The Power and the Money

Observatorio argentino 49: Post-election roundup

The left-wing ruling party in Argentina appears to be in the middle of a complete collapse.

Background

The party, called the Frente de Todos (or “Everyone Front” or “Front for All” both of which sound as clunky in English as it does in Spanish so don’t ask me to explain the name choice) is a coalition of all the old Peronist parties. Peronism is a big tent without much coherence, but it would not be inaccurate to say it is currently divided between moderates and a more radical faction led by Vice-President Cristina Fernández de Kirchner, aka “CFK.”

CFK and her followers are genuinely radical — a long time ago I met the current Governor of Buenos Aires province, Axel Kicillof. He seemed to be the real deal and I have to admit that I have some respect for the way he dealt with the country’s foreign creditors.

But CFK herself is also spectacularly corrupt. She’s under a legal cloud, protected by her position as Vice-President.

The current president, Alberto Fernández (no relation) is a moderate. Rather than fight it out with him for the nomination in the 2019 primary — and thereby risk losing, and thereby risk jail time — she joined him on the ticket as Veep.

The Election

So, as you know, the Frente got hammered in Sunday’s primary elections. The opposition held some actual primaries; the Frente for the most part did not. What the election was for the Frente was a preview of what the real election in November will look like, and it was bad.

For a good overview of the election (well, besides mine, ahem) see Maia here. I like her take on Javier Milei, a seriously batshit insane libertarian candidate for Congress. Seriously, watching the stunned look on an Argentine reporter’s face as he discovers that a woman in one of the capital’s poorest neighborhoods voted for Milei is priceless.

Votante de Javier Milei en la Villa 31 pide que se terminen los planes sociales, "le sacan al que está en blanco para darle a gente que no quiere laburar". Estamos frente a un evento histórico.pic.twitter.com/33OxJIqbth

— Pregonero 🗽 (@PregoneroL) September 15, 2021

But Milei is an aside, at least for now. The key question here is why the Frente did so badly.

For the answer to that question, you can really begin and end with Covid. Massive lockdowns failed to prevent its spread — Argentina did not become Australia. The economy failed. Then the government botched the vaccination rollout, getting into a food fight with Pfizer over legal immunity. Finally, President Fernández got into some Gavin-Newsom-level bad optics for flouting his own rules. Leticia Abad and I are going to try to write a more rigorous paper about the election, but Maia has a great overview.

The Normal Reaction

As I expected, the Frente immediately rolled out a slew of populist economic policies intended to provoke an electoral recovery by November. Minimum wage up 10%. Zero-percent government loans to wage laborers. A US$32 bonus to senior citizens. One that really annoys me: natural gas subsidies between 30% and 50%. One that doesn’t: lots of construction. (See right for a picture of a commuter rail line they rolled out in 2019 at a speed that would impress China and makes the U.S. look very very sad.)

Argentina also has a small universal basic income (IFE) put in place during the Covid recession. The government will now means-test it but also make it bigger for poor families.

And from where will come the cash? First, they intend to go tell the IMF to screw off and forget about getting principal payments for a while. (Interest will be paid, so no default, and honestly the IMF has rolled over for greater demands in the past.) Second, they’ll keep on printing more money and transferring it to the Treasury:

Hey, it could staunch the bleeding by November, and to be honest the economic cost probably won’t be that high.

The Crazy Reaction

Only, well.

CFK seems to think she’s actually running the administration from behind the scenes. She demanded that the actual President fire a whole bunch of his cabinet and put a bunch of her people in place.

And then CFK’s achichincles started yelling that the President is actually a “squatter” in the Casa Rosada. One congresswomen put it this way. “He’s renting the office, he doesn’t understand that he’s renting. The owner of the votes, the legitimate owner, the owner of popular support, the owner of the base that sustains this government and one that put him there is Cristina! Alberto Fernández couldn’t dream of even being an alderman.”

You’re not supposed to make the subtext into text when you’re trying to run things from behind the scenes!

If CFK was really pulling strings the way that, say, Plutarco Calles did back in the day in Mexico, well, then she wouldn’t need to send messages telling the nominal President to fire people. She would just wave a finger somehow and the people would get fired.

But although she is many things but she is not a Plutarco Calles. President Fernández isn’t going to quietly back down, because CFK isn’t really in control and she has given him no graceful way to give her what she wants. All she is managing to do is make the Peronists look really really bad to swing voters.

