¿Pendejo, jalabolas o ideólogo?

Once again today, the Venezuelan government held a press conference in which major economic announcements were expected, specifically, related to the foreign exchange system. Unsurprisingly to anyone paying close attention to Venezuela since Hugo Chávez died in early 2013, the big announcements amounted to little more than a renaming of the existing system of extensive and complicated capital controls. This included some minor tweaks and a small devaluation and a new “free” rate where people are allowed to sell as many dollars as they want, but limited to buying $300 at a time.

Many people are interpreting this as proof that either Nicolás Maduro and those advising him have no idea what they’re doing or that they’re being overruled by factions within chavismo that benefit from the distortions caused by the current forex system. Outside of the hardcore chavista intelligentsia–who have spent much of the last year attacking Maduro from the left–, there is little consideration to the possibility that Maduro and his advisors are genuinely committed ideologically to these policies and believe that the orthodox reforms most people expect them to implement sooner or later will be counterproductive. This is not to discount the fact that there are definitely powerful members of the government who benefit personally from the current system and are fighting to keep it for reason of personal gain. Nor is it to argue that the current course has any real chance of creating a sustainable, productive Venezuelan economy. It is simply to argue that it’s worth considering it as a possible motivation for Maduro’s decision-making since it could inform how his government behaves in the future.

In his book A Failed Emprie: The Soviet Union in the Cold War from Stalin to Gorbachev, Vladislav M. Zubok notes that one of the most striking things in the declassified minutes from Politburo meetings all throughout the Cold War is the degree to which the leadership in the Soviet Union genuinely believed in Soviet ideology and how reluctant they were to abandon or even modify it. This includes even Gorbachev who was genuinely committed to reforming the Soviet to better fulfill its founding principles and ideologies, not to introduce proto-capitalism.

Similarly Fidel Castro is arguably much more ideological–and consequently, less cynical–than many give him credit for. For example, once the economy had stabilized following the collapse of the Soviet Union, he began rolling back many of the limited market reforms that had been implemented during the Special Period. Moreover, during the 1970s, Cuba maintained its support of lefitst insurgencies in Latin America and Africa, even though it alienated him from the Soviet Union, upon whose protection his government depended.

Of course, Nicolás Maduro and his advisors being ideologically committed does not preclude them from also being incompetent. Nor does any amount of ideological commitment change the simple reality that people respond to incentives and that the Venezuelan political economy creates countless incentives to exploit arbitrage opportunities and few incentives to produce goods and services. Nonetheless, why Maduro is making the decisions he makes matters, both for the opposition and others, because it informs how he might react to new stages of Venezuela’s economic crisis. A Maduro who is ideologically committed might react differently than one who is beholden to the interests of the enchufados or one who is simply too stupid to think of any new course of action.

Losing the war he invented

Last night, I floated on Twitter a question about how many long Nicolás Maduro can blame Venezuela’s troubles on an economic war waged against him before his supporters come to believe that he’s too weak to succeed in winning it. Obviously this question rests heavily on the assumption that there are a good number of Maduro supporters who believe that Venezuela really is the victim of some sort of vast conspiracy, and not just the predicatble consequences of poor policy decisions over the past 15 years. Recent surveys, however, indicate that one in five Venezuelans still supports Maduro and reporters have to problem finding people to interview in the now-ubiquitous grocery store lines who at least claim to believe his claims, so there is at least a bit of a constituency.

The threat in this propaganda line for Maduro isn’t really in the opposition so much as within the chavista coalition. Few people who support the opposition are likely to believe that the problem is anything other than the government anyway. However, things are different among chavistas who continue to believe that chavismo is a path to prosperity. For these people, the country’s continued economic malaise might not demonstrate the failure of the model so much as show that Maduro is too weak to protect the gains brought by Hugo Chávez. This is exacerbated by the fact that the policies Maduro has selected to fight the economic war–currency and price controls, taking over producers and distributors, etc–will mostly only contribute to the problem, whatever positive optics they might give. If anything, those positive optics (fighting contraband on the border, taking over stores, seizing “hoarded” inventories) might simply cast into starker relief how little those efforts are doing to alleviate the shortages and inflation wracking the Venezuelan economy right now.

