The Power and the Money

Revolution update: not much has changed

 There was a time when this blog gave Hugo Chávez some credit. I wrote that he was building a pretty effective political machine;  I went so far as to call it “Daleyismo,” after the way this guy ran Chicago. I also gave him credit for raising domestic non-oil tax collection. And when the electricity shortages broke out, I pointed out that Chavista policy hadn’t been a complete failure: there had been a lot of investment in generation, but the country was hit by a really terrible drought.

Sadly, it looks as though the Bolivarian Republic isn’t following through even on its successes. The electricity piece, for example, praised the country’s investment in generation capacity, but lambasted the Bolivarian Republic for letting the transmission grid fall apart and encouraging massive wastage. Not a whole lot has changed: Venezuela has brought a lot of new thermal generation capacity on-line, but blackouts continue. Even more embarrassing, Venezuela has been unable to raise natural gas production, forcing it import gas from Colombia, gas produced by one of the oil companies that the Bolivarian Republic is fighting at ICSID. (As Setty reports, the problem was that Venezuela insisted on paying low prices for domestic gas.)

Housing doesn’t look much better. There’s a conflict over how many houses were built in 2011, but the statistics through the third quarter of 2011 don’t look that encouraging:

And, of course, the tax reforms have gone nowhere. Estimated non-oil tax collection will be 12.4% and 12.8% of GDP in 2011 and 2012, respectively, about what it was in 2008. 

I should take the opportunity to add this report about Maracaibo’s metro to nowhere. Although the cable cars in Caracas are a pretty good idea, albeit taken from Colombia.

We won’t talk about crime. It’s too depressing. If you must, here is a report on the situation. The President has said that he shouldn’t be held responsible for the crime rate, and who am I to argue?

Not terribly much to show for all the noise.

Financing the Revolution

 In an earlier post, I marvelled at Hugo Chávez’s mishandling of PDVSA. The same applies, however, to the fellow’s handling of the Bolivarian Republic’s fiscal accounts. There is something truly amazing about watching an oil-rich republic run into severe budget problems at a time of record oil prices. The upshot is that Venezuela might be even less able to thumb its nose at ICSID than people currently believe.

How bad are Venezuela’s budget problems? Francisco Rodríguez, whose work has been mentioned three times before on this blog, has done the dirty work of digging into the Bolivarian Republic’s accounting. That isn’t easy, because Venezuela has increasingly resorted to off-budget accounts, which now account for about a fifth of all public spending.

Let’s take them in turn. The first is Fonden. Fonden is ... well, it’s hard to say. The “National Development Fund” gets part of its money from PDVSA and part from the Central Bank. The Central Bank turns over “excess reserves” to Fonden. What does that mean? Answer: a sneaky way of financing the government by printing money. Consider: the Venezuela central bank prints bolívares and exchanges them for dollars. It then hands the dollars over to Fonden. If Fonden uses the money to import stuff, then the process ends. But if Fonden buys domestic goods and services, then it has to hand the dollars back to the central bank in exchange for bolívares. As of the end of 2009, $30.1 billion of Fonden $58.1 billion has come from the Central Bank. (See page 121.) This is, in effect, borrowing.

The second are the Chinese funds, financed by loans from ... duh ... China. Venezuela has borrowed $12 billion from China, going through PDVSA, and an additional $30 billion that is entirely obscure. (The $30 billion is a 10-year financing facility; it does not seem that the Bolivarian Republic has yet drawn any money from it.) It pays back interest and principal on the $12 billion by shipping back oil. How much oil? Well, PDVSA makes it impossible to tell, by mixing fuel oil and crude in the statistics. (See page 127.) You gotta love that.

On page 9, Rodríguez estimates that the country ships about 89 million barrels to China every year in loan payments. At $97 per barrel, that will be $8.6 billion, so either Venezuela is going to pay that debt off very quickly or China is charging an insanely high interest rate. (Inasmuch as PDVSA is shipping fuel oil instead of crude, the loan will paid off even faster.) Private sources estimate  the rate is LIBOR plus 2.85%, about 4.0% at the moment. That is a very low rate, consistent with a very short payback period for the loans. Nonetheless, I would not discount the possibility that China may be, in fact, running away with the store.

Finally, PDVSA has taken over many state functions directly, and the Bolivarian government carries out a lot of functions outside the official bureaucracy. That increases both spending and revenues.

The upshot, as a % of GDP:

That’s a pretty phenominal level of mismanagement for a country in the middle of an oil boom. The estimate is that the deficit was 7.9% in 2011, and will be 10.9% in 2012. The government will have access to $10.9 billion of central bank reserves (e.g., printed money), $7.7 billion of new Chinese lending, $15 billion of internal debt, and at least $15 billion of external debt. The reason I say at least is because Venezuela does not issue external debt solely to finance the government; Venezuela also issues external debt to prop up its exchange rate. For example, in the first half of 2011, the government needed only $12 billion, but tapped external financing sources totaling $24 billion.

Venezuelan debt financing:

The result is that at least until the country devalues (which would solve a lot of the financing problems, by raising the bolívar value of oil exports) Venezuela will need access to foreign financing. If that is going to come from private markets, then ExxonMobil will be able to attach it in order to pay any ICSID judgments. If that is going to come from multilateral lending institutions, then Venezuela will need to satisfy the U.S. government: Argentina is the only country to have ignored an ICSID judgment, and the Obama administration has declared that it will oppose new lending to that country. (The relevant testimony comes in this video at minute 41:40; more details here.) Venezuela will likely face even greater opposition. Lastly, if the money is going to come from the Chinese government, then China is going to attach strings (or charge quite a bit) ... and it is far from clear that China would want to weaken the existing system of investor-state arbitration.

Either way, Venezuela’s fiscal problems are a bit stunning to behold. It’s an impressive accomplishment, in its own strange way.

Old evil vendepatria PDVSA saves new socialist PDVSA!

 On the turn of the New Year, the International Chamber of Commerce (ICC) awarded ExxonMobil $907.6 million in its dispute with PDVSA over the Venezuelan government’s nationalization of its interest in the Cerro Negro project in the Orinoco oil belt. The press has been pretty quick to call it a victory for PDVSA, considering that the company initially claimed that its investment was worth $12 billion. Exxon, they say, received only book value for its investment, and Chávez has run away with the store.

Is that true? My job here is to argue that it’s not. Exxon received from PDVSA what it was contractually entitled to get. The standard used by the ICC was the market value of the assets, not book value. The assumptions used to calculate that market value, however — chief among them estimates of the expected future price of oil — were limited by a clause in ExxonMobil’s 1998 association contract that effectively put a ceiling on the value of the company’s investment.

In the words of Steven Bodzin: “So for all the rhetoric about how the Old PDVSA sold out the patria etc. etc., the only reason the New PDVSA was able to do so well in arbitration was because of clever bargaining by the Old PDVSA?”

I’m going to briefly walk through the Orinoco value chain. Then I’ll briefly describe some key features of the Cerro Negro contract. Finally, we’ll run some numbers.

Let’s start with Cerro Negro. The project is in the Orinoco oil belt — but keep in mind that until 1956 it was actually called the Orinoco tar belt. (The “faja bituminosa del Orinoco.”) The crude oil there is “extra heavy,” meaning that its specific gravity exceeds that of water. At room temperature, the stuff is gunky and practically solid. Put it into a beaker and turn it upside down; the oil will stick.

That creates a bit of problem in terms of transporting the stuff. There are three solutions. The first is to heat it up and sent it out in special ships. That’s expensive and really only done for oil intended to be made into asphalt. The second is to mix the extra-heavy gunk with lighter crudes and export it. Venezuela’s “Merey” blend is a mix of 61.8% gunk and 38.2% lighter “Mesa” crude. (That’s nice, because it means you can calculate a market price for the gunk.) The third is to build an “upgrader,” where you partially refine the gunk, mix it with a diluent and then export the resulting “synthetic crude.”

The Cerro Negro project covers 115 square miles and includes an upgrader. Its costs, therefore, are not low. The cost to get the extra-heavy crude out the ground isn’t that high. Wikileaks documents indicate that it is around $4 per barrel, but it isn’t as though that number is top secret: Bernard Mommer, formerly the People’s Vice-Minister for Hydrocarbons and currently the Bolivarian Republic’s representative on OPEC’s Board of Governors, estimated them at $3.60. Upgrading costs, on the other hand, are significantly more expensive: Mommer reported them to be $9 per barrel. That comes to a total production cost of $12.60 per barrel of syncrude.

Production costs aren’t the only costs, of course. In 2002, the Bolivarian Republic hiked royalties from 1% to 17%. In 2006, it hiked them again, this time to 33%. That same year, it raised the income tax rate from 34% to 50%. Taxes and royalties, therefore, are very substantial.

When Hugo Chávez converted the Cerro Negro oil extraction project into a majority-PDVSA joint venture in May 2007, ExxonMobil rejected Venezuela’s (undisclosed) compensation offer and went to arbitration. It went to arbitration in two forums: the ICC and ICSID. The ICC arbitration was based on ExxonMobil’s association agreement, which established the Cerro Negro venture between ExxonMobil (41.67%), PDVSA (41.67%), and BP (16.66%). Article 15, “Consequences of Certain Governmental Actions,” stated that Exxon could take PDVSA to arbitration if PDVSA refused to “restore the economic benefit that the foreign party would have received had the discriminatory action(s) not occurred.”

What were the lost economic benefits? Well, at the prevailing oil price for Venezuelan blends in 2007 (and assuming a 9% nominal discount rate and 2% inflation) Exxon would have earned an average of $325 million per year (nominal), with a net present value of $3.0 billion. That’s a lot more than $907.6 million! So was Exxon robbed?