It is possible seeing try to CFK bludgeon her way back into the driver’s seat will inspire Peronists who stayed home this Sunday to make their way to polls to support the Frente in November.

But how likely is that? First, as I mentioned, you can’t replace candidates now: unless enough the Frente candidates on enough slates proclaim their loyalty to Cristina, any votes for the Frente will be votes for Alberto’s people. “Vote for Alberto’s useless incompetents because you need to do that in order to vote for Cristina” is not an inspiring message.

And are there really all these uninspired Peronists sitting out there? It is true that turnout collapsed during the primary. But … Covid, maybe? And maybe people are realizing that PASO isn’t a real election?

In short, I’m not seeing much here that makes it look like November will be any better for the Frente and I am seeing a lot of things that could make it look much much worse for them. Shiny new infrastructure notwithstanding.

Fear and loathing in Mexico

What would I fear if I were an investor in Mexico? (Oh, wait, I am!)

It is plausible to say, “Not much.” For all the ups-and-downs of AMLO’s first six months, country risk remains low. In fact, it remains as a low as Brazil. Now, that may be a low bar, but wealthy investors love President Bolsonaro. I heard one hedge fund manager describe him as “my guy.” They would not describe AMLO as “their guy.” But they are not running away.

And it makes sense that they would not run away! The country is in great fiscal shape; it can afford the refinery stupidity (which won’t happen) and the Tren Maya nonsense (which might). It has been picking up manufacturing fleeing China for years (as we pointed out back in 2013); now it is poised to benefit even more from the great trade war. And if you are afraid of taxes, relax. AMLO’s party has called for tax hikes, but AMLO himself has been repeatedly clear that they will are not on the table: “Income taxes will not go up. We are going to keep the same tax rates in real terms, the same payments. New taxes will not be created.”

AMLO knows that he benefits from the credit that international markets give his country; if foreign investors treated Mexico the way that they treat Argentina, his plans would be ruined before they started. 

So what is not to like?

Well, I would worry about one thing: becoming a sacrificial lamb should AMLO need one. 

If (when) things go bad, even temporarily, he will need a monster to destroy. What better than a rich company? As long as his proxies can credibly claim in elite circle that it was a assault on an organization that specifically done did wrong and not an attack on the investor class, then he can have the best of both worlds. 

This is now happening.

Two days ago, the AMLO administration has moved against Altos Hornos de México (Ahmsa), freezing its accounts. The Mexican government has evidence that Ahmsa paid a $3.7 million bribe to a shell company owned by the infamous Odebrecht. Yesterday, Spanish authorities detailed Ahmsa’s CEO. Today, the Mexican government opened a corruption prosecution against Emilio Lozoya, the former Pemex CEO. 

To be clear, the prosecution is long overdue. It is astonishing that the Odebrecht scandal, which has toppled governments elsewhere, has been basically invisible in Mexico, despite Odebrecht testimony about bribes. There is fire behind the smoke. 

And while Ahmsa and Pemex are clearly in the wrong, the timing of the announcement and the decision to prosecute are clearly political. 

Meaning an investor’s primary fear should not be macroeconomic. Nor should it be contract enforcement. Rather, it should be that the government might choose to single them out in order to satisfy short-term political needs.

Fortunately, AMLO has more than enough strong domestic monsters to slay that he is unlikely to need to kill weak foreign ones. But for large investors, the danger is there ... especially if they did business with the previous PRI government with its spectacular levels of corruption. 

¿Una maquina Morena o una maquina morena?

There is no doubt that AMLO intends to construct a new political machine. The question is whether doing so will degrade the quality of Mexican democracy or Mexican governance. (These are correlated but not the same.) In a couple of different posts, I am going to make the case that AMLO’s machine is unlikely to make either situation much worse — because both Mexico’s democracy and its governance are already highly degraded. Things can always get worse, but AMLO is unlikely to make it so.

For this post, I want to park questions about Mexican democracy under AMLO and consider what might happen to the quality of Mexico’s governance.

Let’s ask, what does a democratic political machine do? It doesn’t blatantly steal elections: that’s a dictatorship. But democratic machine politics is different in kind from regular interest group politics. Interest group politics works by promising veterans higher benefits or auto companies a higher tariff; conversely, it works by cutting veterans benefits or increasing taxes on gasoline. Machine politics works by offering Josefina the Welder a job or Ford Motor Company a special break; conversely, it works by stopping Josefina from getting a mortgage or launching audits against Ford executives.

