Dilma Rousseff: That sinking feeling (2)...

After new accusations against Rousseff's Minister of Agricuture, Wagner Rossi finally resigned. He is the fourth minister, all of them "inherited" from Lula, to leave Rousseff's cabinet since she was elected. His resignation could suggest that the President is staying the course and will keep cleaning up the higher reaches of the government and is in fact read in that way by The Economist and many Brazilian commentators.

I am not convinced. She is doing her best, but looks increasingly hostage to her allies in Congress, particularly the PMDB, and vulnerable within the PT, many of whose leaders feel that her continuing campaign gives the impression that the Lula government was corrupt. She openly left the selection of Rossi's replacement to her Vice-President, Michel Temer, who is the PMDB leader, not a strong demonstration of force and autonomy...

Dilma Rousseff: That sinking feeling...

From the outside, Brazil looks set for smooth sailing through the current crisis. In its web edition today, The New Republic has a little slideshow called "Economic Crisis? What Economic Crisis? Eight countries doing just fine." Brazil, with little surprise, is on the first slide.

Well, the country's economy certainly looks fine, but its politics are taking a turn for the bad and if hard decisions have to be taken, one really wonders who will be there to take them. In the last week or so, in the midst of ever-juicier corruption scandals, President Dilma Rousseff appears to be losing control.

Two developments look particularly disturbing:

1) After quite openly discussing the coup with Lula, Rousseff decided to keep the minister of Agriculture, Wagner Rossi, opting instead for getting rid of the people that surround him and that he has chosen personally... She thus retreats from a confrontation with the PMDB [Brazilian Democratic Movement Party], vice-president Michel Temer's party and the most important of the PT's  partners in the Congress. Even this, by the way, was not enough: she accepted a whole slew of Congressional "amendments," worth more than $1bn reais (more than U$600 million) to calm down her supporters in Congress. Obviously, she was under pressure: the PR [the Party of the Republic], another significant--though less weighty--ally had defected from the governing coalition after various of its leaders had lost their position in government as a result of the Ministry of Tourism scandal. If the PMDB were also to declare its "independence," the President would for all practical purpose loose control of the Congress.

2) Rousseff complained to her Minister of Justice for not having been informed in advance that a number of high-level officials from these two ministries would be arrested by the Federal Police... Doing so clearly suggests--though it proves nothing--that she wanted to be involved in police activities that affect her relationship with parties in Congress, not an easy thing to reconcile with democratic accountability and the political independence of the police.

These developments weaken Dilma in three important ways:

- Relative to Lula, who appears to have pushed her to a more lenient attitude than the one she had adopted previously (against the PR);

- Relative to the PMDB, which cannot but read this as a licence to binge on public funds, both over the counter, through budgetary "amendements," and under it, through nominations and contracts;

- Relative to the opposition and more broadly the informed public which, seeing her as a weak and easily swayed leader, won't have much incentive to compromise with her or to give much weight to her personal views, values or conviction.

The loss of respect is readily perceptible in the tone in which she is addressed in the media. A recent op-ed, about Brazil's--along with India and South Africa's--admittedly dismal show of subservience to Syria's Bashar--demeans her to the second-person "tu" in its very title: "Atenção, Dilma, ele assina em teu nome."

So, if --or is it when?-- push comes to shove in the next four years, who do you talk to?

Latin America: After all, this government looks serious indeed

Contrary to what I wrote last week, Minister of State for the Americas Diane Ablonczy was with Stephen Harper in Latin America and in fact spent three days in Toronto talking to stakeholders there right before leaving with the PM, which makes plenty of sense. The very critical post below was written as soon as I got the press release, i.e. right after Harper's return from Latin America, which made me think that she was just back from Toronto. I should have checked the dates. My mistake.

Expanding the Latin American Reserve Fund: Is UNASUR taking on the IMF?

There were interesting rumblings at the August 5 meeting of the Finance Ministers of the Union of South American Nations (UNASUR). The creation of the organization's Financial Council--following in the path of its Defense Council--was announced,and ways were discussed to protect the region from global financial instability. In that context, Brazil's finance minister Guido Mantega expressed his country's interest in joining an existing mechanism, the Latin American Reserve Fund (FLAR), which is currently made up of Bolivia, Colombia, Peru, Costa Rica, Ecuador, Uruguay and Venezuela.

