Archive for the ‘Brazil’ Category

Brazil: Fitch Ratings not happy about fiscal deterioration

September 8, 2009
"G-2": Brazil's President Lula and Mexico's President Calderon: Whose fiscal ship faces calmer seas?  Source:  Google Images
“G-2”: Brazil’s President Lula and Mexico’s President Calderon: Whose fiscal ship faces calmer seas? Source: Google Images

Fitch Ratings published a report this month analyzing Brazil’s fiscal deterioration this year (see press release below).  Brazil’s public finances have slipped just like in just about every country in the world.  Fitch highlights Brazil’s heavy government debt burden relative to its emerging market peers.  Brazil’s fiscal deterioration — characterized by rising spending, tax cuts, and a poor tax intake — will at the very least slow any upward movement in Brazil’s credit rating, currently at BBB- for foreign currency debt, and could in fact lead to a downgrade if a fiscal consolidation is not forthcoming over the medium term, suggests Fitch. 

Yet Fitch rates Mexico fully two notches above Brazil (BBB+), albeit with a Negative Outlook (meaning the rating should go down within two years).  Brazil’s government debt to GDP ratio is nearly 70%, whereas Mexico’s is below 40%.  What they don’t highlight is that Brazil’s debt to tax revenue ratio is lower than Mexico’s (nearly 170% in South America’s largest economy vs. Mexico’s nearly 200%).  Mexico’s woeful tax performance is a perennial problem gone unfixed for decades.  Moreover, the Mexican government relies on oil-related revenues, even though oil production south of the Rio Grande is declining.  The Mexican government won’t allow private investment in the energy sector as a way to increase production (and can’t, due to popular opposition).  Mexico is a mess (not least because of its heavy dependence on one country, eh-hem, eh-hem, the United States), and Fitch acknowledged as much in July when it said it will monitor fiscal measures in the wake of the mid-term legislative election to decide whether or not to downgrade.  Signs are that an austere budget may be in the works.

Debt is measured against both GDP and revenues to indicate a country’s ability to grow out of its debt burden, i.e. to raise enough revenues to pay future debt obligations.  The debt to revenues measure is arguably a better proxy for this capacity, even though most analysts look at debt to GDP because GDP is more standardized…and perhaps out of laziness  Sure, Mexico has a vast untaxed portion of the economy it  could draw on to service its debt.  But it hasn’t ever done so and it won’t.  An owner of a Mexican trucking company once told me, he doesn’t pay any taxes.  So, Mexico’s fiscal picture is at least as bad, if not worse, than Brazil’s.  What’s more, Brazil’s external balance sheet is stronger than Mexico’s, with lower net external debt to exports and a stronger sovereign net external creditor position.  Its economy appears more resilient, not least due to its diversification.

Yet Mexico still remains two notches above Brazil due to sticky credit ratings and the inability of the rating agencies to take dramatic action.  Such dramatic rating action would suggest that rating agency analysts have been wrong for some time.      

Fitch: Brazil’s Fiscal Deterioration – A Slippery Slope
03 Sep 2009 2:05 PM (EDT)


Fitch Ratings-New York-03 September 2009: Fitch Ratings believes that Brazil will need to begin the process of fiscal consolidation, as an expected economic recovery begins to take hold, in order to preserve its fiscal credibility. Fitch has published a special report on Brazil’s deteriorating fiscal situation and the potential impact on its credit profile.

The degree of fiscal deterioration in Brazil’s public finances is quite evident when comparing the fiscal outturn of the first seven months of 2009 with the same period a year ago. The central government primary surplus has declined by 60% in the first seven months of 2009 compared with the same period in 2008 as a result of fast-paced spending growth and weak revenue performance.

‘The structure of Brazil’s public spending is deteriorating as a significant part of the increase is related to personnel and pension benefits, which will be harder to adjust in the future and cannot be classified as strictly ‘counter-cyclical’ in nature,’ said Shelly Shetty, Senior Director in Fitch’s Sovereign Group.

On the positive side, the scale of Brazil’s counter-cyclical fiscal stimulus package is modest by international standards, and the expected deterioration in the country’s fiscal balance is somewhat less than its rating peers. In addition, the government has domestic and external market access to fund the higher deficit. However, Fitch notes that the country’s starting fiscal position is weaker when compared with its peers. Brazil’s general government debt burden is significantly higher than the ‘BBB’ median (66% of GDP compared with 27% for the ‘BBB’ median) and will increase further this year.

