Topic: International Economics and Development

Brazil: A Divided House

There were no surprises in Brazil’s runoff election: just as the polls had predicted in the days leading to the vote, President Dilma Rousseff beat Senator Aécio Neves by over 3 percentage points (51.6% to 48.6%). Despite high inflation, widespread corruption charges, and threats of a recession, the incumbent Workers’ Party (PT) won an unprecedented fourth term in power. Now what?

Brazil’s electoral map shows a divided country: the poor north and northeast states voted for Rousseff while most of the rich south and south-eastern states went for Neves. This divide has become more pronounced during the years of PT rule, as the incumbent party increases welfare spending every election cycle and warns voters about how the opposition would get rid of these programs if elected.

President Rousseff gave a conciliatory speech where she talked about bringing together Brazilians, being a better president than the previous four years, and the need for economic reform. Can she do it? The acrimonious tone of her campaign will make it hard for Rousseff to win over the half of the electorate that voted for Neves. Her appeal to voters wasn’t based on promises of a better future but on scaremongering of what a Neves victory would represent to Brazil’s poor. Moreover, new revelations on the growing corruption scandal at Petrobras that seem to show that Rousseff and her predecessor Lula da Silva were aware of the shenanigans at the state-owned oil giant threaten to taint her second term.

As for the economy, during the campaign Rousseff said that she would replace her Finance Minister, Guido Mantega, who is blamed for Brazil’s lackluster economic performance. Still, the stock market took a beating today and the real fell by 3%. Two reasons the bad shape of the economy didn’t play a decisive role in the election is that unemployment is low —which has a lot to do with many younger Brazilians going to university instead of looking for a job— and the fact that the government held back on the publication of bad statistics until after the election.

Can Rousseff deliver reform? Doubtful. As Mary O’Grady points out today in the Wall Street Journal, “Ms. Rousseff ran as the anti-market, welfare-state candidate.” With an economy not even growing by 1% and a stubbornly high inflation rate, the question Brazilians are asking themselves is whether Rousseff will reform or instead double-down on interventionist policies. One area to pay particular attention to is freedom of the press. What we’ve seen in a number of other Latin American countries ruled by left-wing governments is that, as the economy sours and corruption scandals mushroom, the authorities push for more regulations on the media. Will Brazil follow this pattern?

There are good reasons not to be optimistic about Brazil in the next four years.

Preliminary Results in Ukraine

Update: The results are finally in. With 98.5% of votes counted, Western-leaning parties (and independents) have done even better than expected, taking 311 seats. Pro-Russian parties took 112 seats, while 27 seats (mostly Crimean districts) remain unfilled.  In other good news, the populists, though represented in the parliament, did relatively poorly: Lyashko’s Radical Party took only 22 seats. Far right parties did even worse, with Svoboda obtaining only 6 seats, and Right Sector 2 seats. These results mark a major change for the Rada, which has typically had parliaments split almost 50/50 between pro-Ukrainian and pro-Russian parties, and will certainly presage a turn to the West for Ukraine. Unfortunately, Russia has also committed to recognize the results of the Nov 2nd rebel elections in Luhansk and Donetsk. The Rada election results are a major victory for pro-Western democracy, but the crisis in Ukraine is not over. 

Original Post: Yesterday, Ukrainian voters went to the polls to elect a new parliament, replacing the deputies elected prior to the Euromaidan protests of early 2014. In a piece at Al-Jazeera America published on Sunday, I highlighted a few ways in which the election results could impact Ukraine’s future relations with Europe, Russia, and the resolution of the ongoing crisis in Eastern Ukraine. Prior to the vote, a high level of uncertainty about the likely makeup of the Rada - especially the election of far right (ie, Svoboda or Right Sector) or populist parties (ie, Oleh Lyashko’s Radical Party) – was a major concern, as was the uncertainty over whether they might be represented in government. A new governing coalition will be instrumental in the resolution of the conflict, shaping how aggressively Ukraine pursues the rebels in the Donbas region.

