Archive for May, 2009

Moody’s: Benign view of Latin America

May 20, 2009

Moody’s analyst Gabriel Torres penned a nice report on the impact of the global financial crisis on the 27 sovereign nations his firm assigns credit ratings to in Latin America and the Caribbean (email me for a copy — roger.scher@gmail.com).  He joined two of his colleagues in an informative conference call today to discuss the report and respond to investors’ questions.  Moody’s takes a relatively benign view of the impact of the global financial crisis in the region, though the global rating agency believes Mexico, due to its integration with the US economy and its structural weaknesses, remains most vulnerable to deterioration and a possible downgrade.

Torres outlined four channels by which emerging market countries are affected by the global crisis:  remittances (cash sent home by nationals working overseas), exports, capital inflows, and commodity prices.  While countries in the region have been negatively impacted through all four channels, Mexico has been hit hardest.  Most other countries, notably Brazil and Peru, have been in a relatively strong position to sustain the shocks.  Ironically, Latin America is best-prepared for the planet’s worse financial crisis in years (with generally high levels of foreign exchange reserves, reaped during the boom in commodity prices earlier this decade).  Rising interest rates and recession in the developed world in the eighties and nineties toppled many Latin countries; however, the strides made in improving public finances, floating exchange rates, and cleaning up banks have made America’s partners in the western hemisphere more resilient to handle this crisis.  Of note was the point Torres made that, if their benign view is wrong over the next 18 months, it will be because of problems in the banks that are not apparent today.

Moody’s reports that, since the onset of the crisis, Latin American and Caribbean sovereigns sustained negative rating actions in only 5 out of 27 cases, versus 12 out of 21 in Eastern Europe.  Similar trends can be found at the other major rating agencies (S&P and Fitch).  See Moody’s Sovereign Ratings.  This is partly due to the fact that the rating agencies may have over-rated Eastern Europe (brushing aside gaping current account deficits because they were financed by FDI) and under-rated Latin America (over-weighting the region’s poor credit history and discounting its burgeoning fx reserves). 

Finally, ratings are notoriously sticky.  This has been part of the criticism leveled at the agencies for rating real estate transactions too high (some of them AAA).  Because of all the notches in the ratings scale and the inability to take a binary or at least a less “granular” view of risks, agency analysts have a hard time changing a view dramatically on a country (or any other credit) in a short time frame.  In short, the rating agencies are not nimble.  They are prisoners of their ratings scale.  See an Economist article on the agencies and a Reuters article on Goldman’s new product that bypasses credit ratings.

Hence, although Mexico is on a deteriorating trend — it is running out of oil, which represents about a third of government revenue, and politicians won’t liberalize the energy sector or widen the tax base — and Brazil is on an improving trend — it has become a net oil exporter and has very strong fx reserves, the former is rated Baa1, fully three notches above the latter, at Ba1.  Rapid downgrades and rapid upgrades are not possible at a rating agency – until, of course, it is too late — because what does that mean?  It means the analyst was wrong.

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Rising Powers Update…

May 18, 2009

China and the U.S. inextricably linked.  Source:  NYTimes Magazine

A lot is going on in the Rising Powers at the moment, so why not begin the week with a survey of key developments and important news articles? 

On China, there was an excellent article by David Leonhardt in the New York Times Magazine, explaining quite clearly the symbiotic linkages between the economies of China and America and the challenging tasks both governments face to correct the imbalances in trade and finance that have underpinned the current global financial crisis.  I applaud Leonhardt’s mentioning Ben Bernanke’s past and present near-blaming of America’s debt-driven trade deficits on China’s savings glut.  I first heard Bernanke make this argument at a Merrill Lynch dinner in 2005 where he was keynote speaker and was angling to be Bush’s nominee for Fed chairman.  According to Bernanke, then Chairman of the Council of Economic Advisers, America’s twin deficits were not the problem; abysmally low American household savings were not the problem.  It was the global savings glut that kept interest rates low in the U.S.  Global capital sought the superior returns of U.S. assets.  It was up to other countries like China to adjust, not the U.S.  The Special of the Day at the Federal Reserve dining room these days is crow.

I disagree with one point made in the Leonhardt article.  He quotes China expert Nicholas Lardy saying that China’s massive current account surpluses were accidental; the Chinese “fell into it.”  As head of Asian Sovereign Ratings at a global rating agency during the Asian financial crisis of the late 1990s, I recall Chinese officials observing the financial dominos falling all over Asia at that time.  They saw governments, from Korea to Thailand, failing to follow a policy of targeting higher foreign exchange reserves.  As a result, I believe the Chinese became determined to run up their surpluses and to bank them, so as never to go hat in hand to the IMF like their neighbors had to do.