Well, no. The first (and minor) point is that in 2007 it was far from clear that high oil prices were going to last. When ExxonMobil signed the contract in the late 1990s, Venezuelan oil was bouncing around $16 per barrel. So it is possible that Venezuelan lawyers might have persuaded the arbitration panel to use a lower oil price, under the assumption that prices might have crashed. If that had been the case, I would unhesitatingly call the $907 million result a victory for the Revolution.

The nice thing, however, is that we don’t need to resort to hair-splitting. Article 15 of the association agreement tells us the price the arbiters had to use:

… after the first period of six consecutive months during which the price of Brent crude oil is in excess of the threshold price [$27 in inflation-adjusted 1996 dollars], Lagoven CN [PDSVA’s subsidiary in the Cerro Negro venture] will not be required to compensate any foreign party for any discriminatory action(s) with respect to any fiscal year in which the average price of Brent crude oil is in excess of the threshold price, and such foreign party received net cash flow commensurate, after taking into account the effect of the discriminatory action(s), with a reference price for the production produced by the parties that bears at least a reasonable relationship, adjusted for quality and transportation differences, to the threshold cash flow for such fiscal year.

Translation: the highest possible oil price that can be used to value damages in the event of expropriation is $27 per barrel in 1996 dollars, or $37.50 in 2007 dollars. Moreover, that’s the highest price — Venezuela, after all, doesn’t sell Brent but rather lower-priced blends. That price can be marked down to adjust “for quality and transportation differences.” E.g., the arbiters can pick a lower one.

Ah hah! Brilliant! When Brent traded at $37.50, Mesa crude traded at around $32. At $32 per barrel (adjusted for 2% inflation), Exxon would have expected to earn an average of $95 million per year through 2035. At a nominal discount rate of 9%, that would value ExxonMobil’s investment at $865.8 million. It only takes a little tweaking of the discount rate or oil price to get us to the figure that the ICC finally came up with. 

What does this imply for the results of the upcoming ICSID arbitration? Damned if I know. That arbitration is against the Bolivarian Republic, not PDVSA. So Article 15 doesn’t apply. Rather, the relevant document is the bilateral investment treaty that defines what the Venezuelan government can and cannot do. Moreover, it is possible that ExxonMobil will be able to argue not only that the 2007 expropriation was illegal, but that the big royalty and tax hikes the year before were also illegal under the Netherlands-Venezuela bilateral investment treaty. My gut feeling is that Venezuela is going to win, but I’m not sure why exactly I suspect that will be the case.

To sum up, then, this case was not a victory for the Bolivarian Republic. Rather, it was a victory for the PDVSA negotiators who wrote Article 15 of the association agreement back when the plain old Republic of Venezuela invited foreign companies in to develop the Orinoco oil belt. ExxonMobil got basically the maximum that it could have expected to get. So what was that initial $12 billion claim all about? Well, as Michele Bachmann would mispronounce, nothing but chutzpah.

The Nicaraguan exception?

 One story that doesn’t get enough attention has been the collapse of public order in Central America. Why has that happened? Well, there are several possible hypotheses, including the U.S. decision to begin deporting violent felons at the end of their sentences ... but the clear problem is drug trafficking.

Why would drug trafficking suddenly become much worse? The above maps present a suggestion. In 2003, “suspect air activity” was a jumble, mostly over Colombia. As of three years later, in 2006, a lot of “suspect maritime activity” still went directly to Mexico. Over time, that changed. By 2010, Honduras had captured most of the air traffic, while sea traffic migrated to Guatemala, Costa Rica, and Panama. In essence, interdiction efforts by the Mexican government worked, sort of: fully-loaded 727s no longer landed in Sinaloa, and for all the hype over long-distance submarines, boats also stopped coming. Instead, planes diverted to Honduras, and maritime traffic to Panama and Costa Rica (mostly to supply local markets) or Guatemala (where the stuff was then moved overland to Mexico).

Activity in 2011 (see left) shows the pattern even more clearly, but with an interesting gap. Planes fly over Venezuela and land in Honduras, with a few stragglers heading on to Hispaniola or the USVI. Ships head into violence-torn Guatemala and Honduras, where whole tracts are outside the remit of the state.

Also in 2011, lots of maritime traffic heads directly into Costa Rica and Panama. (See right.) 

But where doesn’t it go? Nicaragua. For all his faults, and there are many, Danny Ortega seems to have kept his country from being overrun by drug traffickers. The maps are revealing. (Click on the maps to enlarge.)

Flip the question. Why are ships headed into Costa Rica and Panama? The two countries don’t seem to be a source of transshipments elsewhere. There is nothing flying out, and there is little reason to go to either country if you want to move drugs overland into Mexico, given how easy it is to get to Guatemala and Honduras. But there is a lot of sea traffic into both countries directly from Colombia. If drugs from Guatemala and Honduras could easily pass through Nicaragua, then there wouldn’t be much traffic into the Costa Rica-Panama pair. Back in 2006 neither place showed much direct traffic; the implication being either that a Nicaraguan supply source was cut off, for which there is no evidence, or that as the cocaine markets in those countries grew over the last five years the suppliers were unable to send much through Nicaragua.
 
The question is why Nicaragua is aloof. Is Danny Ortega less corrupt than Laura Chinchilla of Costa Rica? That seems unlikely in the extreme. His fellow Bolivarians (and patrons) in Venezuela have no problem with overflights from cocaine-producing regions. Is the Nicaraguan state stronger than the ones in Guatemala and Honduras? That seems possible, but anybody who’s been to Nicaragua will report that generalized public order is little greater than in the countries to its north (in fact, at first glance, it seems rather worse) and quite a bit less than in Costa Rica or Panama. Nonetheless, Nicaragua not only is bypassed by the drug traffic, it seems exempt from the inexorable rise in violent crime that’s plagued the rest of the Isthmus.  The homicide rate in Nicaragua has been bouncing around 13 per 100,000 for several years, up from the early part of the decade, but little different from the 1990s.  It is, in short, a mystery.

Is it just luck, or is Managua doing someting right? Here is a suggestion that it is the country’s socialist legacy what’s to credit. The idea is that community policing and greater community-police connections (established by the Sandinistas during the 1980s) have kept crime low. Here is a suggestion that it might be because Nicaragua sent immigrants to Florida instead of California, where they putatively became less exposed to organized crime. As someone with a lot of family (and time spent) in South Florida, I doubt this. The same article also suggests that it may simply be that the Zetas haven’t gotten to Nicaragua yet. That is possible: some in Nicaragua have the same fear. But it seems unsatisfying, what with trafficking and violence increasing to both the north and the south.

Nicaragua’s non-participation in the drug trade is striking, as is its (relative!) non-violence. But in order to predict whether it will last, we need to know more Any ideas?

Whose empire is this, anyway?

 A little while back, I argued that information that China may have received oil from Venezuela for $5 a barrel does not represent growing Chinese influence in Latin America, but rather lousy negotiating tactics on the part of PDVSA officials. Lifted from comments (with minor edits), Setty argues that the sales likely represent (if they even happened) corruption inside Venezuela:

I hope you’ve now seen the unredacted text of that embassy memo.

In it, you can see that the embassy itself had doubts about PDVSA board member Fadi Kabboul, its source for this $5 a barrel information. The embassy people’s experience with him was identical to mine. He offers meetings and information and never comes through. He revises history. We don’t know anything about his motives.

Hence, I am loath to trust him on that $5 a barrel figure. Especially since there is evidence contradicting the $5 a barrel figure — it’s pretty clear from the contracts that China was supposed to pay more than that.

It is possible that PDVSA received only $5 a barrel for some shipments. But if that happened, I would bet that the gap between market price and $5 a barrel ended up in someone’s pocket. I think it’s a very long stretch to say that this price shows China has an imperial subject in South America.

Indeed, the most telling item in that memo is the hearsay about George Kabboul. George was at the time head of the shipping department of Venezuela’s state oil company. Previously, he headed its food division, an agency called PDVAL. A 2009 U.S. federal lawsuit named him as having demanded a $2 million bribe to let a ship land and deliver perishable food. Around the same time, pro-Chavez Venezuelans also denounced him for corruption. I don’t have independent information about him, and he isn’t here to defend himself, so please take all this with a grain of salt.

Which is why it’s amusing to read that when the U.S. invited him to come and chat with their information-gathering team, he was worried that he might be “in trouble.” Would any Venezuelan worry that the Chinese embassy had called him in because he was “in trouble”?

Whose empire is this, anyway?

I love that last line! Same as it ever was, perhaps.

Perhaps the strangest thing about the Bolivarian Revolution is how it has mishandled PDVSA, which is, after all, the ultimate source of the regime’s resources. Above is a time series of our best estimates of Venezuelan crude production. New estimates from the International Energy Agency show that the country’s oil production has recovered from the 2002 strike ... but even so, the company has done little other than tread water. To be fair, the company’s 2001 goal of increasing oil production to 5.5 million barrels per day (bpd) by 2006 never looked particularly realistic, at least not in that time frame, but it should be doing much better than it is.

There is, of course, a debate about exactly how much PDVSA produces, and how big its decline has been. A good overview of the state of the debate can be found here. Everything, however, points in the direction of decline: the question is about how much.

In fact, there is indirect evidence from the company that it is in trouble. PDVSA recently cut its 2015 production goal from 4.46 million bpd to 4.0 million. The company regularly abandons its production targets. As Setty said on his blog: we may as well autoprogram the headline “PDVSA cuts production goals” to reappear around this time every year.

In short, China has no influence in Venezuela, the U.S. does, and PDVSA is a wreck all on its own.