Fitch recognizes that Brazil has a good track record in delivering and surpassing fiscal targets even when economic conditions are difficult, such as in 2002-2003. Across the globe, 2009 has been a challenging year, and many emerging markets have seen deterioration in their fiscal balances. However, the sharp increase in spending growth observed so far in 2009 needs to be curbed for the authorities to achieve even the reduced primary surplus target for this year, and more importantly, to return to the higher primary surplus target of 3.3% for 2010, as set under the Budgetary Guidelines Law.

‘Given the uncertainty in the pace of economic recovery and thus revenue growth, greater resolve to contain spending growth (especially current) would be positive for the credibility of fiscal targets,’ added Shetty.

While Brazil’s external finances remain strong and the country has weathered the global financial crisis relatively well, the deteriorating fiscal picture could potentially dampen the upward momentum of Brazil’s credit trajectory. On the other hand, persistent and significant deterioration of public finances and debt dynamics could undermine fiscal credibility, increase investor risk premia, and adversely affect investment and growth prospects, which in turn, could weigh on Brazil’s creditworthiness.

Fitch currently rates Brazil’s Long-Term Issuer Default Ratings at ‘BBB-‘ with a Stable Rating Outlook.

The full report ‘Brazil’s Fiscal Deterioration: A Slippery Slope’ is available on the Fitch Ratings web site at ‘www.fitchratings.com.’

Contact: Shelly Shetty +1-212-908-0324 or Erich Arispe +1-212-908-9165, New York.

Media Relations: Kevin Duignan, New York, Tel: +1 212-908-0630, Email: kevin.duignan@fitchratings.com; Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com.

Brazil: Trouble for Lula’s Heir-Apparent

August 18, 2009
President Lula and Candidate Dilma Rousseff.  Source:  Google Images President Lula and Candidate Dilma Rousseff. Source: Google Images

Dilma Rousseff, the less-than-glamorous heir-apparent to Brazil’s leftist President Lula, is being accused of exerting pressure on a government official to whitewash an investigation into a political ally.  See FT article on the subject.  These corruption investigations snarl Brazil’s Congress all the time, and some blow over, while others balloon.  What will happen to this one could affect Dilma’s chances in the presidential election of 2010, which is getting under way.  Dilma, former guerrilla tortured under Brazil’s military regime in the 1970s, Lula’s chief of staff, energy minister and chairwoman of Petrobras, Brazil’s part-state-owned energy company, may not coast as easily into the Brazilian presidency as Barack Obama did into the White House.  Stay tuned…

Brazil: Another quiver in its bow

August 17, 2009
Brazil's President Lula with Petrobras's CEO and Lula's Heir-Apparent, Dilma Rousseff  Source: Latin American Herald Tribune
Brazil’s President Lula with Petrobras’s CEO and Lula’s Heir-Apparent, Dilma Rousseff Source: Latin American Herald Tribune

Brazil’s persistent economic weakness over the years has been its external balance sheet — heavy indebtedness to foreigners, weak foreign trade sector, and low external liquidity (e.g. low fx reserves).  This was in addition to a heavy government debt burden (government borrowing abroad in fact drove the fragile balance of payments), a poor business climate (a huge tax burden, heavy regulation and a state-dominated economy) and huge social challenges (e.g. poverty, wealth inequality, crime). 

Yet since the arrival of President Fernando Henrique Cardoso in 1994, whose stabilization and market-oriented policies were largely continued by President Lula since 2002, Brazil has improved somewhat on all these fronts.  What has changed like night to day is the external balance sheet  — as the country’s diversified commodity exports have fueled growth of such economic smokestacks as China.  Brazil, traditionally an energy importer — both hydro and fossil — due to its heavy consumption needs, has recently become a net oil exporter.  No longer do higher energy prices mean balance of payments problems for Brazil, but rather rising fx reserves. 

And, the news keeps getting better. With the technology available for deep-sea drilling, Brazil is set to become a quite sizable oil exporter (read a NYTimes article on the subject).  Petrobras, the part-government-owned energy company, is set to take the lead in developing the deep-sea fields.  It is no accident that Lula’s heir-apparent, Dilma Rousseff, is chairwoman of the board of directors of Petrobras.

Brazil’s fx reserves should continue to mount, providing an almost China-like fortress against external shocks.   This should provide the country with the room it needs to confront its other ills, enumerated above, and move higher and higher among the ranks of today’s Rising Powers.

China, Latin America and the US

August 17, 2009

China: Learning to enjoy the Brazilian bear hug.  Presidents Lula and Hu.  Source: Xinjuanet

What would President Monroe say?

An Economist article discusses the growing presence of Great Powers, especially China, in Latin America, flouting nearly two centuries of U.S. dominance in the region, since the articulation of the Monroe Doctrine in the early 1820s.  In the near term, this worry is overdone.  Longer-term, if the U.S. continues to damage its sovereign creditworthiness, i.e. by not putting in place a medium-term fiscal consolidation program (that is, to reduce America’s rising government debt) — a program that should include putting health care reform on hold, then America’s relative decline will accelerate and this will affect its projection of power in the Western Hemisphere. 