Also on China, a Foreign Affairs article called “The G-2 Mirage,” penned by Elizabeth Economy and Adam Segal, argues that prospects for the G-2 cooperatively managing world affairs are not great, given conflicting values and goals, even less so now that Obama is in power.  I heard Economy argue this point in a political salon I attended.  In contrast to Bush, Obama’s team will stress with China reducing greenhouse gases and improving human rights, which could get in the way of coordinating economic policies and solving problems around the world, notwithstanding the best intentions of Tim Geithner.

On an optimistic note regarding China, in a world where relations between (and within) states have been deteriorating (whether it is in Pakistan and Afghanistan, between Russia and NATO, or between Iran and its neighbors), it is encouraging to see China and Taiwan improving relations.  An Economist article discusses the announcement in late April by China Mobile that it would buy a Taiwanese mobile operator.  Taiwanese capitalists have long invested in the Mainland, but Taiwan has restricted Mainland investment in its economy.  With its economy now faltering, Taiwan has liberalized its investment rules vis-a-vis the Mainland.  This is part of a mutual thawing of relations since Taiwanese President Ma Ying-jeou of the KMT party, which advocates closer cross-straits relations, replaced the controversial President Chen Shui-bian, of the pro-independence DPP party, last year. Yet the Taipei Times reports that Sunday tens of thousands of protesters took to the streets of two Taiwanese cities to show anger at President Ma’s pro-Beijing policies.  Organizers had hoped for hundreds of thousands.

In India, contrary to what most pundits had expected, the incumbent Congress Party did very well in national elections and will easily form the next government.  It seems Indians voted for who they believe will run the economy and look after the poor best, not who will take the hardest line on terrorism (the BJP).  Likewise India’s smaller and regional parties had a poor showing overall.  I argued in an earlier post that an election resulting in political fragmentation, characterized by a surge of support for the smaller parties, could lead to higher government deficits and debt.  Let us see if a government dominated by the Congress Party can fulfill its election promises without a deterioration in sovereign creditworthiness.  What is clear is that President Singh is now a giant on the Indian political scene, much like Barack Obama; and, with a likely 260 seats, he needs just 12 more from other parties to govern.

Prime Minister Netanyahu of Israel will meet Monday with President Obama in Washington.  A must-read ahead of this meeting is a NYTimes op-ed by Jeffrey Goldberg, correspondent for The Atlantic, in which he explains what motivates Netanyahu and the consequent challenges Obama will face in dealing with him.  I had extensive meetings with Netanyahu over the years he was finance minister, and there is nothing in Goldberg’s piece that I would disagree with. While it would not be correct to say there has been a deterioration in relations between the U.S. and Israel since the election of Obama in November and Netanyahu in February, the expectation is that they will not see eye-to-eye in the same manner Bush and Olmert did.  However, an AP article quotes Defense Minister Barak suggesting that Netanyahu, who has lowered expectations about his appetite for negotiations with the Palestinians, will reaffirm his country’s commitment to a two-state solution.  This will be a sort of “gift” to Obama, but will there be a quid pro quo?  A commitment to heavier sanctions on Iran on the part of America?  How can Obama promise that?

In the presidential election in Iran, reformist candidates have been knocking Ahmadinejad for denying the Holocaust and ruining relations with the West.  If there is any hope that a reformist can win in Iran with Khamenei lurking behind the scenes, would this presage a détente with the West?  The trouble with this hope is that it may in fact be the case that both reformists and hardliners in Iran are intent on building a nuclear weapon.  Perhaps the only way to stop one, therefore, if that is what in fact the West wants to do, is to sharply curtail the country’s access to petroleum markets worldwide, which is a highly unlikely event.

And in Pakistan, the UN estimates one million people have fled their homes, due to fighting between the government and the Taliban.  Likewise U.S. targeted killings continue, with criticism, including in this country, mounting.  And, a New York Times article on Sunday quoted Admiral Mike Mullen, the chairman of the U.S. Joint Chiefs of Staff, confirming that the government of Pakistan is rapidly expanding its nuclear weapons arsenal.

In Brazil, hundreds of thousands remain homeless after floods ravaged the northeast, and the government is being criticized for not doing enough, reminiscent of criticism of the Bush administration after Hurricane Katrina.