Fortunately, initial exit polls today indicate reasonably positive results. The three mainstream pro-Western parties did well, with the Poroshenko bloc polling around 22.2%, the Popular Front at 21.8%, and surprise contender Samopomich, a Lviv-based moderate party, polling at 14%. These results are excellent news, as a governing coalition with no far right or populist elements should be possible. The far right party Svoboda will be represented in parliament, as will the populist Radical Party, but the latter did worse than expected, taking home only around 6% of the vote. Rounding out the major parties, Yulia Timoshenko’s Fatherland party also did worse than expected, taking just over 5% of the vote. The main surprise is the success of the Opposition Bloc, a successor to Yanokovich’s Party of Regions, which was not expected to obtain seats, but instead took around 7% of the vote.

These results are extremely preliminary, and as with pre-election polling, only give a broad national figure for how people voted. Thus, they predict the 225 seats which are allotted by proportional representation from them, but the remaining 225 seats are elected in each individual district, for which we have no exit polling data. The parties associated with Petro Poroshenko are expected to do well, but these are also likely to yield high numbers of independent candidates.  Full results are expected by Thursday morning.

Until we know the final makeup of the new Rada, as well as which parties ultimately will form the coalition government, it’s difficult to assess how the results will impact the ongoing crisis. Many citizens in Crimea and the Donbas were indeed unable to vote, disenfranchising as much as 19% of the population. The overwhelmingly pro-Western nature of the parties elected may be a double-edged sword: it will be popular with Western politicians, but it is in part a reflection of the disenfranchisement of Eastern Ukraine, and will not be truly representative. Despite this, Russian leaders appear to have accepted the results, signaling, hopefully, a willingness to work with Kiev in the future. Whether any government will be able to tackle Ukraine’s myriad problems is unclear. But while full electoral results will give us a better idea of what to expect from a new Ukrainian government, for now, the indications are reasonably positive. 

Bulgaria: Liquidate KTB, Now

The long-awaited audit of the Corporate Commercial Bank’s (KTB’s) assets has been released by the Bulgarian National Bank (BNB). In its wake, a debate has arisen about the future of the KTB: Should it be recapitalized? And if KTB is recapitalized, should the Bulgarian or the European authorities be responsible? However, it is clear from the results of the audit that, once the obscurity of the technocratic arguments is stripped away, there can be no debate. KTB should be liquidated as soon as possible, and whatever proceeds can be obtained in liquidation should be used to reimburse guarantees to depositors paid from the Bulgarian Deposit Insurance Fund (BDIF).

KTB should be liquidated because it is not, and apparently never has been, a commercial bank. Had KTB been operated according to commercial banking principles, it would be virtually impossible for KTB to destroy value on the scale witnessed by the independent auditors. As of September 30, 2014, the auditors estimate that 76% of the asset value in KTB’s non-financial loan portfolio, which accounts for 80% of KTB’s assets, has been lost.

Losing 76% on a commercial loan portfolio must be put into perspective. In making loans, commercial banks generally require a senior secured position. This means that in the event of default, the bank may take collateral from the borrower and use the proceeds from selling the collateral to recover the bank’s principal, prior to any other creditor. From 2003 to 2012, Standard and Poor’s found that European lenders recovered 78% of their principal, on average, from defaulted loans with these characteristics. Even where defaulted loans were not secured by collateral, European lenders averaged a 48% recovery rate. Compare these recovery rates to KTB’s pathetic implied recovery rate of 24%, and it becomes clear that KTB was not operating as a real bank.

The KTB audit report tells a story in which KTB blatantly ignored the basic pillars of commercial lending. According to the report, there is little evidence that initial loan underwriting and subsequent credit monitoring ever took place at KTB.

If KTB’s management were just grossly incompetent, it would be bad enough. But it appears they were also criminals. The BNB is forwarding the audit results to the Sofia City Prosecutor’s Office. The auditors state that KTB lied to and misled BNB banking supervisors, and engaged in transactions with no evident commercial purpose. The suspicion of criminal activity is just another reason why KTB should be liquidated, now.