China doesn’t have an empire, except maybe in one unexpected country and only if you squint hard

 Empire is one of those ill-defined terms. Problem is, define it too narrowly—say, formal sovereignty over a subordinate political community—and you deny the existence of, say, the Soviet empire in Eastern Europe, or the American one in the Caribbean. That’s not a useful definition. Define it too loosely, however, and every power imbalance becomes an example of “empire.” That’s not helpful either.

One useful way to define empire is through the threat of sanctions. If one political community enforces its writ over another by the threat of sanction (active painful sanctions), then you’ve got an empire. Might be strong, might be weak, but it’s imperial. A corollary, of course, is that the stronger political community will extract either political control or economic benefits from the weaker one. (China gets no visible non-commercial benefit from its presence in the Bahamas, for example.)

Chinese energy policy is often accused of being imperialistic, especially in Africa. The evidence comes in three flavors. First, “equity oil”: the tendency of Chinese state-owned companies to buy equity stakes in foreign oilfields and oil producers. Second, the way China ties state-financed loans to oil agreements. If countries want the cheap finance, they need to give China cheap oil. Finally, the long-term nature of such agreements, putatively locking the producing nations into providing China with oil at a discount.

The most famous of these deals, with Russia, turned out to be a lot less when examined it up close. China lent Russia money at market rates to build a pipeline that would deliver hydrocarbons to China at market prices. It’s hard to see the imperialism. Where was the threat? Where was the benefit?

OK, but that’s with the Russian Federation, you say. Russia is a great power, sort of, and not subject to Chinese pressure the way that smaller and poorer places might be. Okay. To test that, we can go over the universe of loans-for-hydrocarbons deals signed by China since the beginning of 2009. How many of them involved the delivery of oil at less than market price? Not Angola, not Brazil, not Bolivia, not Kazakhstan, not Ecuador, not Turkmenistan.

Has China managed to get a price discount anywhere? Yes, once. In February 2009 the People’s Republic inked an agreement with the Bolivarian Republic which provided a $4 billion loan from the China Development Bank in return for 200,000 barrels of oil per day at a $2.00 per barrel off the market price, invoiced monthly. Now, to be fair, a discount in that range is fairly standard. The problem is that Venezuela’s “market price” is completely opaque. Venezuelan crude trades at rather less than WTI or Brent simply because it costs much much more to refine. Only PDVSA is, shall we say, rather opaque at providing information about the prices that it charges. So how to benchmark against the market price, when the market price (while existant) is hard to find?

You would have to go all James Bond to get the answer. Fortunately, the State Department did so in 2009. Venezuelan sources told State that PDVSA supplied China with oil as low as $5 per barrel. That’s a not a discount of $5 per barrel (which would already be above the $1-$3 norm for such agreements); that’s a price of $5 per barrel.

Wow! Now that’s imperialism!

Only ... well ... imperialism is not defined by a smart bunch of Chinese companies taking advantage of the administrative wreck that is Petróleos de Venezuela. Rather, it is defined as the use of sanctions or the threat of sanctions to alter the governing policies of a subordinate political community. I suppose that maybe you could define the possibility that China would withhold its capital as a form of sanction ... except that the only reason Venezuela has trouble raising capital at much better terms elsewhere is the mismanagement of the Hugo Chávez. (For what it’s worth, which isn’t very much, Venezuela now insists, “We don’t cut prices in any of our international agreements.” Except to the Bolivarian Alliance countries. And Spain. But other than that, we should believe Minister Rafael Ramírez. I mean, he said it below portraits of Che and Fidel!)

I suppose you can call it crafty Chinese imperialism, or you can say, “The people now charged with reaching international supply agreements on PDVSA’s behalf couldn’t negotiate their way out of a wet paper bag.”

Ghana, I should add, appears to be doing a much better job. For all the Ghanian deals’ faults, and there are many, Ghana hasn’t even given the Chinese preference for oil contracts in exchange for their money, let alone a price discount.

In short, Chinese hydrocarbon companies are going abroad ... because that’s where the oil is! Other than in cases of truly gross local incompetence they haven’t gotten particularly good deals, despite widespread bribery on their part.

Uranium, of course, is a different story.

A depressing thought for a sunny Tuesday

 Below the fold, Brad DeLong argues that what he calls the “Barrington Moore problematic” is no longer a useful way of ordering the social sciences.

What is the Barrington Moore problematic, you ask? (Yes, I had to google the name.) In short, it is the search for the answer to why 20th-century states gave rise to regimes like Nazi Germany and the Soviet Union. In an advanced industrial society and a backwards industrializing one, regimes arose which killed millions of people. And even without those horrible ideologies, the First World War showed modern states using nationalism to mobilize for slaughter on an unprecedented scale. Understanding why drove research agendas for a long time; it certainly provided a useful way to organize undergraduate education.

DeLong argues, with good reason, that this no longer dominates. Modern Western societies mobilize rapidly against even relatively mild forms of racism or authoritarianism. Other societies sometimes (but ever less) give rise to tinpot dictators or self-proclaimed socialists, but they are simply not the same.

Al-Qaeda is not about to seize control of any state. Hugo Chávez may be leading an increasingly authoritarian regime, but he is no Joseph Stalin: he isn’t even a Fidel Castro. (Heck, these days even Fidel Castro isn’t much of a Fidel Castro.) And for all the attention to the threat of chaos, embodied by nihilistic terrorists or drug cartels, neither has really been able to do much damage inside functioning modern democratic states.

We need, therefore, to find a new overarching question to bind together the social sciences.

Except ... well ... in one field, economics, a lot of people believed that we had achieved a Great Moderation. Depressions were a thing of the past. Well, not so much. In political science, many believed that we had a pretty good handle on what politics looked like under first-past-the-post. Again, not so much.

Do we really understand why the world hasn’t been turning up many Stalins lately? Are we sure that Communism and facism and future things like them are dead? Is it in fact time to abandon the study of dictatorship and democracy because things look like okay, right now?

Well, probably yes. That said, I worry that in a few years or decades the below essay (under the fold) just might (perhaps) look a little bit like the literature on the Great Moderation, or the Westminster system, or worse yet the positivism that preceeded the First World War. Maybe, just maybe, after the resurgence of problems that so many thought were dead, we just might not yet want to abandon the search for the roots of totalitarianism.

And it sure wouldn’t hurt to keep undergraduate education focused on it.

The aftermath of expropriation in the Bolivarian Republic

 One of the reasons why my Boliblogging has fallen by the wayside is that there is an excellent new blog covering (largely but not entirely) Venezuelan issues: Setty’s Notebook. Setty is a journalist, a very good one in fact, with whom I am working on a case about the energy industry in the Bolivarian Republic. If I had a blogroll (Typepad’s fault, not mine) it would only have two entries: his and Ganchoblog. 

Today he reports a stunning report about the collapse of Maracaibo’s economy following the nationalization of the oil services industry. I have a report detailing all the nationalizations (I got it in a very cloak-and-dagger way) and if I ever get the time I will say more. But right now, go read Setty.

Inflation-fighting credibility!

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

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

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

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

Bolivian energy and the neighbors

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

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

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

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

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

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

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

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

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

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

What should Evo do now?

Finally! The bolívar falls

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

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

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

The Chávez boom

 Back in the comments on the post about Venezuela’s electricity crisis, Scott expressed surprise at the claim that the Venezuelan economy has grown like gangbusters since 2002.  “Has growth really been that dramatic?” he asked.  “It doesn't square with a lot of what you read about Venezuela.” 

In point of fact, growth really has been that dramatic.  Last year, there was a back-and-forth between Francisco Rodríguez and Mark Weisbrot about the accomplishments of the Bolivarian Revolution.  There was an slight pin-angel quality to their dispute.  Rodríguez’s data on spending shares and literacy changes were fairly incontrovertible. Their dispute over inequality hinged over the treatment of zero-income households, but even if you throw them out of the sample you get generally stagnant inequality, which is less than revolutionary. 

Similarly, the two argued about the extent of poverty reduction, but Rodríguez’s point was that the Bolivarian Republic had done a lousy job of reducing poverty given the extent of economic growth, not that it had failed to reduce poverty.  In short, the dispute hinged on whether the country deserved a mulligan for the oil boom.   Rodríguez wanted to grade the government on a curve, Weisbrot didn’t. 

So how big was the oil boom?  Big.  Real GDP doubled between its nadir in the first quarter of 2003 (when the national oil company tried to overthrow the government) and the second quarter of 2008.  From a base of 100 in 2003, real private consumption leapt to 115 in 2004, 133 in ’05, 157 in ’06, 187 in ’07, and 202 in 2008.  Even the inequality measures that include zero-income households remained basically unchanged over this period (with a weird spike in 2005), indicating that the consumption boom was pretty well spread.  Poverty dropped from a peak of 55% in the second half of 2003 to 26% by the beginning of 2008; extreme poverty fell from 25% to 7% over the same period.  To be fair, the reduction in 2007 is really hard to measure, since the poverty basket uses official prices, and most staples have been rationed at the official price since then.  (Although Mickey-D’s has not been affected, as best as anyone can tell me.  Ditto most private markets.  Weird sort of socialism, that.  But I digress.)

There is some evidence that the boom bypassed the poorest of the poor:  The percentage of underweight babies born in Venezuela, for example, increased from 8.4 percent to 9.1 percent between 1999 and 2006. During the same period, the percentage of households without access to running water rose from 7.2 percent to 9.4 percent, and the percentage of families living in dwellings with earthen floors multiplied almost threefold, from 2.5 percent to 6.8 percent.  On the other side of the ledger, infant mortality dropped from 21.4 per 1000 live births in 1998 to 18.5 in 2003 and 14.2 in 2006, while the number of primary care physicians in the public sector rose twelvefold.  That said, the above is a red herring for the purposes of this post:  the point is not that the Bolivarian Revolution has been less than revolutionary; the point is that the country underwent a huge boom in 2002-08, and that boom trickled down to the bulk of the population, if not necessarily the poorest. 