And Friday, Russia and other nations could not agree on a proposal to extend peacekeeping monitors from the Organization for Security and Cooperation in Europe to stay in Georgia beyond June 30.

The world takes one step forward and two steps back…

Are people happy in the Rising Powers?

May 11, 2009

OECD Quality of Life Ranking: Subjective Wellbeing.  % of respondents reporting high evaluation of their life, in the present and future.

Among residents of the BRIC nations, Brazilians are the happiest, followed by Russians, whereas the Chinese are the least happy, followed by the Indians, according to a recent OECD report.

The OECD released its 2009 Factbook with charts and tables of economic and social indicators for its 30 members, countries “committed to democracy and the market economy,”  as well as other countries, many of them applying for membership.  In it, the organization ranks countries based on the relative “happiness” of their citizens. 

The OECD used data from a Gallup World Poll conducted in 140 countries around the world last year, that asked respondents whether they had experienced six different forms of positive or negative feelings within the last day (per a Forbes article). Sample questions included: Did you enjoy something you did yesterday? Were you proud of something you did yesterday? Did you learn something yesterday? Were you treated with respect yesterday? In each country, a representative sample of no more than 1,000 people, age 15 or older, were surveyed. The poll was scored numerically on a scale of 1-100. The average score was 62.4.  The assessment was about happiness in the present and future.

Top ten OECD members in terms of life satisfaction were dominated by northern European countries:

Denmark

Finland

Netherlands

Sweden

Ireland

Canada

Swizterland

New Zealand

Norway

Belgium

High per capita income, low unemployment, a social safety net, a relatively short workweek, and democracy appear to be key determinants of happiness.  Yet culture could play a role as well, as does good family and community life.  One interesting aspect of the study was the divergence of present and future happiness perceptions in some cases (see chart), which could be a measure of a people’s optimism.  Brazilians appear to be an optimistic lot, with one of the highest evaluations of their future wellbeing among the 34 countries in the OECD report.

South Asia heating up…

May 11, 2009

Swat region of Pakistan.  Source: BBC

The temperature in South Asia, often sweltering, has heated up over the last week.  Read a selection of news reports below.

With the peace deal between the government of Pakistan and the Taliban in tatters and pressure on Pakistani President Zardari from Holbrooke and Co. getting heavy, the Pakistani armed forces launched attacks in recent days on the Taliban in the Swat region of northwest Pakistan.  This comes against a backdrop of continued U.S. targeted killings of Al Qaeda operatives in the region. Tens of thousands of civilians are reportedly fleeing their homes, leading the United Nations to call for restraint. 

Meanwhile, in Afghanistan, U.S. air strikes against Taliban positions in Farah may have resulted in many civilian deaths, causing President Karzai, a struggling though still favored candidate in that country’s national elections in August, fresh from a summit with President Obama, to criticize the U.S.  President Obama, as candidate Obama, had been a vocal critic of such U.S. air strikes in that country.  Early last week, President Zardari of Pakistan joined Karzai and Obama for an anti-Al Qaeda summit in the White House.  Finally, elections in India are winding down, opening the door for the Obama administration to pressure the government that emerges there to seek a peace deal with Pakistan over Kashmir.  South Asia certainly qualifies these days as a hot spot.

Read about (and listen to): Obama’s remarks following the meeting with the Af-Pak leaders, praising unity in the war against Al Qaeda; General David Patraeus’s announcement of a policy review regarding air strikes in Afghanistan; a BBC report on the latest fighting in Swat, where 200 militants have reportedly been killed; a NYTimes article over the weekend discussing Al Qaeda’s effort to effect a jihadist takeover of Pakistan;  another Times article about Pakistan’s effective ambassador to the U.S.; an FT opinion piece arguing that NATO is fighting the wrong war in Afghanistan, while hamstrung in Pakistan; a piece in the Economist about how Hamid Karzai, with only 15% support, remains the favored candidate in Afghanistan’s August elections; and finally, further south, off the coast of India, reports emerging of a horrendous death toll of 378 people (over a hundred of them children) in the ongoing civil war in Sri Lanka.

Wilsonianism Run Amuck?