Successful machine politics does not require stolen elections, but it makes opposition harder to organize, increases the autonomy of machine leaders and weakens democracy’s ability to hold officials accountable or translate public desires into public policies.

The PRI under President Peña used machine politics to implement energy reform in 2013. In order to pass and implement the reform, the Peña administration needed the support of the national oil workers’ union. At the time of the reform the oil industry provided 4% of all public revenue and supported much of the economy in the states Veracruz and Tabasco. A crippling oil strike could sink the party’s position in the midterms or next presidential election.

How to get union support? First, threaten the union leader. Carlos Romero Deschamps happened to be a sitting PRI senator and “enjoyed” second-place on the Forbes list of the ten most corrupt Mexicans. On a monthly salary of US$1,864, Deschamps managed to accumulate a $1.5m “cottage” in Cancún, a son who drove a $2m Ferrari, and a daughter who liked to post Facebook images of her jet-setting her three English bulldogs around the world. In other words, a serious corruption investigation would toss him and his children into jail.

President Peña made it clear to Deschamps that he had no choice but to go along with the reform in the most obvious way: in February 2013 he took the powerful leader of the teacher’s union, Elba Esther Gordillo — number 1 on the Forbes list and head of the New Alliance Party — and had her arrested on anticorruption charges. Gordillo was fortunate enough to be over 70 years old and therefore be eligible for house arrest instead of prison — she owned a rather nice apartment in Polanco, Mexico City’s equivalent of the Upper East Side — but the message was clear. Deschamps brought the union on board with reform.

Alternative facts are not an American monopoly: in a rather startling 2014 declaration, union leader Carlos Deschamps declared that energy reform would bring no lay­offs. Even more startlingly, Deschamps denied that mass firings were taking place even after they began. According to him, only oil workers employed in private companies lost their jobs.

Source: Abad and Maurer (2018).

Unfortunately, the reality was otherwise. Reform let Pemex lay off almost 30,000 employees in a three-year period. (See above.) Layoffs hit unionized and non-unionized workers alike; in fact, the share of union workers declined slightly during the mass layoffs of 2015. But the machine kept that from triggering strikes by (1) concentrating the layoffs in places that were already voting against the PRI—i.e., Tabasco and Veracruz—where workers did protest but the protests could be controlled; and (2) making sure that wages went up dramatically for those workers who kept their heads down, kept their jobs, and accepted the reforms. (See below.)

Source: Abad and Maurer (2018).

Of course, you would be right that this particular exercise of machine politics removed most of the putative fiscal gains from allowing the layoffs. The chart to the right shows payroll costs as a percent of Pemex revenue: they did not fall. 

But that’s how machine politics works. Rents are generated and distributed on one end; individuals and individual group leaders are punished on the other.

Absent the subversion of democracy, it’s hard to see how AMLO could build a machine more effective than the PRI, circa 2012-18. (To reiterate, the PRI circa 1929-1997 was an institutionalized dictatorship masquerading as a political machine, not a genuine democratic political machine.) There is no obvious source of rents that the PRI did not already tap. There are places that have improved — say, competition policy — but where it would be hard for Morena to loosen the rules without pushback. Elsewhere, things are not good, as this OECD report on electricity procurement shows. In that sense, things cannot really get worse.

And a democratic machine, no matter how efficient, can’t stay in power if it really lets things go to hell. The PRI discovered that this year, losing even its heartland in the town of Atlacomulco, Mexico State. In other words, straight-up machine politics means more of the same in Mexico and is self-limiting if it delivers truly bad results — albeit less self-limiting than in democracies free of machine politics.

Morena will try to build a machine. But building a machine is hard and machines themselves do not guarantee that a bad government can remain in power.

The real worry, I think, is democratic backsliding. That is, machine politics plus institutional changes to make the vote less effective and hamstring the opposition. Without democratic backsliding, you might get a maquina Morena, but you won’t get a dark machine.

Thoughts?