The boom certainly translated into jobs.  Formal-sector employment grew 42% from 4.53 million in 2003 to 6.45 million in 2008; informal employment stayed basically unchanged, drifting up from 4.99 million to 5.02 million.  Public employment outpaced private, growing from 11.6% of total employment (formal and informal) to 16.6%, but since my readers are smarter than Michael Steele, they recognize that a job is in fact a job.

So, jobs, incomes, consumption, all way up.  Not as far up as in places that handled the hydrocarbon boom better, like Alberta or Trinidad or Bahrain, but still way up.  Which leaves me curious.  Scott, what did you read that left you with a different impression of economic conditions in Venezuela over the last half-decade?

Housing the Revolution

  One place where the Chávez administration superficially appears to have fallen down on the job is housing construction.  Building residences is one of the easiest ways that I can think of to translate oil money into political support, while at the same time building a class of people dependent on your party’s patronage.  Less cynically, it is also one of the easiest ways to translate an oil boom into a lasting increase in well-being.

 
Yet the actual amount of housing construction has been pretty low.  Cabdrivers (I seem to get a lot of opposition cab drivers) love to point out the above clump of houses on the road to the airport, the orderly red-roofed ones towards the bottom of the picture.  “Look at that!  Big deal!  New face of Venezuela!” they say, sarcasm knife-thick.  Of course, absence of evidence is not evidence of absence; the lack of massive building along the airport road indicates only a (rather sensible) lack of massive building along the airport road.  (Here is a 2005 look at another public housing project.)  Rather, evidence of absence comes from the government’s statistics on the number of new housing units constructed every year:

 

Public construction hasn’t returned to the halcyon days before Chávez, let alone reached new heights.  Now, to be fair, you don’t need to construct a whole lot of public housing to create an effective political machine.  Mexico’s PRI managed to use access to housing as a very effective tool of political support in the 1970s while building only 57,000 houses a year.  Of course, the flip side of that is when the Mexican economy collapsed in the subsequent decade and the PRI needed more support, the Mexican government churned out more houses, building 253,000 per year during the 1980s.  In other words, the Mexico of Miguel de la Madrid and Carlos Salinas managed to churn out six times as many houses every year as the current Venezuela of Hugo Chávez.

The private boom looks interesting, but really isn’t.  It is exactly what you’d expect to happen in a country undergoing an oil boom.  In point of fact, it is a little hard to distinguish public and private homebuilding in Venezuela, since most private housing is financed via a public program called “Ahorro habitacional,” a subsidized lending program.  The program predates the Bolivarian Republic, although it has been changed.  The old program financed mortgages via a forced savings scheme in which employees contributed roughly 3% of their wages into a common pool, from which they could then borrow once they could come up with a down payment worth 3% of the property’s value.  The new program is more complex and involves direct subsidies, but essentially works similarly. 

The bottom line is that the government has not built a whole lot of houses.  In a sense, it doesn’t have to.  The Socialist Party has enough support without a massive homebuilding program.  And such a program, while technically straightforward, would get the government involved in a mass of planning and siting issues that it might prefer to avoid.  But in another sense, it is a puzzling failure, a chance to spend oil money for a threefer:  (1) improve living standards; (2) reward the government’s friends; and (3) put a long-lasting stamp on the built environment, show the Revolution in bricks and mortar. 

The government of Trinidad and Tobago has managed to win re-election besides completely botching up law & order partially on the fact that it used the hydrocarbon boom to fundamentally transform life on the island via the construction of massive tropical Levittowns ... at least massive by the scale of a small country.  So what does the People’s National Movement understand that the United Socialist Party does not? 

Maybe I am missing something.  I only study political machines, I’ve never run one.  Thoughts? 

The Bolivarian military

  Another cat-like day spent sleeping yesterday.  17 hours!  Damn.  I’ve also been craving football, so far as to watch replays of old games on Channel 265.  Strange.

 
Venezuela recently reinstated national military service.  This is only the latest in a series of military reforms.  Taken together, the reforms have fundamentally reshaped the military establishment ... although with so much of the Bolivarian Revolution, its hard to know how well the changes have been executed, or how deeply they run.
 
The reforms started in 2004, when the Army replaced its old woodland camo with a solid olive drab uniform called the “Patriota.”  It was deliberately intended to evoke Cuban revolutionary garb. In 2005, a new National Reserve and Territorial Guard replaced the traditional reserve system.  The National Reserve fulfilled the functions of a traditional reserve, at least at first.  The Territorial Guard went beyond that, establishing a new military branch.  New recruits were trained over 20 consecutive Saturdays, during which they earned 16 bolívares.  By 2006 the government claimed to have trained up 110,000 reservists with a further 800,000 on the waiting lists.  The distinction between the two branches of the reserves, however, had by then blurred.

Those of you have served in a national military will understand that 20 days spread over as many weeks is a rather ineffective way to train soldiers ... whether that was the purpose is left as an exercise for the reader.

The “26 laws” that I marched against in 2008 further extended the reforms.  Superficially, they renamed the National Armed Forces the Bolivarian National Armed Forces.  More profoundly, they put more heft on the Bolivarian National Militia’s bones, constituting it as an official fifth branch of the military, after the Army, Navy, Miltiary Aviation, and National Guard.  (The Guard is oriented towards maintaining domestic order.)  The law also established links between the Militia and the “communal councils” that the government had earlier established.  Communal councils could now go down to the local Bolivarian Militia office and declare themselves an official unit, after which they would receive “advice, adequate training, and all actions pertainining to social questions, the solution of problems.” 

The latest reform took place last month, when the government issued an updated conscription law, replacing the old one from 1978.  The new law strengthens most of the current system of selective service registration, even though the Constitution of 1999 technically bans conscription.  In fact, the government will increase the fines for failing to register, and the new law requires that military documents be presented from anyone desiring to work for the government. 

In theory, now, every Venezuelan now owes a year of military service.  In practice, who knows?

It’s hard to tell what it all adds up to.  The Bolivarian Militia is badly trained, barely uniformed, and generally disorganized.  It might be an attempt to use state resources to train up the “Bolivarian Circles” that used weapons to defend Chávez back in 2002.  In September, the BBC reported that Socialist Party “patrols” were fusing with the militia, but the evidence was pretty half-assed, and it was monumentally unclear what such a fusion would get the government.  After all, the militia thus far seems not a whole lot better than what a devoted political party with government support could do by itself, without the bureaucratic bother.  I understand Rocío San Miguel’s fears, but they seem a bit premature.  The Bolivarian National Militia is still pretty far from a parallel military. 

Conversely, turning the Army into a large-scale conscription machine would be a fairly effective way to implement social change:  the Bolivarian Republic would be far from the first government to use military service in such a way.  Problem is, the Venezuelan military isn’t set up to train the 550,000 people who reach military age every year.  It isn’t even set up to train half of them. 

Of course, we haven’t reached the end-state yet — perhaps the goal is to eventually get to a point where the armed forces are omnipresent enough to serve as a means of social control, and where universal conscription serves as a way to reshape society.  In that view, we are simply not there yet.  Or maybe the goal is just to build up a legal body of Socialist Party thugs capable of breaking heads.  In that view, the mission has been accomplished with just enough socialist rhetoric to hold some weak margin of support that an open program of partisan militia-building would lose.  Or ... and this would be my guess ... it’s a way to give an ideological dressing to a scheme designed to plonk eight dollars into the hands of happy supporters in return for a fun Saturday afternoon playing soldier. 

The military reforms are like so much else about the Bolivarian Revolution over the past year:  too serious to be just window-dressing on a political machine, but not serious enough to be a real attempt to remake the country.  (Rephrased for Chávez’s foreign policy adventures:  too serious to be costless domestic posturing, not serious enough to actually extend Venezuelan power.)  At some point, you’re left scratching your head.  At least I am.

Thoughts?

Above the clouds, or Venezuela’s electricity crisis

   No, it’s pretty clearly the flu.  I’m completely laid up.  Ugh.  Misery, compounded by the Broncos piling up 16-0 lead.  Yes, I’m a Patriots fan, in my one sporting concession to my new home town.  But I retain a little bit of love of for the Giants and Jets.  Not being returned so far.  Still, hearing that series of curses from the Bronco’s coach was awesome.

But Stephen Rogers wants to know about Venezuelan electricity, so I dig around to find out about Venezuelan electricity.  Why is an energy-rich country experiencing periodic blackouts?  I mean, there are a lot of things about the Bolivarian Republic which are in cloud-cuckoo land, not least the place where I was in the above photo.  But generating power should not be one of them, should it?

The immediate reason for the shortages is:  a really bad drought this year.  Venezuela, sensibly, does not burn exportable hydrocarbons for electricity.  The country has been slow in exploiting its natural gas resources, but given its immense hydro capacity, that is far from a disaster.  (Venezuela’s natural gas reserves are “associated,” which means that they require larger up-front investments to extract.)  In fact, the country has ramped up an almost-astounding amount of hydropower in recent years. 

Unfortunately, this year the rains have almost dried up.  (Ecuador has also been hit.)  This has caused hydro production to dip on the national level ... but Guayana, the big industrial province, only has one 15 megawatt diesel generator at Puerto Ayacucho as a backup. 

 

(Data comes from Venezuela's system operator, called Opsis.) 