So what happens if the loyal chavista base decides that Maduro is too weak to win the war he says he’s fighting? The conspiracy-minded might say that this is the machiavellian plan of some high ranking officials who have allowed–or even encouraged–Maduro to founder while enriching themselves off the distortions, only to swoop in and save the day once the situation starts to risk chavismo’s hold on power. Whether that’s someone’s plan or not, any clear-eyed people close to Maduro must be concerned about what happens if the chavista base ends up in the streets protesting. Considering how openly authoritarian the government has become in recent times, it seems difficult to believe that the opposition would be able to end up in power, at least immediately.

Never let a good crisis go to waste

Cristina-kirchner-clarin

That other time she blamed Clarín. No, that other, other time.

Two weeks ago, Argentine prosecutor Alberto Nisman dropped a bomb on the political landscape, accusing President Cristina Fernández de Kirchner and members of her cabinet of criminally covering up the culpability of multiple Iranian officials for the 1994 attack against the AMIA Jewish Center in Buenos Aires that left 85 people dead. In a criminal complaint, Nisman alleged that Cristina Kirchner and members of her government negotiated a deal with Iran that would establish a–presumably biased–joint truth commission in exchange for various commercial engagements.

The scandal exploded into an international story last Monday when Nisman was discovered dead in his apartment from a gunshot wound to the head just hours before he was to testify to Congress about the case. Investigators originally called his death a suicide and the government quickly mobilized around that conclusion. After a day of protests, testimonies from friends and colleagues and the revelation that Nisman did not have gunpowder residue on his hands, Cristina Kirchner walked her position and declared in a statement on her website that even she did not believe it was a suicide. Instead, she claimed that Nisman had been the victim of a conspiracy within the intelligence services intended to impute her government for whitewashing the AMIA prosecution, and that the same people who had fed him fake evidence eventually killed him to pin the death on her.

Last night, Kirchner addressed the nation via a mandatory nationwide broadcast lasting over an hour; her first comments about the case not through social media. In it, she accused Nisman of lying about the facts when he called the memorandum signed with Iran unconstitutional and argued that various Iranian officials named in the case had been made available to testify had they been called. Then she the capitalized on her previous theories and announced that she would be calling an extraordinary congressional session to debate a new law to dissolve the Servicio Intelligencia to replace it with a new Federal Intelligence Agency that, according to her, would be isolated from forces within the judicial system and media that she claims had corrupted it.

Like so often with these types of situations in Latin America, there are some very good reasons to overhaul the Argentine security apparatus. By many accounts, it’s plagued by internal factions and is not terribly effective for its costs (although that can be said of many intelligence services). However, looking at the specific denunciations Kirchner made, they read very much like the usual accusations she makes. Namely that they are part of a medial and judicial plot to undermine her rule. As such, it seems less like a genuine attempt to reform the intelligence services because they need to be reformed so much as a pretext to bring them more firmly under executive control. This was what happened with the media reform from 2009. She used the legitimate need to reform and update Argentina’s outdated media laws as a means to target Clarín, Argentina’s largest media group and a former ally turned arch nemesis of her government.

It remains to be seen, of course, whether this effort will be successful. Kirchner’s party and it’s allies control a majority in both houses of the Argentine congress, but as relatively unstable coalitions. It also remains to be seen exactly how the reform would look. The early indications presented in her speech are that the new agency would be subject to both executive and senate oversight. However, the executive branch is particularly powerful in Argentina, so nominal control by both often turns out to mean little legislative oversight.*

If it is passed, and does give the executive significant control, this would be a truly impressive political maneuver on Kirchner’s part. Right now, she stands accused of having used her power to cover up the culpability of Iranian terrorists in order to gain commercial concessions with Iran, a grave abuse of her power. Moreover, many believe that she is directly responsible for the death of the man who accused her (to say nothing of the heavy-handed response of the government to journalist Damián Patcher leaving the country). Yet, if she is successful in reforming the intelligence services, she could turn a potentailly disatrous scandal about her abuse of power into a new law that accumulates even more power within the executive branch, and by extension, her own personal control.