Criticism of the Trump letter to Panama is missing the point

The Trump Organization recently sent a letter to the president of Panama in regards to a legal dispute over a Trump-branded property. The letter listed some putative irregularities in the legal proceedings and asked the President of Panama to intervene lest his government be held responsible for denying justice to the Trump Organization. The threat, made quite explicit, is that the Trump Organization would then haul Panama up in front of a panel at the International Center for the Settlement of Investment Disputes (ICSID).

Vox wrote the following:  “Even if Varela decides to do nothing about this specific dispute, he could now feel obligated to curry favor with Trump in other ways to make up for the issue and keep US-Panamanian relations stable. That could lead to his government approving specific policies to placate Trump or perhaps covertly acting to ensure that the Trump Organization secures favorable business deals in Panama in the future.”

In other words, Vox and others fear that President Trump’s personal connection to a private venture means that American foreign policy is being perverted to produce private gain. 

So is that what is happening? Is this a case of the Trump Organization using the fact that its principal is also President of the United States to muscle a small country for private gain? Well, to know that you need to answer three questions:

1. Would the Trump Organization have sent the letter if Donald Trump weren’t President of the United States?
2. Will the Panamanian executive react differently to the letter than it would have if Donald Trump weren’t President of the United States?
3. Will the United States government take actions against Panama that it would not have taken had Donald Trump not been President of the United States?

The answer to the first question is “yes.” As a colleague of mine at Brookings wrote:

Details of the case a bit unclear, but foreign investors complaining they've been mistreated in local courts (and that this reflects poorly on investment climate) is pretty common... More generally, aggrieved investors will complain to anyone who will listen

— geoffrey gertz (@geoffreygertz) April 9, 2018

The answer to the second question so far is, “We don’t know yet.” But probably not. President Varela does not have a lot of power to intervene and the Trump Organization does not have a particularly good case to bring to ICSID. 

Which brings us to the third question. Will the Trump administration use the vasty power of the United States to twist Panama’s arms? To which the right answer is: probably, but what else is new? I wrote an entire book about the rather egregious ways American administrations of all ideological stripes twisted the arms of small countries in fights with American investors. The Obama Administration did that to Argentina when its government tried to ignore an ICSID decision. (Obama later went after Argentina on behalf of U.S. creditors.) And Geoffrey Gertz has found that American investors still rely on official U.S. support to get their way with foreign governments. If the administration leans on Panama to aid the Trump Organization it would be following a long-standing American tradition.

To be honest, the Trump Administration is more likely to fail at getting its way than earlier administrations. First, the current President speaks so loudly and is so unpopular that it would be hard for any foreign government to easily acquiesce. Second, the current President is unpopular at home and actions that might have slid under the radar will get much play. 

So stop worrying that Trump corruption will pervert American foreign policy or create some sort of American empire run for the benefit of an investing class. That ship sailed in the 1890s.

What you should worry about is not Trump leaning on foreigners to benefit his private businesses. You should worry about foreigners favoring Trump’s private businesses to benefit their interests. There is evidence that the Philippine government is doing exactly that and we all know about the Russians.

I doubt that President Varela will do much in this particular case (not least because he can’t do much) but others in other countries will. The tail will wag the dog.

Does small-scale bribery matter? An empirical puzzle

Transparency International has released its new report on corruption in Latin America. One of the things that I like about the survey is that it asked whether respondents have personally had to pay a bribe. 

Let’s call it “retail corruption,” as opposed to “wholesale corruption” paid by businesses or stolen from public coffers. In theory, that strikes me as a more accurate measure than simply asking about overall perceptions.

The problem is that the survey gives some unexpected results. Is Trinidad really that clean? If it is — and it very well might be, asking people I know reports very low levels of retail corruption — does that imply that the retail corruption does not matter? After all, Trinidad suffers from very high rates of wholesale corruption. So does Brazil. Conversely, Chileans and Uruguayans report levels of retail corruption on a par with their Paraguayan and Argentine neighbors ... but corruption appears to play a much smaller role in economic life in the former two.

Consider Uruguay. 22% is a very high number of people needing to pay a bribe for public services! (Albeit not to use the courts or public utilities.) But in overall corruption perceptions it is between Japan and Estonia, slightly less corrupt than France. The country certainly does not feel particularly corrupt on the ground. Of course, it is consistent with the survey that Uruguay should feel much less corrupt than Mexico; but it also feels much less corrupt than Brazil! In a brief trip to Brazil, I came directly in contact with venal officials several times; equally brief trips to Uruguay have yielded nothing. 

