March 4, 2006

The road not taken...

This piece about Lula in the current Economist is absolutely required reading: proof that the democratic left in Latin America can reduce poverty and inequality without oil windfalls, without populist spending binges, without empty grandstanding, without antagonizing the US and without undermining the institutional underpinnings of democracy or prosperity. Instead, Lula has done it by thinking long-term, being humble enough to learn from his mistakes, and adopting policies that make sense:

Lula's leap

That the mass of Brazilians seems prepared to overlook the PT's misdeeds suggests that Lula got two big things right: the economy and poverty alleviation. Comparing Brazil's vital indicators when Lula took over with the same ones now “is like looking at two different economies”, says Vinod Thomas, former head of the World Bank in Brazil. In the autumn of 2002, Brazil's currency, the real, plunged, largely because the markets feared Lula's arrival. Inflation, already in double digits, threatened to spike higher and the yield on Brazil's dollar bonds was 25 percentage points above that of American Treasuries. The new government swerved away from disaster. The finance minister, Antonio Palocci, raised the target for the public sector's primary surplus (before interest payments) by half a percentage point to 4.25% of GDP, persuading the markets that Lula could be trusted to pay Brazil's public debt. The central bank steadied the real and raised interest rates to choke inflation.

An economy that swooned every time confidence in emerging markets wobbled now looks steadier. Spurred by a devaluation in 1999 and buoyant demand for commodities, exports have boomed, turning a current-account deficit into surplus. Mr Palocci has used the inflow of dollars to pay off foreign creditors, including the IMF. Soon, Brazil will no longer have to worry about a falling real driving up its debt burden. The risk premium has fallen to a record low of two percentage points.


Lula points out that the government has not raised a single tax rate yet. Revenue is up because profits are higher and tax collection is better. As this improves, “we'll be able to reduce the tax burden by cutting rates and expanding the base of contributors”. For Lula, sure growth is worth more than fast growth. “I don't want to grow 10% or 15% a year. I want a lasting cycle of growth averaging 4% or 5%.” There will be “no magic in the economy”, he says. This year growth should be around 3.5%.

But stability has its own subtle magic. It protects the value of salaries and encourages business to plan long term. “The capital market is now an option” for financing infrastructure, says Paulo Godoy, president of the ABDIB, a group representing infrastructure firms. Despite high interest rates, consumer credit surged after the government let banks lend to consumers against their paycheques. This contributed to what will no doubt be the PT's favourite campaign statistic: 3.5m jobs created in the formal sector between 2003 and 2005.

This points to a second achievement: a reduction in poverty and inequality—the blight that Lula was elected to combat. A poverty index tracked by the Fundação Getulio Vargas (FGV), a business school, fell from 27.3% of the population in 2003 to 25.1% in 2004. Strong economic growth in 2004 helped. More important, says Marcelo Neri of FGV, was a sharp drop in inequality, which is “now at its lowest level in the past 30 years, and still falling.”
In fact, the whole piece reads like a catalog of Chavez's wasted opportunities. Read it all.

Dangerous Liaisons

Knight Ridder newspaper readers throughout the US woke up today to find this piece by Steven Dudley in their morning paper:
Chavez's wooing of Iran called troubling
They started with an agreement to build tractors, but Iran and Venezuela have quickly moved to oil, cement, homes, auto parts, shipbuilding and perhaps even nuclear energy. The new friendship between the two deeply anti-American governments was further cemented last month as Iranian Parliament speaker Gholam Ali Haddad Adel headed a delegation that visited Venezuela and drew expressions of support from populist President Hugo Chavez.

"It's a natural byproduct of their confrontation with the United States," said Armando Duran, a columnist and former Venezuelan foreign minister. "Chavez looks for an alliance with those who confront the U.S." Iran is not the first or last openly anti-Western Middle Eastern government that has warm relations with Caracas. As an OPEC member, Chavez courted Libya leader Moammar Gadhafi and Iraqi President Saddam Hussein, and last month endorsed the Palestinian government of Hamas, which Washington and Europe regard as a terrorist organization.

But few countries are as embroiled in as serious an international controversy as Iran, accused of seeking nuclear weapons. Venezuela joined Cuba and Syria as the only countries to vote in the International Atomic Energy Agency last month against reporting Iran to the U.N. Security Council.