Fragility of Tunisia’s Transition

The upcoming parliamentary election in Tunisia comes at a critical time. For a while, Tunisia was seen as a poster child for a successful transition away from authoritarianism. In Egypt, a widespread disappointment with an Islamic government resulted in a military coup last year. In contrast, when Tunisia could not get through a political impasse, the Islamic Ennahda party negotiated a handover to a caretaker government earlier this year, which has led the country to an early election.

Regardless of whether Ennahda can repeat its electoral success from three years ago or whether secular forces take over, the new Tunisian government will be in an unenviable position: it will have to address a growing security crisis in the country. In the past two years, the country has seen the emergence of political violence and terrorism perpetrated mostly by radical Salafist groups. Those violent efforts include the killings of two opposition politicians, Chokri Belaid and Mohammed Brahmi, as well as a car bomb plot foiled just last week.

Tunisia has also become a fertile ground for the recruitment of fighters of the Islamic State (ISIS). Some estimate that over 2,400 ISIS fighters are from Tunisia, which would make Tunisians the most numerous nationality fighting for ISIS. Restoring basic security, order, and rule of law—and preventing the country from descending into a full-fledged internal conflict—will have to be a priority for the new government.

The political violence may have multiple roots, but Tunisia’s poor economic performance is clearly one of them. In recent years, many strikes and protests over economic conditions have taken a violent turn and led to attacks on local police stations, for example.

While the West is confronted with problems posed by aging populations, Tunisia, like other countries in the region, faces the challenge (and opportunity) of harnessing the economic potential of an extremely young workforce. Practically half of Tunisians are under the age of 30, and many of them are struggling. Although unemployment is slowly falling, the unemployment rate among university-educated young Tunisians is over 30 percent, making their situation precarious.

Bill Gates Recognizes the Improving State of Humanity

With the newspapers full of crises, it can be hard to maintain a proper perspective on the progress humanity has made, and to remember that there are individuals striving every day to make the world a better place. In a recent interview, businessman and philanthropist Bill Gates discussed the improving state of humanity, and the work that he is doing through private charity to help those in need.  He said,

I think the idea that people are worried about problems, like climate change or terrorism or these challenges of the future, that’s okay. But boy, they really lose perspective of what’s happened over the last few hundred years. And how science and innovation have been a central factor of that. And I think that’s too bad, because people are lucky to live now. And they should see that progress is actually taking place faster during their lives than at any time in history.

One of the major initiatives of the Gates Foundation, for example, aims to eliminate polio. The data bear out how much progress has already been made towards that end:

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In 1980, about half of all children received the polio vaccine. Today, around 90% of children receive the vaccine, and eradication of the condition is in sight – just as people eradicated smallpox in 1979.

Gates is also among the many caring individuals working to eliminate malaria and malnutrition, areas where humanity has already made great strides. Insecticide-treated mosquito nets, for example, protect more children from malaria in Sub-Saharan Africa:

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Malnutrition among children is also declining. In populous developing  regions, such as East Asia and the Pacific, malnutrition affected about 20% of children in 1990. More must be done, but today malnutrition affects fewer than 6% of children in those areas.

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Even one child afflicted by polio, malaria, or malnutrition is too many, but the dramatic improvements the world has made on these fronts should be celebrated. Like Gates, while working to make the world better we must not lose a proper perspective on the progress humankind has already made.

More Censorship Will Hardly Save Xi’s Dictatorship

In recent days, I’ve received messages from several groups on WeChat (a popular social media network in China) reporting on the arrest of more than 40 Chinese activists who support the protests in Hong Kong, as well as on an official order to ban the publication or sale of books written by authors considered to be supporters of the Hong Kong protests, human rights and the rule of law. The crackdown was also reported this week in the Washington Post.

Among the authors now banned is economist Mao Yushi, the 2012 recipient of the Milton Friedman Prize for Advancing Liberty.

This is not the first time Mr. Mao has suffered unfair and illegal treatment (an official, public written notice is often not even issued to carry out censorship; sometimes an “anonymous” phone call understood to be from an authority or from an official agency to the publisher will suffice). Mr. Mao’s books were also banned, although not for the first time, in 2003 when he signed a petition at a conference in Qingtao appealing to the government to exonerate the students’ protests and democratic movement which was ended with the June 4th massacre on 1989.