* Of course, legislative oversight of intelligence agencies is often ineffective, even in countries with much stronger institutions than Argentina.

Gusanos fleeing a sinking ship

Today, Barack Obama shocked the world by announcing that the United States and Cuba had reached an agreement to begin normalizing relations between the two countries after more than 50 years of conflict. The deal, brokered with help from the Vatican, Canada and Spain, centered around the exchange of the three remaining “Cuban Five” agents for a US spy in Cuba that few had known about. Additionally, Cuba released USAID contractor Alan Gross after 5 years in prison and 53 political prisoners. Obama, for his part, has exercised most of the authority he has as president to loosen the embargo, allowing for closer economic and social links between the two countries, though the embargo itself, codified into law under the Cuban Democracy Act and the Helms-Burton Act, will remain in place until both laws are repealed by Congress.

Beyond the usual acknowledgements that the embargo has been a half-century disaster that has done nothing to achieve its stated goals while executing a significant reputational cost to the Untied Sates, there isn’t much to say about this. It’s an exceptionally important event, but one so obviously necessary, it’s difficult to say anything unique about it.

More interesting, however, is what this says about the situation in Venezuela. Ever since Hugo Chavez took power in 1999, Venezuela has heavily subsidized the Cuban government–to the tune of 100,000 bbl/day of oil–in exchange for doctors, sports trainers and other Cuban experts coming to work in Venezuela. This has been a huge boon to Cuba, and provided the necessary cushion for the Castros to reverse many of the “Special Period” reforms made after the collapse of Cuba’s previous benefactor, the Soviet Union, pushed the regime to the brink in the early 1990s. It also proved useful to Hugo Chávez and Nicolás Maduro, as their close relationship with Fidel Castro provided them with a legitimacy among the Latin American left that would have been difficult to achieve on their own, while helping keep an increasingly irrelevant Castro in the spotlight.

In the past several years, however, the inevitable economic dislocations associated with a socialist revolution began to act as a drag on the Venezuelan economy. Oil production has still never recovered to the level it was at before the 2002 strike and then mass firing of oil workers by Chávez, and increasingly byzantine currency restrictions, labor laws and export licensing choked off most of what remained of Venezuela’s productive capacity. This has left it extraordinarily vulnerable to a price decline, which appears to have struck in force over the past few months. Venezuelan oil, which for a variety of reasons trades several dollars below the benchmark rates, has fallen from more then $95/bbl to less than $55/bbl since the spring.

While the Castros are many things, one thing they most certainly are not is stupid, particularly when it comes to staying in power. They were largely caught off guard by the fall of the Soviet Union at the end of the Cold War, and were forced to take extreme measures to weather the crisis. They were not going to be caught unawares a second time. Like a rat fleeing a sinking ship, the Castros clearly realized that Venezuela is not going to be able to pay for it for too much longer and had to look for other alternatives. Incidentally, most other “anti-imperialist” countries are either unable to help (Iran, Russia), or rather uninterested in helping (China). This left liberalization as the most viable backup plan. Rapprochement with the United States, and the possibility of ending the embargo has finally surpassed the political benefit of blaming the embargo for all of Cuba’s troubles in the Cuban government’s calculations. It doesn’t mean that Cuba is going to be a free-market democracy any time in the near future, but it clearly indicates that Cuba sees some degree of liberalization as its best way forward.