Anecdotes are dangerous, of course. But the disjunct between the data and broader survey results, as well as personal experience, makes me wonder. Either the survey cross-section fails to capture actual differences or small-scale bribery is less damaging than I would have thought.  

So many questions, so little answers. I wish somebody would take the bribery survey and include the United States and Canada, to give us a baseline. 

Schneiderman ain’t playing

We called it. Robert Mueller has announced that he is teaming up with Eric Schneiderman, the NYS attorney general. Right now the cooperation is about Manafort but we expect future announcements.

As we pointed out, President Trump can only pardon people for federal offenses. So if Mueller finds evidence of violations of New York laws, Schneiderman and he can threaten the perpetrators with state prosecution unless they cough up more evidence. 

A related question: can it really be true that Arpaio has broken no state laws? I know there have been multiple civil suits; did he comply with all of them?

Painting a scary picture for President Trump: civil asset forfeiture edition

In comments, NYCMT wrote the following: “You know what might survive a presidential pardon? A civil asset forfeiture claim.” I have now talked to him in depth about what this meant.

The federal government has a lot of power to seize property involved in the commission of a crime. 18 USC 981 (a)(1)(A) states “The following property is subject to forfeiture to the United States: any property, real or personal, involved in a transaction or attempted transaction in violation of section 1956, 1957 or 1960 of this title, or any property traceable to such property.” Sections 1956 and 1957 deal with money-laundering, tax fraud, and dealing in assets that are the result of crimes. 

The key is that civil forfeiture is undertaken against property, not an individual! You can pardon a person from a criminal act but you cannot pardon their property against a civil judgment. Moreover, forfeitures are undertaken under a preponderance-of-the-evidence standard. Since a pardon would essentially admit as true all of the facts of the criminal charges involving the property, a civil asset forfeiture proceeding would be a slam dunk for a federal prosecutor.

NYMCT laid out the following hypothetical. On the last day of the Trump presidency‎, right before the Senate takes its vote on the articles of impeachment reported out of the House, Donald Trump signs several hundred pardons, not least for himself, but also for his associates in the Trump Organization, his counterparties in a number of different transactions, and the principles of all financial firms whom may have been involved in any of his financial transactions. The pardons cover not only any financial crimes but all violations of the various sedition, conspiracy, and obstruction of justice statutes.

Well, if the pardons specify all illegal conduct against the United States then they become open ended gateways to factual stipulations in later court proceedings. If one single transaction involves the Trump Organization, even as an intermediary, then you have trouble. I dunno, imagine a purchaser of first resort for a condominium in Trump Tower funded through a secured credit facility that relies on underlying assets like Trump Tower or Trump Village in Coney Island. If that credit facility was repaid with money traceable directly to the proceeds of crime, then it satisfies the materiality requirements under 18 USC 981(a)(1) and the feds can seize the securing assets.

This does not mean that President Trump is going to lose his stuff! I have no idea what crimes, if any, have been committed. What it does mean is that if Mueller uncovers financial chicanery, then President Trump cannot pardon himself out of trouble. (Assuming, that is, that the courts interpret the pardon power as allowing the president to pardon himself.) In addition to potential state prosecutions, he would run the risk of losing many of the things that really matter to him.

Outside the box #2 for Venezuela: An oil-for-food program?

Foreigners (including Venezuelans in el extranjero) want to find an international response to Venezuela’s descent into dictatorship that won’t kill children. We aren’t yet in a situation where inaction will lead to the deaths of even more children. Which means that a lot of people want to find something new. 

Julian Adams has such a suggestion: imposing an oil-for-food program on Venezuela. Under Oil-for-Food, created in 1995, the the U.N. permitted Iraqi oil exports under its control. Payments for Iraqi oil went to the U.N. and could only be spent on U.N.-approved imports. The idea was to prevent the Iraqi government from being able to finance its war machine without starving the Iraqi people. In the Venezuelan case, the idea would be to prevent the Venezuelan government from distributing oil largesse to its cronies without starving the Venezuelan people.

One problem is that the U.N. is not about to impose such sanctions. Adams points out that most Venezuelan exports go to the United States and India, but he is not quite right that there is no capacity to refine Venezuelan crude elsewhere. In point of fact, Venezuela could find alternative markets, albeit at a large discount. If the regime really believed that oil-for-food threatened its control, then it would find those markets.  