May 8, 2009
Georgia, bounded to the west by the Black Sea, to the north by Russia, to the south by Turkey and Armenia, and to the east by Azerbaijan.  Abkhazia is the highlighted part of Georgia to the northwest.  Source:  Wikipedia
Georgia, bounded to the west by the Black Sea, to the north by Russia, to the south by Turkey and Armenia, and to the east by Azerbaijan. Abkhazia is the highlighted part of Georgia to the northwest. Source: Wikipedia
Since President Wilson enunciated his Fourteen Points during World War I, the principle of national self-determination has been an objective of the Western Powers.  The plethora of weak national states in Eastern Europe in the interwar years, and the temptation this gave a revanchist Germany to invade and a greedy Soviet Russia to divide the spoils tempered to some extent postwar Western support of national self-determination.  It remains a principle the world community supports…however selectively.

An interesting NYTimes article discusses the national aspirations of less than 100,000 ethnic Abkhaz in Georgia, a nation of 4.7 million (mostly ethnic Georgians), which finds itself hosting NATO exercises and therefore in a tense relationship with neighboring Russia.  Russia recognizes the independence of Abkhazia and South Ossetia.  Most every other nation in the world does not. 

The conflicts there are complex, with poor judgment taking place on both sides.  Abkhaz nationalists are seeking to attract some 500,000 Abkhaz living in Turkey to return and help build an independent state.  Ottoman Turkey invaded Abkhazia in the 16th century and converted the local population to Islam (versus the Orthodox Christianity of ethnic Georgians).  Interestingly, it seems much of the Abkhaz diaspora had fled Georgia in the 19th century to escape the rule of an expanding Czarist Russia.  Russia is now of course the principal benefactor of Abkhaz separatists.

So, where does our moralistic support of national self-determination of peoples begin and end?  The Abkhaz and South Ossetians? The Chechens? The Basques of Spain and France? The Kosovar Albanians?  The Palestinians?  The Tibetans and Taiwanese?  The Kurds, the Armenians, the Azeris?  The Sunni of Iraq?  The residents of Darfur and of southern Sudan? Kashmiri Muslims under Indian rule? Tamils in Sri Lanka?  German speakers in the Italian Sud Tirol?   Difficult questions affecting minorities in some Rising Powers, as well as the world’s other powers who have to formulate policies balancing the principle of national self-determination against other interests.

Nato: Keep your eye on the ball

May 7, 2009

NATO in Georgia.  Source: AFP

Little kids want to live in a world where they get everything they want.  Parents teach kids that they can control only so much.  In AA meetings, recovering alcoholics quote the “Serenity Prayer,” attributed to theologian Reinhold Niebuhr:

God grant me the serenity

To accept the things I cannot change;

Courage to change the things I can;

And wisdom to know the difference.

Let us add to this – use your scarce resources to change the things that are important to change.  This would be a good prescription for the leaders of the North Atlantic Treaty Organization.

NATO should focus on what really matters to Western interests over the coming half-century:  arresting the proliferation of WMD; stopping Iran from acquiring the above; anchoring the Great and Rising Powers (including Russia and China) into Western institutions in order to more effectively resolve regional conflicts and other global problems; and, gently pushing human development in the direction of Fukuyama’s End of History. 

Ensconcing Georgia in NATO and other Western institutions is expressly not on this list of priorities (see NYTimes article).  Sure, it would be nice to have Georgia in NATO.  Likewise it would be nice to have Russia in NATO, Kissinger’s point that alliances must be against someone notwithstanding.  But, as adults we must realize that we cannot have it all.  America’s unipolar moment of the nineties gave us a false sense of our power.  Let us therefore refocus our priorities on what is important.  We can debate the latter, but let us at least open the debate.  This is change we can believe in.

I understand the notion of not caving into Russia on every action they take in their so-called “near-abroad.”  However, I wonder if NATO could have quietly “postponed” the military exercises in Georgia (which are part of its Partnership for Peace program, a name that probably appears like doublespeak to the Great Powers not participating, much like Ronald Reagan’s MX “Peacekeeper” missile). 

Mikheil Saakashvili, the president of Georgia who behaved irresponsibly last summer in that country’s conflict with Russia, is bolstered by the seeming Western support of his objectives.  A report on NATO’s exercises in Georgia appeared on the front page of China’s Xinhua news agency’s web site.  Are these military exercises in Georgia critical to the security of NATO’s members, and by undertaking them, are we encouraging Russia and China to help us (the West) achieve our priorities?  Read what NATO has to say about its relations with Georgia.

Great Power Diplomacy: Big Stick or Good Will…What works?

May 5, 2009

It is legitimate in foreign affairs to employ both the carrot and the stick.  Both policies can secure a nation’s interests; the trick (and difficulty) is to employ the strategy a given situation warrants.  In spite of partisan name-calling, whereby stick-wielders are called warmongers and carrot-salesmen weak, all Great Powers, all statesmen (and women), must be prepared to use both.  In the United States, at least since Teddy Roosevelt and Woodrow Wilson, these two camps have savaged each other in the political arena.