In my own experience, a couple of articles in one of my books were deleted without an official explanation, while the deletion of phrases, sentences and even paragraphs from my columns and commentaries in journals and newspapers were quite common.

Another very respected author is Mr. Yu Ying-shih, an 84-year-old emeritus professor of history at Princeton who has taught at Ivy League universities since the 1950s. Mr. Yu supports the Hong Kong protests and has criticized the tyranny of the Chinese Communist Party (CCP) for more than five decades. In his books he develops analytical critiques of traditional culture and classical philosophy in China, and advances universal values based on Western scholarly traditions. The books have sold well and contain no direct reference to contemporary political issues, yet his books were officially considered critical of CCP rule and deemed damaging to social stability.

Another banned scholar is Prof. Zhang Qianfan, one of my former colleagues at Peking University (a professor at the School of Government as well as the School of Law). He is a very cautious and prudent scholar (we have disagreements on several issues in which he suggests my opinions are too radical and aggressive against the current regime) who focuses on constitutional studies, and serves as vice president for the China Society for Constitutional Studies. He opposes the Hong Kong protests – in what seems to me to be a contradiction of his own views – for fear that the June 4th Massacre might happen again if the students and civilians in Hong Kong do not withdraw.

Therefore I presume that the banning of Prof Zhang’s books is not a result of his views on the Hong Kong protests, but is rather aimed at his research in Constitutional Studies.

The arrest of famous activist and human rights advocate Guo Yushan is not a surprise to most of us since he has been involved in so many so-called sensitive issues in the past decade, with the most politically irritating one being his role in the escape of the world-famous blind activist Chen Guangcheng. Yet the timing of his arrest is troubling since the 4th plenary session of the CCP’s 18th National Congress will be held next week while the plenary session will purportedly focus on the Rule of Law or “Governing the State with Law” even if the majority of Chinese is suspicious about the possibility of implementing that agenda.

The treatment of dissidents outside and inside China is abhorrent. Many dissidents have not been able to visit their parents, brothers, sisters or relatives for two or three decades. Even many scholars, researchers and even businessmen who sympathize with human rights ideas in China or have expressed different views than those of the CCP have been denied visas or have had them cancelled. Among those who are still not allowed into China, for example, are former Princeton professor Perry Link and Andrew Nathan of Columbia University.

Chinese citizens should be free to exit and enter their homeland no matter what political positions or beliefs they maintain.  The refusal to allow the exit or entry of a dissident without a legal justification is an obvious violation of modern law and international norms, and is inhumane.

I hereby wish to call the attention of the international community to this new round of crackdowns and violations of freedoms of speech, publication, assembly, association and movement unfolding in China.

Oil Price Blues (Read: Dangers) for Some

As the price of crude oil continues its downward tumble towards $80 per barrel, I am reminded of a similar scenario from near the end of the Cold War in the 1980s. When Saudi Arabia announced in 1985 that protecting oil prices was no longer its main priority, oil production surged and prices fell off a cliff, briefly plunging below $10 per barrel, as I had correctly predicted.

Lower prices delivered a fatal blow to the Soviet economy, which ended up seeing $20 billion per year in oil revenues evaporate. The resulting fiscal shortfalls proved to be a dagger in the heart of the U.S.S.R.

On October 1st of this year, Saudi Arabia’s national oil company announced that it had abandoned a policy of price protection and would start to focus on protecting its market share. Combined with falling global demand and rising supplies elsewhere, oil prices have fallen accordingly. This has put a squeeze on eight of the world’s top oil producers. States like Iran, Venezuela, and Iraq can only balance their current budgets at oil prices ranging from $110 to $135 per barrel (so-called break-even prices).

If oil prices stay below $90 per barrel for any length of time, we will witness massive fiscal squeezes and regime changes in one or more of the following countries: Iran, Bahrain, Ecuador, Venezuela, Algeria, Nigeria, Iraq, or Libya. It will be a movie we have seen before.