Thing is, when you're dealing with two regimes as opaque as these two, you get the distinct feeling that the public, above-board ties are very much the tip of the iceberg. What do these guys get up to behind closed doors? You can't help but wonder...

March 3, 2006

The Daily Journal goes to the dark side...

The Daily Journal, Venezuela's only English-language newspaper, has been bought by Julio Augusto López, the Peruvian-born, government-connected empresario behind the new-style, pro-Chavez Diario de Caracas.

López, who first tried to buy the DJ back in 2003, has big plans for the paper...but then, every new DJ owner in memory has had "big plans" for the paper until they collide with the harsh realities of publishing in a foreign language for a tiny market. (Though one suspects none of the previous owners had pockets anywhere near as deep as him.)

Now, the venerably old but consistently loss-making DJ is hardly a publishing powerhouse in Caracas. With a skeleton staff and circulation figures that have long prompted snide quips about how "en vez de dar noticias da lástima," this is far from a major coup for the government's communications strategy. Still, go to any given newsstand in Venezuela and the DJ is the only thing you'll find in English. Just the latest fallen domino...

March 2, 2006

International solidarity turned on its head...

Chavez supporters tend to applaud his moves to stick it to the gringos by raising the price of oil. The argument ignores a basic, but seldom-acknowledged fact: as this International Energy Agency study (PDF format) finds rising oil prices hurt poorer countries more than richer ones.
The adverse economic impact of higher oil prices on oil-importing developing countries is generally more severe than for OECD (developed) countries. This is because their economies are more dependent on imported oil and more energy-intensive, and because energy is used less efficiently. On average, oil-importing developing countries use more than twice as much oil to produce a unit of economic output as do OECD countries. Developing countries are also less able to weather the financial turmoil wrought by higher oil-import costs.

The economic impact on the poorest and most indebted countries is most severe. On the basis of IMF estimates, the reduction in GDP in the sustained $10 oil-price increase case would amount to more than 1.5% after one year in those countries. It is estimated that the loss of GDP averages 0.8% in Asia and 1.6% in very poor highly indebted countries in the year following a $10 oil-price increase. The loss of GDP in the Sub-Saharan African countries would be more than 3%.

Asia as a whole, which imports the bulk of its oil, would experience a 0.8% fall in economic output and a one percentage point deterioration in its current account balance (expressed as a share of GDP) one year after the price increase. Some countries would suffer much more: the Philippines would lose 1.6% of its GDP in the year following the price increase, and India 1%. China's GDP would drop 0.8% and its current account surplus, which amounted to around $35 billion in 2002, would decline by $6 billion in the

Other East Asian countries would see deterioration in their aggregate current account balance of more than $8 billion. Asia would also experience the largest increase in inflation in the first year, on the assumption that the increase in international oil price would be quickly passed through into domestic prices. The inflation rate in China and Thailand would increase by almost one percentage point in 2004.

Latin America in general would suffer less from the increase in oil prices than Asia because net oil imports into the region are much smaller. Economic growth in Latin America would be reduced by only 0.2 percentage points.

The cost of fuel imports relative to GDP is particularly high in Africa. In 2000, Sub-Saharan African countries spent 14% of their GDP on fuel imports. As a consequence, sharp fluctuations in oil prices can lead to big shifts in their current account balance, often amounting to more than 1% of GDP. This generally leads to a rapid economic adjustment involving a sharp contraction in domestic consumption, because these countries have very limited access to international capital market to finance a temporary increase in the current account deficit.

By working to jack up oil prices, Chavez exports poverty rather than abating it.

If fungibility opposes us, we shall fight against it and make it obey us

What with this stuff about the Citgo Buy-cott, and Chavez's ongoing threats to "cut off" oil supplies to the US, Dilbert comes to the rescue:

(Do you understand what fungible means?)

March 1, 2006

Venezuela as Strategic Threat to the US?

Well, that Stratfor article I reprinted has vcrisis up in arms. Alek indulges his tendency to look for the fifth leg on the cat, suggesting only a conflict of interest could explain Friedman's piece. John Sweeney, in a delightfully spiteful little hatchet job on his old boss, takes a different tack, claiming Friedman doesn't know what he's talking about and that Chavez does represent a security threat to the US via the Iranian/North Korean connection.