In the 1820s, as revolution in Spain led to unrest in its colonies in the Western Hemisphere, the Holy Alliance of autocratic east European courts — Russia, Austria and Prussia, threatened to intervene in these colonies.  President Monroe in 1823, backed by the British Navy, warned Europe that any extension of European power to the Western Hemisphere would be “dangerous to our [U.S.] peace and safety.”

Nowadays, as the world moves increasingly toward a multipolar system, power projection in Latin America is largely in the form of commerce.  China, India and others seek, above all, the region’s raw materials to fuel their rising economies.  True, with economic influence comes political influence.  True as well, such powers as Russia and Iran seek direct political influence through arms sales and energy deals with the likes of Chavez’s Venezuela, Cuba, and Evo Morales’s Bolivia.  But these countries are on the fringe.  More of interest to U.S. policymakers are China’s economic relations with the major economies of the region, notably Brazil.  China’s economic relations with Brazil have been hand in glove — raw materials fueling a manufacturing juggernaut, while with Mexico, they have been competitive.  Brazil is also a manufacturing nation and will one day find China an unwelcome competitor. 

So, the thrust of the foreign “intervention” is commercial and good for Latin America.  This is good for the United States as well, insofar as China supports growth in the region and the U.S. no longer has to be relied on so heavily as the source of demand and investment for the hemisphere.  In previous U.S. downturns, Latin countries hovered on the brink of default (or in fact defaulted), whereas this crisis they have weathered, due in part to demand from China and elsewhere. 

China, for its part, is “intervening” in Latin America as a rule-abiding member of the global capitalist system, wrought by the U.S. and its allies.  This should not worry American policymakers.  Sure, they should keep an eye on the mischief-making of countries like Iran and Russia that seek to upset the U.S. in its own backyard, much as Krushchev did with Cuba in the middle of the last century (however less dramatic and threatening the current mischief-making is).  Again, the smartest thing U.S. policymakers can do is get America’s fiscal house in order — by first of all, postponing health care reform — and revive the formidable U.S. economy — upon which the country’s power projection is based — not least through continued banking overhaul, workout of real estate loans, policies to increase household savings, and a reform of monetary policy (by discarding Greenspan’s discredited approach).

China: Update on Rio Tinto Corruption Case

August 10, 2009
Australian Mining Co., Rio Tinto  Source:  www.newsdaily.com/photos/2009-07-09T060018Z_0...
Australian Mining Co., Rio Tinto Source: http://www.newsdaily.com/photos/2009-07-09T060018Z_0…

Australian mining giant Rio Tinto knows that when it does business with a sovereign government, it is dealing with an entity that writes, executes and adjudicates laws on its territory.  Read about the China-Rio Tinto issue in a previous post

Every multinational knows, especially those in industries such as mining and energy that operate in funky locales, that the sovereign can seize your assets, throw your officers in prison, and undertake other such mischief as it pursues its interests, whether economic or political.

So, as the Chinese goverment has orchestrated an assault on Rio Tinto in recent weeks, claiming corruption and over-invoicing, it is sending a message to Rio Tinto, its backers in the Australian government, and the wider world — you can make money over here, but do not cross us.  A NYTimes article today suggests that the Chinese government is easing its pressure on Rio Tinto as negotiations over a mining contract resume, which became acrimonious in late June.  

Lest we forget, all sovereigns, even liberal democracies, have the power to encroach on private property.  A libertarian paradise exists nowhere on Planet Earth.  “Eminent domain” is a concept in the United States, whereby the state has the inherent right to seize private property for its purposes, be it a public highway, utility, a military facility.  Financial compensation by the goverment is due the private owner of the seized asset.  You would feel like you were up against the Chinese government, if your local mayor decided he needed to build a road across your lawn.  Hence the American phrase, “You can’t fight City Hall.” 

With the retreat of colonialism after World War II, a wave of nationalizations and expropriations by sovereigns in former colonial lands changed the landscape of international commerce.  Does anyone remember the Oil Embargo of the 1970s?  With the arrival of the Washington Consensus in the 1990s, which despite what naysayers say is still largely the consensus, most reforming emerging market sovereigns resist nationalization and expropriation because this destroys a country’s business climate and limits the inflow of capital.  Almost everyone knows this, unless you’re Hugo Chavez or Evo Morales.  Note the fact that the Brazilian government under President Lula, an icon of the Latin American left, was on the receiving end of an expropriation threat, when Bolivia’s Evo Morales called for the nationalization of natural gas refineries owned and operated by Petrobras, Brazil’s energy behemoth, a few years ago.