Second,  Iraq managed to collect illegal surcharges on the export of its oil. These surcharges were not that large: Yujin Jeong (American) and Robert Weiner (GWU) found that they came to about 0.8% of the total value of oil exports. Iraq had to discount its oil by 11%, so the surcharges did not match the losses, but they earned Saddam Hussein an additional $91 million per year in 2000-02. The equivalent number for Venezuela would be about $135 million per year.*

But the real problem is that the Venezuelan state would continue to control the internal distribution of food and medicine. That would provide a massive source of largess to distribute. Imports could be given to middlemen and sold on the black market. That might be slightly less efficient that the current way the government redistributes its export income, but when was the Bolivarian Republic ever about efficiency?

It is a very neat idea, but I do not see how it could work. Is there something I am missing?

President Trump cannot pardon himself out of trouble

The Trump presidency is different, as I note when I am outside the United States. Back during the Bush administration, foreigners would often (and without prompting) verbally criticize traveling Americans for the actions and policies of our President. And when that happened to me, which was often, I often felt an emotional need to defend President Bush, no matter how terrible a president I actually thought he was.

With the Donald, though, not so much on either tip. Oh, he certainly comes up all the time, far more than President Bush ever did. But nobody — not in the Netherlands, not in Uruguay, not in Argentina, and not in Mexico — has ever put on an accusatory tone. It is more pity, sometimes shaded with incredulity. That may be why I have never felt any urge to defend the Trump administration ... but I suspect that even should I hear a vicious hostile angry attack on his presidency my reaction would be, “Well, yeah.”

The worst that has happened to anyone I know is the American daughter of a good friend, who got a nasty note in her Mexico City school calling her a “Trump lover.” (Both the friend and his daughter are also Mexican citizens, but kids don’t care about that.) Considering what has been happening in U.S. schools, that is small beans. And compared to the Bush administration, it is nothing.

It is something to have Mexicans pity you for living under a corrupt president. In Mexico, one of the biggest problems that officials seem to be immune from prosecution. They cannot be indicted while in office and it is damnably hard to prove anything once out.

Which brings me to the recent news that the Trump administration is considering issuing pardons for the president and his family. Such pardons would be unprecedented in American history, but it is not clear that they would be unconstitutional. I certainly think that it would have been ridiculous for the framers to have given the president the power to pardon themself, but the question is open.

Except it might not matter! Donald Trump is a resident of New York State and the owner-proprietor of 500 different partnerships, LLC’s, S-corps, and pass-through proprietorships forming the Trump Organization business collectivity domiciled in New York. Trump’s business activity occurs in New York State as a consequence of his residency and offices located in New York, and his financial transactions, insofar as the financial entities within which those transactions take place are under New York State supervision and regulation, are subject to New York State law.

Imagine that the Mueller investigation uncovers some sort of financial chicanery. Well, I talked to Dave Greenbaum, a lawyer from Trump’s home borough (not pictured above!), and as you might expect any such evidence would be admissible in New York courts and give Eric Schneiderman all the ammunition he needs to go after the President. (At least once he is out of office; beforehand is less clear.) 

The easy stuff: misstated income and fraudulent income tax returns. If Trump has been using his labyrinthine corporate structure to hide income, he is liable for New York income tax fraud under Tax Laws 1805 and 1806, which would be felonies. Even if he pardoned himself for the federal income tax evasion, he would still be liable for state tax evasion.

Getting harder: securities and business entity fraud under GBL 23-A-352 and 353, aka the Martin Act. If Trump has been using his business entities to shuttle debt and conceal liabilities from lenders, limited partners, and other persons, he is potentially liable for felony misrepresentation under identical elements as SEC rule 10b-5. (Misrepresentation or Omission, and Materiality). A federal SEC violation would be chargeable under New York law, as long as New York had jurisdiction, and since Trump is a New York citizen and most of his business happens in New York, despite choice of law clauses, New York would have jurisdiction.

Harder still: New York no longer has a treason statute, but any foreign payments structured so as to defraud co-owners or partners or secured parties would serve for bank fraud or Martin Act charges. And New York has a conspiracy law just as strong as 18 USC 371. Plus, in New York you can be charged for attempting financial crimes, even if you fail to pull it off.