This is doubly bad for Nicolás Maduro. On the one hand, Venezuela appears to have been caught completely unprepared for this agreement. State-run media took hours to even acknowledge what happened, indicating that they did not have any prior warning that would have given them time to prepare their spin. That, in and of itself, shows how little the Cubans value the Maduro government despite all the money they’ve spent. Moreover, it represents a clear indication that the Cubans, who know as well as anyone, think the situation in Venezuela is not worth betting on. Finally, it poses some real problems for Maduro within the fractious chavista coalition. The general consensus is that Maduro’s power base sits in Havana and the radical civilian left of chavismo, as opposed to the more nationalist military wing. Maduro has heretofore done an unexpectedly good job of balancing the forces within chavismo, largely by showering the military with lagresse. However, a clear rebuke like this by the Cubans could undermine his legitimacy.

“Why,” the military chavistas might ask, “should we put up with this guy the Cubans picked if the Cubans don’t respect him at all?”

Brazil’s Election: Seeing Triple

...four Krustys!

…four Krustys!

At work on Monday, I hosted an event with BrazilWorks director Mark Langevin where he spoke on the platforms of the three top candidates in October’s presidential election. The talk was useful in highlighting some if the important differences between the candidates, but was also illuminating because it demonstrated just how similar their platforms all are. All three favor an important role for the state in the economy, particularly in industrial policy, none is particularly enthusiastic about liberalizing the country’s protectionist trade regime, and all are vague about the contours of the fiscal adjustment they’d likely have to undertake once in office. This presents two problems for Brazil; one immediate and the other more structural.

Having three candidates whose platforms vary mostly on the margins or simply in tone is not necessarily a bad thing; it can be indicative of a broad national consensus about the direction the country should go. One could argue that this was the case in 2002, when Luiz Ignacio Lula da Silva and José Serra were running on a platform of continuity with the policy framework instituted by Fernando Henrique Cardoso. However, in 2002, the sentiment was that Brazil had found the right policy mix and that the best route forward was building on what Cardoso had started. The arguments were over more ancillary policies and the rhetorical emphasis of each candidate.

That is not the case this year. Brazilians and non-Brazilian observers alike seem to agree that the country needs a change. To be fair, the change Brazilians seem to be looking for is poorly defined and is exemplified by the protests in June 2013, which expressed Brazilians’ broad disillusionment with the state of things in their country, but was unable to coalesce around many concrete proposals. Considering that there is a strong, if amorphous desire for a change in the country, it would be encouraging to see more variety in the platforms. Instead, what you mainly see is a bit of tinkering with Dilma’s governing philosophy by her and her two opponents, former Lula minister Marina Silva and Aecio Neves a senator from Minas Gerais. Considering Brazil’s economy is already stagnating, inflation is persistently at or above the Central Bank’s ceiling and China, the engine of the spurt of growth during the Lula years, is settling into a slower-growth equilibrium, this seems wholly insufficient for the situation, yet Brazilians have no alternative.

The threat in the longer term for Brazil is that the Workers Party (PT) becomes a political force that effectively gobbles up the center and center left of the country, leaving the opposition to form as an awkward coalition of far left and right—a coalition that would have difficulty forming coherent policy alternatives and would be inherently unstable. It would also be electorally unviable, acting more as a rump opposition and transferring the real competition for government into the PT. This has been one of the legacies of peronismo in Argentina, where many of the most important power struggles in the country happen within peronismo instead of between the various political parties, limiting democratic accountability. Silva and Dilma—the two frontrunners—both were members of the Lula administration, and Silva, while having left the PT, doesn’t differ with the PT on many policies. In effect, this is an election that could end in a runoff between the PT and a dissident PT, not a major clash of different governing philosophies.

I was recently discussing Darren Acemoglu and James Robinson’s Why Nations Fail with a Brazilian professor. He said that he liked the book, but felt that the chapter that dealt with Brazil was overly optimistic and that whatever improvement Brazilian institutions had made since the end of the dictatorship was being undone. I am less pessimistic, but as Brazil approaches this election needing fresh ideas and no candidates presenting them, while the two candidates most likely to win have both come from the same party (and the Lula administration), it’s difficult to imagine the country taking a big step forward in the next presidential term. Moreover, it’s increasingly possible to imagine a scenario where the only viable candidates in future elections are from the PT or are dissident PT members. That would point toward a degradation in the quality of Brazil’s institutions and an empowering of the most destructive tendencies in the Brazilian political system.