Alek argues, correctly, that Chavez has never placed commercial interests at the top of his agenda. This is true, as far as it goes, but misses the point: what Chavez does place at the top of his agenda is staying in power, and he can only stay in power by spending oil dollars hand-over-fist. But Chavez can only affect US energy interests by exiting the oil market entirely. Doing so would mean foregoing the revenue stream that keeps him in power. Much of the point of Friedman's piece is that this will never ever happen.

John Sweeney comes at it from a different angle. Friedman argues that "Latin American countries in general are of interest to Washington, in a strategic sense, only when they are being used by a major outside power that threatens the United States or its interests." Sweeney retorts that if Friedman wasn't so damn ignorant, he would realize that this is precisely what's happening, via the Iran/North Korea connection.

Sweeney says that Iran and Venezuela signed a secret treaty for nuclear cooperation last year, and adds that Iranian and Cuban geologists are already prospecting Bolivar state for uranium deposits. He says there are secret negotiations underway with North Korea for conventional weapons purchases, and that 100 to 120 North Korean Special Force agents are in Venezuela conducting training on asymetrical warfare. He also charges that Venezuela is currently discretely seeking "one or two nuclear warheads" through these ties.

If these things are really happening, then Venezuela would certainly become a top-tier security threat for the US. The problem, though, is that all we have to go on is John Sweeney's say-so. No documents, no details of the operations, no specifics, not much really. This doesn't mean this stuff isn't going on, it just means that the story can't possibly get any traction if it's this abstract.

Still, the possibilities are intriguing. If Venezuela is really pursuing these avenues, the US will eventually find out. And if that happens, Venezuela will rocket to the top of its geopolitical worry-list. There's just no way the Americans would allow a nuclear armed opponent in the Western Hemisphere. What now seem like oceans of BS about asymmetrical warfare could become very very real indeed. But if this is the game we're playing, we need proof, we need a solid, documented case out in the public domain. Incendiary accusations alone sure won't do it...

Chavez Galactico

According to the BBC's By Greg Morsbach,
Venezuelan scientists are going to China to begin work on Venezuela's first satellite - the first step on the way to a national space programme. President Hugo Chavez has earmarked around $0.5bn (£287m) to get the space agency off the ground in 2007.

The 30 scientists will be joined by another 60 next year to build the satellite along with China. Venezuela's government hopes to use it to broadcast many of its own radio and TV programmes throughout Latin America.

The Simon Bolivar satellite is supposed to be launched into space by August 2008. Mr Chavez wants the satellite to be blasted into orbit from a Venezuelan launch pad.

The Venezuela government intends to put several satellites into space, some of which will be used for geological surveys of the Earth.(!!?!??!!)

Venezuela's military will play a key role in the space programme and so the satellites could eventually be used to gather intelligence.

February 28, 2006

If geography opposes us, we shall fight against it and make it obey us

Well, the oil sabers they are a'rattlin' again as Chavez's Oil Tsar Rafael Ramírez resumes threats to start selling Venezuelan oil to China instead of the US. The threat seems formidable, but only if you studiously avoid thinking through its implications.

Currently, Venezuelan oil travels 3,200 km. to get to the US Gulf Coast. Middle Eastern oil travels 7,000 km. or so to get to China. Overall, oil has to be shipped over some 10,000 km. to satisfy both countries' demand.

What would happen if Venezuela were to go through with its threat?

First off, Venezuelan oil would have to travel over 15,000 km. to get to China. And the US? Well, every barrel of oil China buys from Venezuela instead of the Middle East is a barrel of Middle Eastern oil it frees up for other buyers. The US, facing a sudden shortfall, would presumably buy it. And that Middle Eastern oil would have to travel about 12,000 km. to get to the US.

So demand that might have been satisfied by shipping oil over a total of 10,000 km. will now take 27,000 km. of shipping to satisfy.

(In fact, it's even worse than that: in the short-term, most of the refineries able to handle Venezuela's sour crude are in the US Gulf Coast - so Venezuelan oil would likely end up being shipped to the US, refined, pumped back into a tanker as products and shipped off to China!)

At the end of this whole silly rigmarole, does the US get any less oil than before? No.

Does China get any more oil than before? No.

Is the total amount of oil in the market altered? No.

Is the world price changed? No.

The only difference is that oil travels farther from producer to consumer, raising transportation costs all around. The US and China pay more for their oil imports, Venezuela and the Middle East get less from their oil exports. Only the shippers gain.

Viva la revolución, no joda!