That’s a problem, but it wouldn’t be a huge problem if it weren’t for the fact that Venezuela's grid is in worse shape than America’s.  In 2006, Venezuelan transmission and distribution losses ran 22%, against 7% in the United States.  That’s a crappy grid.  With a crappy grid, it is not easy to get electricity from where it is to where it is needed when the baseload capacity declines.  Blackouts result.  In October, Opsis carried out 48 planned outages and suffered 66 unplanned ones, even with all the diesel and gas peakers run way above their normal capacity. 

In fact, there is a second constraint on the grid.  Venezuela has managed to produce a lot more thermal electricity by running its thermal peakers at their maximum for more time ... but what it cannot do is get them to produce more power than their rated maximum at any given moment.  According to Opsis, peak demand is running 7.0% higher this year than in 2008, which was up 5.1% on 2007.  Overall load factors are down, but on those days when power spikes, there is nothing to be done.  Especially in Guayana.

Of course, one has to ask:  if Venezuela has succeeded in its heroic efforts to increase hydro capacity, why did demand outstrip supply this year?  Well, that’s easy to answer ... the government froze electricity rates in 2002.  Given the awesome scale of economic growth since then, and the even more awesome scale of consumption growth, and galloping inflation, what would you expect to happen?  Exactly. 

A lot of very poor people bought lamps and satellite dishes, a lot of slightly less poor people bought refridgerators and air conditioners, a lot of not-really-poor people got dishwashers and giant plasma screens, and a lot of not-poor-at-all people stopped caring and began to run their air conditioners with the balcony doors open.  If you aren’t going to ration by price, you've got to ration by other means, blackouts being one.  After all, in 2006, Chile was hit by a perfect storm when Argentina cut off the gas, a drought shellacked the dams, and oil prices spiked.  Was a lousy year for consumers and a lousier year for energy-company shareholders, but there were no blackouts. 

In short:

(1) Investment in generation has been just short of heroic.  ¡Viva la revolución Bolivariana!

(2) Investment in the not-as-sexy business of getting the stuff from where it’s generated to where it’s consumed has not been quite as heroic.  In fact, it’s been bloody awful.  ¡Malditos chavistas!

(3) Demand has quite deliberately been allowed, nay encouraged, to explode. 

Problems (2) and (3) were eventually going to outrun advantage (1).  This happened to be the year.

The government faces three long-term choices.  First, direct more-and-more-and-more investment into generation, first hydropower, then CCGT, maybe even nuclear.  Of course, that means burning associated gas instead of exporting it to (say) Trinidad’s industrial sector.  It also means diverting limited resources away from other things that might have much larger economic or political payoffs.  And it would force the government to have to show a level of execution that it hasn’t quite demonstrated, massive investment notwithstanding.

Second, cut demand.  Which means raising rates.  Won’t that be popular!

Third, get used to blackouts.  Hey, the Philippines lived with ‘em for a very long time, so have many other countries.  In fact, if Corpoelec can get good enough at directing where the power will go out, selective outages could be a win-win for the Socialist Party. 

Stephen, that answer your question?

Madrugada roja

  Venezuela.  What a country!  In the name of cheese, I hope that the producers of Red Dawn manage to work in some sympathetic Bolivarians.  Outside government offices in Chacao, the Socialist Party has put up these red posters of revolutionary heroes.  It kinda sorta looks like something outta the last post, no?

 
They also, of course, warn against the empire.  The below mural reads, “The Empire’s new toy:  easy to use, totally manipulable.” Made me proud to be an American!

More revolutionary art below the fold.

Is the madre patria scamming the Républica Bolivariana? Probably not.

  Over at Caracas Chronicles, they’re perplexed by a deal just signed to build a combined-cycle gas turbine power plant in Cumaná, Venezuela.  The Spanish contractors, Iberdrola and Elecnor, want to charge €1.45 billion to build two 500-MW plants.  The cronologistas caraqueños have done some digging, and found that €1,450 per megawatt is a lot to charge for a CCGT installation.  The closest was a €1,225/megawatt project in Algeria.  The highest that I knew of before they started investigating was a UAE project that came in around €890. 

They conclude corruption.  Are they correct?

Well … maybe.  But to be fair, I suspect not.

Venezuela, you see, maintains exchange controls.  Official transactions need to be made at the approved exchange rate.  On the one hand, this shouldn’t bother the contractors all that much:  they’re getting paid in euros, and the price of imported equipment is the price of imported equipment regardless of the denomination.  The problem, however, is that the relative price of all of their domestically-sourced inputs will be much higher.

Think of it this way.  Imagine you imported €1000 worth of machinery to Venezuela in 2004, after paying Venezuelan tariffs (around 20 percent) and taxes.  In that same year, a manufacturing worker cost €7,388 to employ for a year at the official exchange rate.  You could buy a worker-year for 7 units of machinery.  By the middle of 2009, after several years of high inflation in Venezuela, that same worker cost €12,720 to employ — a worker-year now cost you the equivalent of 13 units of machinery.  Unless you figured out a way to use half as much labor as you did in 2004, your labor costs (in euros) have just doubled.  (All data comes from the Banco Central de Venezuela.)

In fact, the same problem applies for all domestic inputs.  According to the Venezuela central bank, the bolívar cost of construction materials (including taxes) rose 230% between 2004 and the middle of 2009, while the official exchange rate remained the same.  That’s going to further drive up your costs.  

If it turns out that the Bolivarian Republic has agreed to let the contractors use the parallel exchange rate to purchase bolívares, then this analysis goes out the window.  But if the contractors have to use the same exchange rate as everyone else when buying local inputs, then the price that they are charging for the plant seems entirely reasonable ... even without taking into account the political and economic risk.  (Will PDVSA pay everything up-front?  Will inflation in Venezuela accelerate?  Will there be labor trouble?)   

In other words, unless the contract exempts the Spanish companies from exchange controls, then I doubt that there is much corruption to be seen in this case.  Bad economic management yes, corruption no.   

Does anyone have more details about the contracts?

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?

This movie looks really bad

  Well, I guess I'm not really all that much of a lefty, all things considered.  This movie looks really really bad.  Although what Raúl Castro says in the below clip is true.

Caray.  I am not sure that Stone is doing Lula or Lugo any favors with this film.  And I find it sort of amusing that he lumps President Fernández in as a Venezuelan ally.  Very ironic portrayal, considering her government's reaction to Venezuela's nationalization of Argentine-owned assets. 

Revolutionary comrades-in-arms they are not.

Menos vegetariano que antes

  As some of you may remember, about a year ago I took part in an opposition rally in Caracas.  I left pessimistic that they would succeed in slowing Chávez down as he constructed a political machine.  The marchers seemed dispirited, and the hecklers very confident, while the police just watched, amused.

A few days ago, another opposition march ended with tear gas.  The story in English is here.

I think it is very easy to exaggerate Venezuela's slide towards authoritarianism.  The upper classes are too powerful, the middle class is too large (in absolute terms), and the government itself is too disorganized to pull off a full Cuba.  (In Mexico I met Cuban doctors who claimed to have worked in Venezuela; they had nothing but disdain for the Venezuelans they worked with.  Assuming, of course, that the stories are true; a few details didn't seem right.)  The PSUV will be lucky to cement as much control over the country as the PRI used to wield over Mexico. 

But there are worrying movements ... and as the popularity of the government's policies drops, one might see more incidents like the above.  Or worse. 

Anyway, as long as this website is up, Venezuela isn't a dictatorship.  Check it out; it's the Onion of Venezuela.  My favorite has to be “La Reelección indefinida llega al Miss Universo.”

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. 

Bad politics at the OAS, updated

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

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

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

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

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

More on the Honduran constitution

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

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

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

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

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

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

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

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

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

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

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

An Andrew Jackson moment

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

 

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

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

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

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

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

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

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

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

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

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

What do you think?

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

Coup in Honduras, updated

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

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

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

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

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

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

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

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

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

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

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

A different perspective

  I haven't been to Mérida, Venezuela, in decades.  (I haven't been to the one in Yucatán for about as long, either.)  I used to have an aunt who lived nearby.  She's long gone, and last I heard both her grown children (and their families) lived in Houston and Miami.  

Anyway, Gringa Diary is by an Australian socialist fervently working to further the triumph of the Bolivarian Revolution and turn back to the forces of imperialism.  I believe her name is Tamara Pearson.  It's a fascinating look into the Revolution, up-close-and-personal. 

Of course, her perspectives on the value of Mr. Chávez or the long-term impact of his policies on the poor of Venezuela are quite different from my own.  But she's so earnest about it.  Which is sort of touching, in a way.  More importantly, the true-believer tone infuses the blog with this sense of reading something for a parallel universe.  You read her stories, and more often than not find yourself scratching your head at her emotional reaction or logical analysis, so different from your own. 

But you can't get angry; she's so enthusiastic about it all.  Recommended. 

There is no bloody resource curse already

  So there are these people out there, notably the Oracle of Flat, talking about how high oil prices lead countries to do all sorts of crazy things, like take stuff or invade their neighbors or build weird shit. Which is a problem, see, because except for the building of the weird shit the real world just doesn't fit the model. 

Above you’ve got an example of weird shit.  Ditto to the right.  But what about the neighbor-invading or stuff-taking?  Well, I don’t have a whole lot to say about neighbor-invading at the moment, but there is some stuff-taking in the news: the Bolivarian Republic just cancelled all its oil service contracts.  That’s a form of stuff-taking, yet, as the great and immortal Onyx once said, but wait it gets worse!   The government also intends to nationalize the contractors’ assets.  That is stuff-taking of the purest form, which the “resource curse” models predict isn’t supposed to happen when oil prices are low.  After all, the government is supposed to need the service companies to keep production up.  And yet, here we are.