The emotional name-calling is unfortunate.  It distorts policy.  President Obama has suggested he will utilize American goodwill around the world far more effectively than did his predecessor.  Maybe he will.  But, George W. Bush had a point – that America could utilize its overwhelming military superiority to further its interests.  Notwithstanding the critique of Bush’s point by the Democrats, it wasn’t Bush or Cheney who said to Colin Powell, “What’s the point of you saving this superb military for, Colin, if we can’t use it?”  It was Madam Secretary, Madeleine Albright, during America’s unipolar moment. 

Further, President Obama, as candidate Obama, vilified Bush for his big stick policies.  He decried neo-con tactics in the war on terror, but has now adopted many of them.  In a blog last month, I noted that Daniel Byman of Georgetown University in a March 18th Foreign Affairs piece, referring to a U.S. Predator strike against militants in Pakistan in early March, wrote, “The strike, the fifth drone attack in Pakistan since late January, demonstrates that the Obama administration is not jettisoning the policies of the Bush administration regarding targeted killings; in fact, it appears to be ramping them up.”  Even those that advocate goodwill on the campaign trail will wield the stick in the Oval Office.

Likewise, in another era, another Obama-esque candidate, Ronald Reagan, vilified a sitting president for weakness, vis-à-vis the Soviet Union.  Exaggerations of Soviet strength were put forth, with Reagan offering us “morning in America,” which was, we the American electorate decided in 1980, change we could believe in.

With regard to Iran, it seems unclear to me today which will work, the carrot or the stick (if either).  Can the threat (or use) of military force or diplomatic engagement stop or slow Iran from acquiring a nuclear weapon, or can either succeed in changing the nature of the Iranian regime?  Both options have merit.  While Bush wasn’t able to further this objective, the jury is still out on whether Obama, with a mix of engagement and crafty horse-trading with powers such as Russia, will be more effective.  It is not worthwhile, however, for partisans to call each other names. 

And, just as during the Cold War when Soviet capabilities were exaggerated, politics can prevent an accurate assessment of Great Power strengths today.  Secretary of State Clinton’s awkward remark that the engagement of China and Iran in Latin America is “disturbing,” represents just such an exaggeration of the threat of these Rising Powers, not to mention how condescending this must sound to Latin ears (Monroe Doctrine redux) and how belligerent to Chinese and Iranian ears.  Let us not exaggerate the threat of these two nations, especially in regions where it may be difficult for them to project power.  Such exaggeration is just as much folly as was the neo-con overestimation of American power.

On the other hand, the Middle East is somewhere the Iranian threat is real.  If you want to raise emotions over the carrot vs. stick debate, initiate a discussion of Israeli foreign policy.  It appears that the Netanyahu government, fronted in foreign affairs by tough guy Avigdor Lieberman, is reassessing its foreign policy approach (see article in this Sunday’s NYTimes).  The Israelis will raise with their American and European partners the notion that the carrot of Palestinian statehood and land-for-peace has not worked at resolving the Israeli-Palestinian conflict over the last thirty years, since Israel gave back the Sinai to Egypt.  Netanyahu and company instead believe that Iran is currently fomenting trouble in the region, including by emboldening (and arming) Hezbollah, Hamas and Syria to reject accommodation with Israel.  Ahmadinejad cancelled his worrying trip to Latin America this week in order to go where?  Syria.  Iran is a regional power, a dangerous one, but very unlikely to project power extra-regionally to places like Latin America, though don’t rule out mischief there.

Likewise, the Netanyahu government will argue that Palestinian economic, civic and political institutions must be upgraded before real peace can be negotiated.  This view will seem “war-mongering” to some.  While this blogger is not advocating such a change of direction in Israeli policy – the jury is still out — I believe that considering a new approach, wielding the stick where carrot sales have failed, is worth discussing.  Let the name-calling begin…

Great Powers: Maintain sound public finances

May 4, 2009

Democracies with weak and/or fragmented party systems seem to produce sub-optimal public policies, including heavy government debt burdens.  From Israel to India, Italy to Japan, Brazil to Belgium, governing coalitions held together by paying off key constituencies have yielded chronic deficits and high debt.  By contrast, countries with a small number of strong political parties – usually ideologically-based — that can form stable governments have tended to mind the public purse better (e.g. the U.S., U.K., Germany, and Mexico are examples). 