Barely possible: New York has two relevant laws on obstruction of justice: NYPL 195.05 and  NYPL 205.50 et seq. 195.05. “Obstructing govt. admin in the second degree” consists of affirmative action to prevent a public servant from carrying out their official duties and it is a Class A misdemeanor. 205.50 is “hindering prosecution,” which can range from a Class A misdemeanor to a Class E felony. That law could conceivably be used to prosecute the Bharara firing, given that Bharara was working with the New York attorney general to trawl Trump payments through New York banks, but it would be hard to argue that it really obstructed government administration or hindered prosecution in New York State.

Basically impossible: payoffs that take the form of capital investments in Trump businesses unless there is an obvious quid pro quo or you can use them to charge conspiracy to commit tax fraud. It is barely possible that if Trump uses a vehicle as a conduit for a payment that he only partially owns, he could be charged with a Class B misdemeanor for ripping off a co-owner.

In short, if the Mueller investigation uncovers untoward things in the President’s business dealings,it is highly likely that the State of New York will come after him. It will not be as effective as a federal prosecution, but even if he pardons himself and Congress fails to remove him, he will still be in no small legal peril.

¿Viva Nueva York?

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. 

Why did the Trini government stop paying salaries in 2015?

Front page headline in the Sunday T&T Newsday?  “Easter backpay for 16,000 health workers: $636M blessing.” Short version: 16,000 government employees are going to receive US$5,923 per person in unpaid salaries. This in a country where average annual government expenditure on wages and salaries per employee came to US$10,606 in 2015 and US$9,930 in 2016. The arrears are big.

Health workers were not the only ones to go without pay: when I was last here in April, the big news revolved around the way the previous government had randomly suspended salaries. You heard that right: in response to falling oil prices, the government stopped paying salaries.

At first glance, this does not seem unreasonable. Consider the below chart: total government revenues (in millions of U.S. dollars) fell 30% in 2016, from $8.8 billion to $6.1 billion. (Figures are only available through August 2016; data is annualized based on the first eight months of data.) That is one hell of a fiscal adjustment!

But at second glance, it’s crazy. First, in 2014 had Trinidad a debt-to-GDP ratio of only 51%; by 2016, that had risen to only 58%. There was plenty of scope for borrowing to ease the transition. Second, Trinidad could have let the exchange rate depreciate, spreading the pain. Third, the arrears started proliferating in 2015, before the big meltdown in revenue. 

Finally, and here is the kicker: expense on wages and salaries barely went down. The government spent US$1.6 billion in 2015 and US$1.4 billion in 2016. Public employment slid from 150,600 to 144,100. Per worker expenditures barely budged. 

So what the hell?? Tens of thousands of people without salaries in 2015? Where did the money go? 

Obviously, people think corruption. It does not help that Jack Warner (of FIFA scandal fame) said that he witnessed PM Persad-Bissessar accept TT$8.3 million in checks from ... wait for it ... Ishwar Galbaransingh. Now, I would not trust Jack Warner at all about anything ... but the atmosphere here is febrile, considering the apparent mismanagement of the Persad government. 

AFAICT, the new government is on track to meet its commitment of clearing the arrears by the end of this calendar year. But the whole episode is inexplicable. You cannot find much evidence of the arrears in the government accounts (which are putatively on a cash flow basis) and you cannot find much evidence in the audit accounts.

But you can find lots of evidence among the government workers who were not paid and the current politicians who seem to be moving heaven and Earth to make them whole! 

The new government could do a lot more to make its accounts transparent. It is not doing so. So while employees are getting paid (that I can confirm, although contractors are still SOL) there still seems to be no good understanding of just what happened last year. No wonder cynicism is higher than I have ever seen it, and this is not exactly an idealistic trusting place to begin with. 

Back to Trinidad

There is nothing remotely unusual about going back to Trinidad! But for reasons that have nothing to do with this blog, I noticed that I stopped travel blogging around 2012. Which is too bad, since I made some fascinating work-related trips to Colombia, Israel and Albania before I stopped taking such opportunities because I preferred to hang out with my bambinos. 

One day, I will say more about those places! But right now, let us discuss Trinidad, and later, Miami.

When you arrive at Trinidad, you arrive at Piarco International Airport, which encapsulates the country’s recent troubles. The new terminal, completed in 2001, isn’t terrible. It’s actually quite functional. But it’s barely functional. The security checks going out and the customs checks going in are easily overwhelmed. The terminal wait areas are spacious and nice, but that’s about it. For $1.6 billion, you’d expect a lot more. 