“Oil service companies” are at-their-simplest basically oil companies that extract petroleum for a fixed price on behalf the owner ... in Venezuela’s case, the government.   With nationalization of the oil services, the government gets a threefer:  the assets, the value of future payments, and the value of all unpaid bills.  But it loses the companies’ ability to run and maintain the assets and opens itself up to arbitration and lawsuits.  It also loses future investment.  Oil companies will tolerate expropriations-that-weren’t, like the Bolivarian Republics’s so-called “nationalizations” up until now.  They have less patience over the real thing.  It’s a particular problem for Venezuela because its wells tend to have a half-life around three years.  Without continual new investment, production will decline.

I’m not sure what Chávez’s motivation is, although I can speculate.  I am sure, though, that this is another sign that the whole petropolitics idea is worth a lot less than a gallon of crude, even at current prices.  Sure, it might be possible to take the political resource curse theories and mash them to fit recent events in Venezuela, but then you would wind up with a theory that predicted that governments nationalize when prices go up and they nationalize when prices go down; or that they nationalize when they don't need foreign technology and they nationalize when they do.  In other words, you would get a theory that predicted that the governments of oil producing states should always nationalize at all times. 

The proper word for such a theory?  Worthless. 

Venezuela cede

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

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

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

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

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

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

Bolivarianism and Mercosur

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

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

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

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

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

Oh no he di’n’t

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

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

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

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

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

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

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

The other Castro

  Cipriano Castro managed to make a bit of a hash of Venezuela during his brief regime.  He gained power in 1899, at the head of a revolutionary army.  His army mobilized resources by confiscating property; sometimes of opponents, sometimes not.  Eventually he provoked a bunch of European navies into blockading him.  The resulting diplomatic mess eventually dragged in the United States, who was worried that Germany intended to, say, scarfle off some Venezuelan islands and establish a naval base.  Or something.

So it isn't really clear to me why Hugo Chávez would want to replace a bust of Rómulo Gallegos with one of Cipriano Castro in the presidential palace. 

And then Leticia Arroyo sent me this speech by Castro made on December 9th, 1902, just as the European navies started sinking Venezuelan ships in the harbor of La Guaira:

Venezuelans!

The insolent foot of the foreigner has profaned the sacred soil of the Fatherland!  An extraordinary act in the history of the civilized nations, without precedent, without possible justification, a barbarous act because it is an attack on the most rudimentary principles of international law, an ignoble act because it is the fruit of an immoral and cowardly collusion of force and betrayal, it is something that the English and German squadrons have just done in the harbor of La Guaira just a few moments ago:  in a simultaneous and coordinated action they surprised and captured three undefended ships of our navy that had entered dock for repairs. 

The battle is unequal because two of the most powerful nations of Europe have conducted an attack against our country, which has barely made it out of a  long and painful convalescence ... But justice is on our side, as is the God of the Nations who inspired Bolívar and the constellation of heroes who accompanied him in the great work of bringing us, at the cost of great sacrifice, our Fatherland free and independent ... For my part I am prepared to sacrifice everything on the altar of the Fatherland, everything, including what one might call my anguish over our internal differences.  I have no memory of what disagreements may have occurred in the past.  Erased in my thoughts are the politics and fighting of all who were opposed to my aims, of all who have been able to leave a trace of pain in my heart.  In front of me lies no less than the luminous vision of the Fatherland, of which Bolívar dreamed, of which I dream.

... I open the doors of the Republic’s jails for the political prisoners who still remain in them; I also open the doors of the Fatherland for those Venezuelans who remain abroad for similar reasons and return to them under the constitution the properties of all the revolutionaries who lost them for reasons of public order.  Further still, if I survive these events ... I am prepared to return to private life, leaving behind my sword, of course, at the service of the Republic, and you can be sure that I will retire sans nostalgia for power, because my greatest aspiration is to see my great Fatherland prosperous and happy.

Now I see exactly what Hugo sees in this guy.  I can imagine him giving this speech on Aló Presidente, word for word.  Some things never change indeed.

When lawyers declare war!

  You know, the more I learn, the more I think that President Correa of Ecuador is really playing with fire in defaulting on his debts.  Brazil is mad at him, and you don't want to get the new imperial rulers of South America mad at you.  But more importantly, he's got his American creditors mad at you ... and it seems as though those creditors may have a rather powerful legal recourse.  It'll all depend on the definition of a “central bank.”

But let's start at the beginning. What happens when lawyers declare war on a country? Well, remember this post, on the U.S. sanctions against Manuel “La Piña” Noriega ?  Turns out that the sanctions weren't really Elliot Abrams' idea. Rather, the credit goes to a lawyer, William Rogers, acting on behalf of his client, former President Eric Delvalle of Panama. 

La Piña, you see, had an anger-management problem. He decapitated Hugo Spadafora, one of his political opponents.  When the President of Panama, Nicolás Barletta, made the mistake of thinking that he, you know, ran the country, and decided to investigate the head-chopping, Noriega locked him in his office and threatened his family.  At 3am, President Barletta appeared on national television and offered his resignation, which the National Assemby accepted in a late-night emergency session.  Eric Delvalle, the education minister, then became President. A little while later, Delvalle decided to pass on to La Piña an American offer to let him peacefully resign with all his ill-gotten gains. In response, Pineapple-face ejected Delvalle from the presidency.  Delvalle got word that he was going to be arrested the next day, and managed to make it to an American military base. His ambassador-at-large hired Rogers, and then ...

... Rogers' firm filed suits to freeze Panamanian assets in the United States, beginning with the banks.  On March 3, the courts froze the U.S. accounts of the Banco Nacional de Panama (BNP).  The freeze deliberately cut off the BNP’s liquidity — it could no longer access any of the deposit accounts it held in American banks.  Nor could it clear checks through American institutions. The BNP had to close its doors.  In Rogers' words: 

“It was a conscious plan to tighten the financial noose around the neck of the Noriega regime. The consequences were seen with precision: Starve the banking system of cash, force the banks to close, and thus cause —not to put too fine a point on it — considerable financial, economic distress in Panama. The economy doesn’t function now.” 

Since the BNP was also the Panamanian clearinghouse for cashing domestic checks, the subsequent payday, March 14, became a bit problematic. How could Panamanian firms make payroll? Over 145,000 people, twenty percent of Panama’s labor force, had no access to the $30 million in wages they were owed. A general strike quickly ensued, beginning with the dock workers. By the end of March, Panama’s economy was in disarray, and the country defaulted on its foreign debts.   

Rogers was quietly pleased with himself:

“I don’t know of anyone else who — I mean on the assumption that it works, and Noriega is out — I don’t know of any effort to overturn another government by litigation which really was based on, and derived from, litigation in the United States. Or that worked as fast as this, or that had the consequences this one has.”

Well, it didn't work. But think about it for a moment. Could lawyers declare war on Ecuador for defaulting on its debts the same way that they declared war on Panama for ousting a president? After all Ecuador uses the dollar. And sanctions that didn't work on a dictator might be very effective in swinging public opinion against an elected president. Maybe Felix Salmon was on to something. 

It all depends on whether American courts consider the Banco Central de Ecuador (BCE) to be a real central bank. If it is, then its assets are not attachable, and U.S. courts cannot interfere with its functioning. But if it isn't, well, then some enterprising lawyer could go give it the full Rogers. And wouldn't that be interesting to watch? 

From a big distance, that is. Correa may be worried about this possibility. The BCE is buying a lot of gold ... which is weird, to say the least. But is Ecuador vulnerable?

Lawyers read this blog. So help a brother out with his research. Could somebody do to the BCE what Rogers did to the BNP, or is Ecuador safe? 

Another senate

  One rather strange thing, when you think about it, is the incredible influence that the United States Constitution has had over political structures in Latin America.  None of those polities developed under similar circumstances — the Argentine Republic comes closest, and it's not very close — and none of them had similar political traditions.  So its rather strange when you realize both how universal the American presidential-bicameral model has become and how durable it's proved.

It turns out that Bolivia also has a U.S.-style senate. Before the recent constitutional reform, each province enjoyed three senators. Now each one has four. Not much of a change there, unless the system for electing those senators (still undetermined) has the result of dividing the delegations from the other provinces while united the Media Luna ones, or vice versa. That's remotely possible: the old system worked like Argentina, giving the election winner two senators and the runner-up one, while the new system is proportional. Depending on the election rule chosen, the effect would be to strengthen parties with overwhelming support within their province and split delegations from provinces with more divided electorates. But we'll need to see both what proportional rules is chosen (the constitution seems unclear on whether the provinces or the legislature will set the rules) in order to know the actual effect.

In short, in terms of the Bolivian legislature, the new and awfully-named “Plurinational Legislative Assembly” doesn't change much. Not only is equal representation preserved in the Senate; the new reserved “indigenous” seats in the lower house are designed to insure that the Media Luna's current representation will not change. 

My opinion of the Bolivian senate, however, is very different from my opinion of the Argentine, American, and Brazilian senates.  Those are undemocratic travesties that need to be reformed. (Here's a much more democratic way of apportioning the U.S. senate among the states.) Inertia and the power of special interests are the only reasons to keep them. 

The Bolivian senate, on the other hand, is a necessary compromise to hold a deeply-divided country together. President Morales's original proposal for a single-house FTFP legislature with a block of reserved “indigenous” seats would most likely have served only to keep fueling the political violence that wracked Bolivia last year. Given that it's hard to see anyone benefitting from a breakup of the nation, the undemocracy of a senate is a price worth paying. 

¡Hasta la reelección siempre!

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

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

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

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

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

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

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

Schoolhouse rock, Venezuelan-campaign style

 A friend of mine (who works for the government ... shhhh!) sent me this Venezuelan television commercial.  It's about the referendum on abolishing presidential term limits. 

Kinda catchy, I think.  Can the Sí-side match it?