So, shed no tears for Rio Tinto…

From BRIC to BIC…or even IC?

June 8, 2009

BRIC leaders meeting last year.  Source: www.corporate-eye.com

The Economist published an article this week suggesting that Russia’s slide into recession this year – due to lower oil prices, capital flight, weak banks and greater state involvement in the economy — could mean the fabled BRICs will become BICs. Of the four BRICs that made it into Goldman’s arbitrary moniker for major emerging market economies, Fitch Ratings forecasts only China and India will grow this year. Does that mean the BRICs should actually be the ICs? Does Brazil’s shrinking economy also knock Latin America’s largest country out of this select group? Somehow IC doesn’t sound as good as BRIC. Before the global financial crisis, some had said that Brazil had hit a BRIC wall, due to its much worse economic growth performance. I guess that would have been RIC, right?

Fitch Ratings forecasts Earth’s economy will contract 2.7% this year, driven by a nearly-unprecedented shrinkage of the major advanced economies by 3.8%, much worse than the zero growth of the 1975 and 1982 global recessions. Russia is likely to contract by about 3%, Brazil by a little over 1%, while China and India expand by 5-6% each (slow for these countries). Russia’s contraction is driven by its dependence on energy exports, the price of which has fallen markedly since highs last year. However, should the recent push upward in the price of a barrel of oil to nearly $70 persist, Russia’s contraction this year could be more muted.

As noted, Russia is also buffeted by weak banks, capital flight and the heavy unmet external financing needs of the private sector. In addition, as The Economist points out in an article likening Putin’s Russia to the Ottoman Empire, the greater intrusion of the state in the economy and the corporatist corruption of Putin and his men have stymied, though not uprooted, private entrepreneurship in Russia.

The comparison between Russia and Brazil is interesting. Fitch rates Russia’s sovereign debt “BBB” with a Negative Outlook, and Brazil a notch below at “BBB-” with a Stable Outlook (the Outlook reflects the likely direction of the rating within two years). India is also rated “BBB-” with a Stable Outlook. And China, in a class by itself with its $1.8 trillion in reserves – perhaps Goldman’s next appellation should simply be C – is rated “A+” with a Stable Outlook.

But as I said in a previous note about Moody’s, ratings are notoriously sticky. Brazil is looking better than Russia these days. Its economy is more market-oriented and better structured. Its exports are much more diversified. Its domestic market is stronger, as are its banks. Its only negatives vis-à-vis Russia are: its higher government debt, though its deficits are lower than Russia’s because the latter relies on volatile oil to balance its books; and, Russia’s stronger external balance sheet, i.e. excess of foreign exchange reserves over money it owes foreigners. However, Brazil’s balance between external assets and liabilities is near zero — pretty darn good — so I’m not sure Russia is so far ahead on this front. India likewise has a heavy government debt burden and fiscal deficits (both larger than Brazil’s).

India’s and Brazil’s fiscal woes emanate out of their tradition of coalition politics, a dynamic described in an earlier post. India now has the potential to improve its fiscal performance, given the strength of the Congress Party after last month’s elections. Congress should require less pork to distribute to keep its coalition together. India likewise has external assets in excess of liabilities, but not to as great an extent as Russia. Both Brazil and India benefit from a relatively closed economy (at least during a global meltdown) and a strong domestic market. (China’s openness to trade has become a major vulnerability in this crisis.) So perhaps the ratings of both Brazil and India should equalize with or even best Russia’s. Let’s wait and see.

Fitch regularly publishes an interesting report on banking sector risks across the countries it rates. The last one came out May 11, 2009. They assign a letter grade and a number rank based on the health of a country’s banks and vulnerability to shocks. The letter grade (A-E) is an average of the credit quality of the nation’s banks. The number (1-3, 3 being the worst) reflects the vulnerability of the country’s banks to financial shocks from asset prices (including real estate), excessive growth in bank lending, and exchange rate movements. The risk indicators for the famed BRICs are as follows:

Brazil C-3

Russia D-3

India C-2

China D-1

By this measure, India may be the least vulnerable to a banking crisis. China’s score of 1 for financial shocks is good, but may change given the breakneck growth in bank lending of late. China’s banks are fairly weak, given heavy policy lending to state-owned enterprises. Russia’s banks are also weak and prone to shocks. Fitch’s banking sector indicators were always much better in the advanced industrialized countries than in emerging markets in the past. In late 2006, the US and UK were both B-2, and now they’re both C-3, same as Brazil. Some powers rise and some powers fall.  My email is roger.scher@gmail.com.

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.

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.

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.