Some countries with fragmented multi-party systems have been moving in the direction of two or three ideological groupings in recent years, which could be a positive development.  This has been the case in India, Italy and Japan, with some promising signs in Brazil.  This year the financial crisis will continue to unfold, and elections are taking place in such Rising Powers as India and Indonesia.  The conclusion that weak coalition governments produce fiscal irresponsibility will no doubt be tested. 

Recent debt/GDP ratios of selected countries:

India                77%

Brazil               65%

Indonesia        32%

Mexico            31%

Japan              180%

Israel               76%

Italy                103%

Belgium           88%

U.S.                  62%

U.K.                  50%

Germany         64%

Note: Debt/GDP ratios are not strictly comparable, as wealthier countries have a higher “debt tolerance.”

Weimar Germany was the poster child of a weak democratic system.  Electoral and legislative rules hindered the formation of stable governments, and therefore the public had little faith in democratic government.  To avoid the errors of the past, the architects of Germany’s postwar constitution, the 1949 Basic Law, erected a system that balanced fairness with effectiveness.  It was a mixed proportional representation/first-past-the-post system that excluded parties garnering less than 5% of the popular vote from the legislature and produced two large, ideologically-opposed parties of the right and the left.  Stable governing coalitions alternated in power. 

Konrad Adenauer, postwar Germany’s first chancellor

 

Konrad Adenauer, one of postwar Germany’s architects, and his Christian Democratic Union were able to govern West Germany democratically and effectively from 1949 till 1963, two years longer than his totalitarian predecessor.  His center-right CDU/CSU and the center-left SPD have largely governed Germany ever since.  Currently, these two strong parties cooperate (to some extent) in a grand coalition, but will head back to the polls this fall to see if they can oust their opponents from power.  Germany’s constitution has worked so well that democratic reformers the world over consider adopting portions of it.

The logic of the two-party, or nearly two-party, system is that if one party mucks up the economy while in power, the voters will “throw the rascals out.” Hence, the incentive to mind the public purse.  On the other hand, if a party’s survival in power is based less on success at the polls and more on maintaining complex coalitions, then the dominant coalition partner will be more interested in using the public purse to buy off smaller parties than in maintaining fiscal prudence. 

This is exactly how the State of Israel functions.  In its February 2009 election, the largest party, Kadima, only garnered 22.5% of the vote.  With twelve parties in the Israeli legislature, the six smallest obtained only 2.5%-3.4% of the popular vote apiece.  The German constitution (and by the way, newly reformed Italian electoral rules) wouldn’t even seat these parties.  It can be argued that Israel’s system is fairer, giving voice to the country’s diversity, but it is not very effective.  Only during Ariel Sharon’s popular rule beginning in 2001, when his party reached close to 30% of the popular vote (quite high in Israel), was his strong finance minister, Benjamin Netanyahu, able to implement reforms to public finances that reduced the deficit and got the debt/GDP ratio on a downward trajectory.

Italy functioned in much the same way until the reforms of the mid-1990s.  Belgium, Brazil and India have functioned this way as well, with public debt levels rising as a result.  Although Japanese politics has long been dominated by one party, the center-right LDP has for all intents and purposes engaged in coalition politics and a consequent public spending spree. The LDP is a collection of personality-based factions, interest groups, local constituencies, and patron-client relationships.  As a result, by opening up the public spigot, the LDP holds together these factions, keeping itself in power. 

Interestingly, the U.S. is embarking on a very large increase in its public debt, and this will occur in a two-party system with one party now overwhelmingly dominating two branches of government.  This must be seen as an aberration, however, an exception to the rule, given the size of the fiscal stimulus required to prevent a collapse of the financial system and to support sagging demand.  This unprecedented increase in public outlays is not being implemented in order to keep a coalition together.  Nevertheless, should the Democrats not act quickly, once the economy rebounds, to re-establish fiscal rectitude, an adjustment that will be very painful, then the government’s credibility will suffer, foreign investment will slow, the dollar will fall, interest rates will rise, and American voters will “throw the rascals out.”

As for India’s election, as spelled out by my colleague, David Kampf, the world’s largest democracy is in the midst of a month-long national election that will be tallied on May 16.  Some commentators believe that the two large parties, the center-left Congress Party and the center-right BJP Party, will lose ground to smaller and regional parties.  This will put pressure on the coalition leaders to spend their way into power.  Rulers of Rising Powers be forewarned: history shows that a sustained mismanagement of public finances often precedes the decline of nations.