The expropriation that wasn't

  Kevin Drum and Dan Drezner wonder why the oil companies would get back into Venezuela after the way Hugo Chávez treated them the first time around.  The answer is simple:  Chávez didn’t treat them badly.  When oil prices head back up, they’ll do fine even if he plays the same movie all over again. 

“What???” you say?  How can that be?  Simple.  Between 2004 and 2006, the Bolivarian Republic of Venezuela expropriated the marginal surplus generated by the run-up in oil prices.  It did not, however, reduce the revenues of the oil companies.  They took home about $10 a barrel when the contracts were signed in the late 1990s, and they took home about $10 a barrel in 2008.  In fact, some of the companies that had signed service contracts under the old regime received more money under the Bolivarian regime than they would have under the original rules.

So why not get back in?  It isn’t like there are a whole lot of places around the world for the oil companies to invest in, especially not on-shore.  Most oil reserves are closed to the majors, and political risk is everywhere, including Alaska under its radical socialist governor.   The companies have little chance of enjoying the upside from a return to high prices, but with estimated costs of $6-$7 a barrel, Venezuela is still a good bet. 

Details and money graph below.

In the 1990s, Venezuela opened its oil industry to foreign investment.  The first contracts in 1991 and 1992 were “operational service agreements” signed to take advantage of marginal fields that PDVSA didn’t want to develop itself.  In essence, the 1991-92 agreements pledged PDVSA to purchase the output from the marginal fields for a fixed price of $12-$14.  The oil cost between $4 and $7 per barrel to extract, and the concessionaires faced an income tax of 34%.

In 1997, PDVSA signed a second wave of operational service agreements.  These were a little more complicated.  Basically, the concessionaire kept everything (subject to income taxes) until it broke even, after which PDVSA’s share would slowly rise to 70 percent. 

At the same time, Venezuela signed a different set of contracts to open up the Orinoco oil belt.  Under these “association agreements,” PDVSA took an equity stake between 40% and 47% in the projects.  The resulting joint venture would then pay the 34% income tax and a royalty of 1% on production.  The royalty rate, however, would rise to 16.7% in either ten years or after the project reached a pre-set level of profitability, whichever came first.  

Chávez changed the rules in 2004, when he upped the royalties to 16.7%.  That change, however, affected only one of the four Orinoco association agreements.  In 2005, the income tax rate on all foreign ventures went up to 50%, and the Orinoco royalty jumped to 30%.  In 2006, the government abolished the operational service agreements, replacing them with joint ventures in which the government charged a 33.3% royalty and in which PDVSA took a 60% stake, in addition to income taxes.  The Orinoco agreements were placed under the same framework, only PDVSA took even higher stakes, averaging 78%.  (PDVSA paid some compensation for its upped stake in the projects.)  This last change was what the Bolivarian government called “nationalization.”

Chevron, B.P., Total, and Statoil accepted the change; Chevron and Exxon left and took Venezuela to arbitration.  Chevron later backed down.  Exxon did not, and continues to threaten Venezuela at ICSID.

The above sounds very bad for the oil companies, but when you calculate the net effect on their revenues, Chávez’s changes had the net effect of expropriating the marginal revenues that the Orinoco companies would have received from the big run-up in oil prices.  Their net revenue per barrel remained basically unchanged.

The effects of the new rules on the companies governed by operational service agreements are a little more complicated.  Projects initiated under the 1991-92 rules benefitted from the changes, at least as long as oil stayed above $80 a barrel:  they moved from an effective marginal tax rate of 100% to an effective rate of 87%.  Some of operational service agreements initiated under the 1997 rules didn’t do as well, depending on how much money they had already made for their owners.  Perversely, the more money they had already made, the more likely they were to benefit from the Bolivarian revolution.  The reason for that perversity is simple:  under the old system, marginal tax rates rose along with cumulative profitability, and the new rules cut the maximum marginal rate.

In short, Chávez’s great oil expropriations weren’t.  Expropriations.  They were tax hikes, and in this, they were not at all unlike Bolivia’s putative gas nationalization.

It surely would have been better for everyone to have specified a set of progressive taxes and royalties to cover the unforeseen contingency of super-high oil prices, but the net effect would not have been different.  So why not get back in now that the oil price is low?  The oil companies won’t enjoy any future boom, but they are also unlikely to find themselves truly nationalized.

The big mystery is neither why Chávez changed the concession agreements, nor why the oil companies appear willing to re-enter the Venezuelan market now that he appears to be changing them back.  Nor is it a mystery why most of the majors decided not to pursue the options available to them against Venezuela. 

Rather, the big mystery is why Exxon went to the mattress against the Bolivarian Republic.  It isn’t clear to me that they will be able to win.

Thoughts?  Greater knowledge? 

By the power of ICSID

  How vulnerable are Latin American nations to international arbitration? 

Venezuela makes the answer easy to find.  The Bolivarian Republic owns $14.5 billion in direct investments abroad, mostly Citgo refineries and gas stations.  It also enjoys $22.9 billion in accounts receivable, mostly for oil delivered by not paid for.  Some of that are debts incurred by the Petrocaribe countries, but most of it is with the United States, and it is all potentially attachable in a settlement.  (The liquid assets are probably owned by the central bank, which has $39 billion in reserves, and are considered immune.)  Blocking those accounts receivable is the 21st-century equivalent of parking a gunboat in the harbor.  Hugo needs to tread very carefully, and considering that Cemex is still being run from Monterrey, it looks like he has been.

How about Argentina?  Mecon gives the answer for 2007 right here, on page 15.  The Argentine government owns $8.2 billion in foreign assets.  Sounds vulnerable!  It's not, however.  $6.0 billion consists of “créditos por financiación de entes binacionales.”  The big one is the  Yacyretá dam on the Paraguayan border, an $11 billion project.  I suppose one can imagine a world in which ... uh ... no, I can't really imagine a world in which foreign investors in Argentina could go after Yacyretá.  And given that it loses money, I'm not sure that they'd want to.  Another $1.5 billion represents Argentina's paid-in capital to multilateral lending organizations like the IMF and World Bank.  In theory, I suppose, that money is very vulnerable to an adverse ICSID (aka CIADI in Spanish) ruling, considering that ICSID is part of the World Bank group.  In practice, I don't know of any cases where the a multilateral institution has reassigned capital from a national entity to a private interest.  I don't even know how that would work, accounting-wise:  the multilateral entity would need to find cash to pay the private investors for its shares, since only governments can hold capital stakes in multilaterals.  That would get beyond messy right quick.  In short, Argentina isn't all that vulnerable to the postmodern imperialism of the 21st century.  So why not nationalize the airlines?

What about Ecuador?  Sadly, its central bank does not make the figure easy to find.  It does not track Ecuadorean foreign direct investment at all.  And what it does track is not broken out into public v. private, save for central bank reserves.  (Which is an odd concept in a dollarized economy, but the number is there.)  I'm still stumped. 

Correa lo hizo

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

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

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

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

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

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

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

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

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

The empire's demise has been prematurely reported

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

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

Around the Revolution

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

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

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

In Venezuela, the Revolution just won what is either an impressive victory or a debilitating blow in the gubernatorial elections.  On the one hand, Socialist party candidates garnered a total of 53.5% of the vote.  They also took control of most state governments.  On the other hand, urban votes shifted dramatically towards the opposition.  More ominously for Sr. Chávez himself, the biggest Socialist vote margins piled up in three states whose incumbent Socialist governors opposed the President’s constitutional reforms in last year’s referendum.  (Monagas, Anzoátegui and, Lara.)  That bodes ill. 

As does the fact that Venezuelan oil is now heading for $40 a barrel.  (You heard it here first!)  Venezuela’s budget is a mess, and a gigantic hole has just been blown through it.  Unless Chávez intends to try to emulate Plutarco Calles (or, more contemporaneously, Vladimir Putin) and become a behind-the-scenes jefe máximo de la revolución, he will be on his way out in 2012. 

Crossing the Caribbean to Nicaragua, we come to the interesting administration of President Daniel Ortega.  One difference between Nicaragua and Venezuela is that Venezuela has a very well developed system for insuring that elections are free and fair, while Nicaragua does not.  There are reports that President Ortega, it seems, has taken advantage of that lacuna to steal municipal elections.  Several Sandinistas have defected, and violent demonstrations have gripped several cities, including the capital.  Things could easily get worse.  The Russian Federation, I should add, is a non-player here, despite its government’s pretensions.  Venezuela is not a non-player, but given Hugo’s trouble at home, I don’t see him upping aid to Managua.  He’s already called off a $4 billion refinery project.  Anyway, I’m not sure that Ortega is at the stage where aid could help:  fraud charges cross a line, and it will be hard for him to buy support back.

Jinking to the north, Honduras has just joined the Alternativa Bolivariana, and the first shipment of 50 tractors from Venezuela has arrived, along with four million energy-saving light bulbs.  El Universal reports that Caracas stands ready to lend Tegucigalpa about $132 million more, along with $82 million in subsidized oil for agricultural use.  (It isn’t clear whether that subsidy is a standard Petrocaribe credit, or an actual grant of free petrol.)  A nice economic gain for President Zelaya, with the additional benefit of sending a shot across the bow of the new American president-elect.  “Pay attention to me or else!” it says. 

The problem, of course, is that there doesn’t seem to be a whole lot to the “or else” part.  Or else Hugo Chávez will give your people much-needed aid?  Okay.  Latin Americans, like other foreigners, may have some trouble adjusting to a non-hysterical foreign policy coming from Washington. 