So why isn’t it nicer? Well, allegations of corruption surround the project. The government commissioned an inquiry, but didn’t publish it. Then the government lost the 2001, and the report came out. (Although, amusingly, it is currently embargoed in Trinidad.) Charges were filed and wound through the local courts. In 2006, the United States filed charges against two contractors, Steve Ferguson and Ishwar Galbaransingh, alleging that they had defrauded the airport authority of US$150 million. The T&T government agreed to extradition. Allegations then crawled up the political food chain: former finance minister Brian Kuei-Tung; former Works minister Sadiq Baksh; former chairmen of the Airports Authority Tyrone Gopee and Ameer Edoo; former client representative in the Ministry of Works at the airport project Peter Cateau; and financial director Amrith Maharaj. By the time all was done, the fraud allegations exceeded US$245 million.

But then the UNC wins the 2010 election. (The United National Congress was in power between 1995 and 2001, when the new terminal project was implemented.) And what happens?

1. A high court judge stays the extradition. Now, it is plausible that said decision had nothing to do with politics (note that the Florida indictment had been four years previous). But then we get ...
2. The Administration of Justice Act of 2011 sweeps all the accused under a new statute of limitations, sending US$10 million in government legal expenses down the tubes. More details here.

Agh. That is not good. But hey, the UNC got trounced in the 2015 elections. Surely that means the PNM will clean house? Even if there are no new trials or extraditions, things will be better going ahead.

Although, well, it seems a little perturbing that one Ishwar Galbaransingh was a guest at the new transport ministers 50th birthday party. 

Trinidad is not a basket case by any means. But it is underachieving. And the reason seems to be that voters are not yet angry enough to force change through.

Wagging the Dog: Lessons from France and Gabon

In 2011, France was wracked by corruption scandals in which African leaders, from Côte d’Ivoire and Gabon in particular, passed off millions of dollars in cash to the Jacques Chirac and Dominique de Villepin. It was the flip side an earlier scandal in which the French national oil company, then called Elf Aquitaine, funneled millions of dollars per year into the coffers of Gabonese leaders. The African tail had begun to wag the French dog; some politicians called it “reverse colonization.”

And now it looks like something similar could happen under President Trump. Consider our own former colony in the Philippines. President Rodrigo Duterte has appointed Jose E.B. Antonio to be Manila’s special representative to the United States. Antonio also happens to be the CEO of Century Properties Group, which is building the Trump Tower Manila and paid the organization around $5 million for the privilege of using the Trump name. More payments are due: one Trump deal in Puerto Rico involved a 12.5% share of profits plus a 4% slice of operating revenues in addition to the up-front fee. 

What happened in France was illegal. What is happening in America appears to be legal: the payments from the Philippines are not coming directly from the government.

But what happened in France had tangible effects on Africa. France continued to prop up the execrable Bongo dynasty well past its sell-by date. In 2008, for example, the French government shut down an investigation into the provenance of Omar Bongo’s Parisian real estate portfolio. In 2010, the American embassy in Cameroon reported that the Gabonese government embezzled funds from the Banque des Etats de l’Afrique Centrale — that is to say, one of the two central banks serving French West Africa — and used them to support President Nicolas Sarkozy. When Bongo’s son, Ali, won the 2016 election with a razor-thin (and clearly fraudulent) margin the country erupted into riots. Ironically, the 2011 corruption scandal made France reluctant to pressure Gabon with anything stronger than mild language: not because Gabonese oil is so important, and not because Hollande received Gabonese money, but because the public scandal itself made any French actions in Gabon appear to be a continuation of the illicit ties between the two nations. 

Right now, a legal battle between President Bongo and his sister is bringing some of the looting to light and the European Parliament threatened sanctions on February 2nd. But Bongo is still there and Gabon is looking far more fragile than an oil-rich coastal statelet of 1.5 million people has any right to be. 

So now in the Philippines you have Duterte running death squads and cozying up to China. Maybe no U.S. president would have been able to do much about the former (and the latter likely deserves no response). But President Trump is not even going to try. And maybe he would not have tried no matter what. But the stench of corruption lies about it. Françafrique, meet Philamerica.

And worse yet, there are other, even more depressing places involved. Wagging the dog, indeed.