract.  Bolivia did get more revenues but a tax hike didn't require troops.  Political theater, it was.

Of course, whether it was good theater depends on your seat.  Investment in the gas industry has collapsed, and Petrobras now prefers to access higher-cost gas deposits at home ... not because of the taxes, but because of the uncertainty.  Similarly, the dramatic way in which the tax hikes were guised as a nationalization meant tossing out the old revenue-sharing agreements with the provinces, and thus the current autonomy crisis.

It's not clear where the country goes from here.  I had lunch with a Bolivian and a Brazilian who joked about civil war.  The Brazilian was sanguine until the Bolivian suggested that eastern rebels might cut off the taps.

“No, you can't have a war,” joked the Brazilian, “until we get the other gas projects going. Then we will happily sell you weapons.”