Jumping across the Pacific, we come to Ecuador, where President Correa recently shepherded through a new constitution.  Ecuador is currently testing how easy it will be to default on its foreign debts.  As regular readers know, there are cases when I think sovereign default is a great idea.  In this case, I think it is pretty dumb.  First, Ecuador would open itself up to lawsuits.  If successful, and given the structure of the loan contracts they probably would be, then Ecuador could find its export revenues attached, or worse.  With oil prices tanking, interference by the Obama Administration wouldn’t be likely.  Second, Ecuador can pay.  It can probably roll over its outstanding debt.  Now, perhaps all the terrible things that the government claims in its audit are true, and the loans really were odious ... but I’m having trouble believing it.  The claims are just too hyperbolic.  Third, even though the Ecuadorean government can pay, it would have a great case in a rescheduling negotiation, what with some of its bonds trading as low as 24¢ on the dollar.  So why run the risk of default when renegotiation is an option?

But President Correa will do what he will do; I just wish I understood what he is trying to accomplish.  Right now, he’s managed to irritate the Brazilian government by threatening to default on a loan from Brazil’s development bank, and he may be about to blunder into a very unnecessary and potentially expensive default on American creditors.  To be fair, the brinksmanship to date has worked.  The country is not in a technical default despite its recent postponed payment, and I suspect that fortunes may have been made by the debt’s recent dip to 14¢.  But my gut feeling is that default would not be wise at the present moment.  How many foreign assets does Petroecuador hold?

If I am missing something, I would very much like to know what.

One country that is not a member of the Bolivarian axis but which has a government that is sometimes considered to be allied to it is Argentina.  Argentina has just run into a bit of trouble that might be relevant for Ecuador’s energetic head of state:  the (in)famous Judge Thomas Griesa of New York has frozen $2 billion in recently-nationalized pension assets.  Argentina could lose those assets on appeal; they would then be used to pay the American “holdouts” from that country’s debt renegotiation and repudiation.  Ecuador could be headed for a similar problem, and that is assuming that the debtors fail to get ICSID involved. 

(I have no opinion on the Aerolineas Argentinas nationalization.  After all, the firm is headed towards liquidation, and its owners don’t have much of a leg to stand on demanding more compensation.  That said, it isn’t clear to me why Argentina needs a national flag carrier.  Unless there is some reason why the airline’s failure will cause some sort of catastrophic economic knock-on — and I am open to arguments of that type in the case of the Big Three in the U.S. — it seems like a dumb idea to take a dying airline under government ownership regardless of who gets compensated by how much.)

Which finally takes us to Bolivia.  The country is back from the political brink.  A draft of a new constitution has been agreed upon, and goes before the voters on January 25th.  More interesting is the Bolivian government’s aggressive stance towards the U.S.:  expelling the ambassador, the DEA, and the Peace Corps.  Where will that lead?  Some cogent analysis here.  What do you think?

And that has been your latest installment of “Around the Revolution.”  Stay tuned, and hasta la victoria siempre. 

Nicaragua dreaming

Somehow I just don't think that this is going to happen.  I mean, it's nice that Managua recognized South Ossetia and Abkhazia, but Russia just doesn't have the money right now.  No, if you're going to reward your faraway friend (although I'm at a loss as to why Moscow would want to) this seems like the way to do it.

And much as Nicaragua is a full-up member of the Alternativa Bolivariana, Venezuela doesn't have the money to toss away on such a megaproject right now.  Astoundingly enough, Caracas is going to have to cut back spending if oil goes below $90, a level of fiscal irresponsibility to rival Washington. 

Still, for a guy who proposes transcontinental railways and really likes to build stuff, I'm surprised that a Nicaraguan canal hasn't caught his eye. 

A new constitution

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

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

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

What's wrong with it?  Well, the the 1998 Magna Carta was pretty bad.  Its most innocuous feature is a lot of blather about social policy.  As regular readers know, I've argued that the evidence supports the idea that large social transfers are, at worst, not bad for growth and there is considerable evidence that they speed it up.  That said, spending commitments in a constitution are generally a bad idea.  Either the commitments will be dead letters, or you'll involve the judiciary in making spending decisions --- neither seems wise. 

More problematic was the amount of power it placed in the president.  He or she had control of monetary policy.  (Indirectly, since he or she appointed the central bank board, with Congressional approval.  I'm neutral on dollarization, but placing control of monetary policy in the president's hands was a bad idea.)  It removed cabinet ministers from Congressional oversight.  It allowed the president to control Congress's legislative agenda.  In fact, it prevented anyone but the president from introducing revenue bills.  It limited the kinds of treaties that need Congressional ratification to those that establish "alliances" or "integration."  It let the president call referenda.

I've only give the new constitution a cursory reading, but it doesn't fix any of these things.  In fact, it makes some worse.  Now the president has total control over making and ratifying treaties.  (Article 147, although Article 419 seems to re-establish the same limits as the old constitution.)  It grants the President the power to dissolve Congress and call new elections.  (Article 148.)  Bizarrely, it prohibits the government from assuming private debts while making it easier to renounce public ones.  (Article 290.)  And it puts monetary policy directly in the hands of the President, removing even the old constitution's fig leaf.  (Article 303.)

Plus, it bans genetically-modified products.  That's just a little weird for a constitution.   

Still, it isn't the worst constitution I've ever seen in terms of centralizing executive power.  (The 1917 constitution of Mexico was pretty bad in its original form.)  And Ecuadorean political culture doesn't have a great record of hewing to constitutional rules, so it's not clear how much any of it will matter.  Plus, it does permit limited presidential re-election, which is probably a good thing.

In short, I'm not a big fan, but it's not a disaster relative to the previous constitution, and if the ancilliary stuff brings legitimacy to Ecuador's fundamental law, then that will be good. 

But color me skeptical.      

Postmodern commentary

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

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

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

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

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

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

Going south?

Cooler heads may not have prevailed in Bolivia.  I'm not sure what to make of this report from Pronto, but is sounds doubleplusungood:

From email from my parents (who live in Santa Cruz): Evo has just announced an alleged a coup plot between Goldberg (the US ambassador expelled a few days ago), Costas (the Santa Cruz prefect), and a number of high-ranking military officers. Meanwhile, reports from Pando suggest that five of the bodies were Venezuelan soldiers, who are being repatriated. Costas has also asked Evo to call of the MAS protests who are still marching towards the city of Santa Cruz; he’s also called for a suspension of labor & a public assembly in the main plaza for a cabildo (a “popular assembly”) to decide what to do. (FYI: The last Santa Cruz cabildo proclaimed Costas “governor” & demanded regional autonomy.) Also, as of now, the 24 de Septiembre celebrations are cancelled — the first time that has happened in more than 50 years. This doesn’t look good at all.

The part about “Venezuelan soldiers” is particularly perplexing.

   

The good news is that it seems as though Evo agreed with Costas and got the marchers to stop.  So sanity still might prevail.      

Yankee go home

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

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

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

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

Old news from Santa Cruz

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

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

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

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

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

Cooler heads prevail

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

Judge for yourself.  

The Great National Agreement:

1. Basis for a national dialogue:

(a) The dialogue will cover the following agenda:

•IDH - royalties:  The national government, in accordance with current law, recognizes the right of the provinces to share in the Direct Hydrocarbon Tax.  The national government, while guaranteeing the payment of the Dignity Pension, repeats its decision to respect the current distribution of royalties to the provinces. 
•Provincial autonomy: The national government expresses its respect for the autonomy of the provinces of Pando, Beni, Tarija y Santa Cruz.
•The new constitution.
•Institutional pact: congressional vacancies, electoral rolls, voter ID distribution, and the election process.

(b) The objects of the dialogue's agenda will be detailed in three working roundtables and one central session that will approve all agreements.

(c) Unasur, the Catholic Church, the European Union, the OAS, and the United Nations are invited to facilitate.

2. Reestablishing social peace under the rule of law:

(a) All public offices and petroleum installations that have occupied due to the conflict by non-authorized personnel will be turned back.  Discussions about the new territorial administration of such office and institutions will be undertaken. 

(b) All road blockades will be lifted. 

(c) The national government will suspend the Congressional vote on a referendum for a new constitution for one month, which may be lengthened in accordance with the results of the national dialogue.

(d) In order to shed light on the tragic events in Pando, investigators from impartial national and international organizations and a Congressional committee will be dispatched to the place when the events took place.

(e) No judicial actions that might have political connotations will be taken.

(f) The Governor of Tarija, representing the five mobilized provinces, asks that the state of emergency in Pando be lifted. 

3. The national dialogue will officially begin on Thursday, September 18, 2008, in the city of Cochabamba, and conclude in the city of Tarija.

Things could still go very wrong, of course.  The devil is in the constitutional details.  But so far, so sensible. 

I am very curious as to how all this looks from elsewhere in the world.  Is this sort of mutual stand-down, where everyone throws stuff under the bus, easier or harder in the Balkans and Caucasus?   

Full moon rising?

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

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

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

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

Half moon at bay

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

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

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

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

El Hugo del extremo norte

In a previous post, I wrote that total taxes as percentage of revenues on hydrocarbon extraction in Alaska were 25 percent.  Well, I've just had a chance to play with the data, and it turns out that my estimate was flawed.  (It failed to take into account that profit margins in Alaska are substantially higher than the overall profit margins in hydrocarbon extraction across the United States.)  Direct taxes on Alaskan oil & gas actually turn out to be 32 percent of gross revenues ... 33 after Governor Palin's tax hikes. 

One-third of revenues is a nice round number that you can use to put hydrocarbon tax burdens in other countries into perspective.  Bolivian taxes, for example, had fallen impressively low by the time Evo Morales assumed office, and some revision was almost certainly in order.  Time will tell whether he found the right level, and the means by which he raised taxes caused unnecessary uncertainty, but a substantial tax hike on the industry was the right thing to do by the people of Bolivia.  Regardless of whether you're a Bolivarian.