Potential is not destiny

Brazil’s 7-1 semi-final loss to Germany last week followed by an uninspired 3-0 defeat against the Netherlands in the World Cup’s vestigial third place match on Saturday cast into stark relief the national team’s deficiencies relative to other world powers. Obviously, the 7-1 result was a sort of “black swan” event—a highly unlikely worst-case scenario—but no one watching Brazil’s first five matches in the tournament should have been arguing that Brazil, even with Neymar and Thiago Silva, was a better soccer team than Germany then. Except many were. And many spent the tournament treating Brazil like a team that was far more dangerous than the one actually on the field playing.

I mention this because it struck me throughout the tournament how similar a phenomenon the systematic overrating of Brazil’s national team was to the declarations in 2009-2010 that Brazil had finally “arrived” as an economic power. Saying that the Brazilian team is overrated or that it has not “arrived” as an economic power is a relative discussion; Brazil finished 4th at a tournament in which more than 200 countries try to qualify and its economy is the 6th largest in the world by certain measures. Brazil’s national team is among the best in the world, and with a couple more breaks, could have lifted the trophy this year. Similarly, Brazil’s economy is huge and dynamic, even as growth lags and inflation pushes up.

The problem in both instances was the process of evaluation. In 2010, Brazil’s GDP grew by 7.5 percent after a barely perceptible recession in 2009 following the Financial Crisis and the world decided this was the new norm. This analysis downplayed or completely ignored the structural problems like poor infrastructure and education as well as an inefficient bureaucracy and a rigid labor market, none of which was being adequately addressed and treated the commodity boom generated by China’s industrialization as something which would never end. A perfect example of this would be Larry Rohter’s Brazil on the Rise: The Story of a Country Transformed. While talking up Brazil’s future Rohter acknowledges many of issues that have come to mire Brazil in 1 percent GDP growth the past two years, but simply brushes them off, assuming that they would be resolved. Commentary during the World Cup followed a similar pattern; an acknowledgement that Brazil had not played well, followed by an assertion that Brazil would make the necessary changes and a declaration that they were still definitely the favorites.

The point is not to denigrate Brazil or to argue for blanket pessimism (just look how silly all those doom and gloom projections for the World Cup turned out). Simply to acknowledge the tendency to project what we think Brazil should be onto what Brazil actually is. Brazil has the potential to be among the most powerful countries in the world and to challenge for the World Cup every time. The key is to not treat potential as destiny.

Moving forward while falling behind

The 2014 IMD Competitiveness Ranking was released today and for the big economies of Latin America, the news was not good. Of the seven Latin American countries included in the rankings, only Argentina moved up (from 59 to 58) while Venezuela stayed stable as the least competitive country of the 60 in the rankings. Brazil, Mexico, Colombia, Chile and even current economic star Peru all fell.

Rankings like this have to be taken with a grain of salt. Since it is a relative ranking, a rise or fall in the ranking can be as much a factor of other countries’ performances as anything Chile or Mexico might be doing. Moreover, some factors, like currency fluctuations, can significantly affect a country’s competitiveness yet are not something that governments can completely control.

That said, this should be a worrying data point Latin American governments as it represents a continuation of a decades-long trend of Latin America continuing to fall behind, even when it moves forward. Several of the countries included in the ranking have been actively working to improve their international competitiveness, yet are, according to this methodology, doing so more slowly than elsewhere. If Mexico can pass its most aggressive economic reforms in decades and become relatively less competitive, what are the chances it will ever achieve meaningful catchup-up growth with the developed world?

At the end of World War II, Latin America’s per capita GDP was higher than Japan’s and comparable to Eastern Europe and the Soviet Union. In the decades since, country after country has caught and passed Latin America. To reverse this, Latin America is going to need to consistently be moving up, on rankings like this one.