The FLAR, very much like the IMF, is meant to help its members deal with current account and debt crises. Although the commitments of its members total U$2.3 bn, the FLAR, established in 1978, currently controls... $1.84 bn, which basically means that it cannot be of much help. Hence the idea of beefing it up to $10 or 20bn, by having the region's two largest economies, Argentina and Brazil, join in with significant contributions.

Brazil's support remained very abstract, however, and no decision was taken. In fact Mantega argued that the main obstacle lied in the FLAR's own regulations, which currently set a mzximum contribution of $500m to its participants. With Colombia and Ecuador--an unlikely pair--promoting the idea, and Argentina and Venezuela apparently enthusiastic the proposal, Mantega's argument sounds very lame.

Now, Brazil's stand should come as no surprise. These regional outfits offer very little to Brazil, for a number of reasons: 1) unless it invests massive amounts of resources in these endeavours, they are unlikely to have much bearing were a serious financial crisis--think Venezuela in the next 24 months--to happen in the region; 2) Brazil cannot openly dominate these mechanisms, for fear of looking like--and being painted as--an imperialist power, making its resources vulnerable to hijacking by more aggressive regional actors--think Hugo Chavez or friends; 3) for both these reasons and because such a fund would have no bearing whatsoever on Brazil's own financial security, a serious commitment would be a losing proposition with the Brazilian public and Congress.

Following Brazil's less than lukewarm support for Hugo Chavez' Banco Sur--idealized as a regional challenger to the World Bank and the Inter-American Development Bank--this latest non-decision thus looks a lot like another Brazilian refusal to serously back regional institutions, in spite of the country's lofty rhetoric about South American solidarity and integration. With international reserves currently worth $335bn dollars, even $5bn should have been easy enough to commit, obviously conditional on changes to FLAR's regulations.

Now, Brazil is not alone: given the size of the region's international reserves ($500bn for South America; 650bn for Latin America as a whole, and even $20bn for tiny Central America), the tiny amounts being discused here show once more that Latin America is not really serious about collective action. While there are many, many things that should keep Christine Lagarde awake at night, a Latin threat to the IMF is not one of them...

Brazil: The ways in for the private sector

In my recent post on Harper's visit, I have been insisting on the difficulties posed to private sector entry into the Brazilian market, particularly the fact that Brazil, especially under Lula, has been pushing very hard to protect and promote its own large companies and make them national champions. That view is a bit too simple and if you take it literally, you certainly cannot make sense of the flood of investments that has engulfed Brazil in the last few years, as the total stock of foreign investments in the country essentially doubled in five years, to reach more than $400bn.

So, there must be ways in, and there are. One of them is to produce something that no local champion does. This is the path taken by global car manufacturers and, recently, by RIM: you move in, fighting through the bureaucratic and regulatory maze, produce for the fast-expanding local market, and count your money. The appeal of this strategy is that the outsider, once inside, can reap the benefits of the still protectionist outlook and policies of the government.

Joint ventures represent the other path: work with a local champion, accept a minority stake in the project, and then you can produce both for the local market and for exports, in addition to benefiting from nice government treatment through your local friend. Look at this recent case: two groups from South Korea, Dangkuk (30%)  and Posco (20%) are joining Vale, Brazil's largest company, to build a huge steel mill project (the Compañía Siderúrgica do Pecém (CSP)) in the Northeastern state of Ceara. When completed, by 2014, CSP will be producing 12.5 million tons of steel per year. Total foreign investment: $2.1bn or about 20% of the total current value of Canada's investments in Brazil. Vale has a similar project with Germany's Thiessen Krup in Rio de Janeiro, the Compañía Siderúrgica del Atlántico (CSA).

This second path, no doubt, is the one that will be pursued by the Canada-Brazil CEO Forum. Opportunities there will be. Note however, that to play either of those games, you'd better be big.

Latin America: How serious is this government? CORRECTION

Well: BIG change. This government looks serious indeed. Contrary to what I wrote, Ablonczy was with Harper in Latin America and in fact spent three days in Toronto talking to stakeholders there right before leaving with the PM, which makes plenty of sense. The very critical post below was written as soon as I got the press release, i.e. right after Harper's return from Latin America, which made me think that she was just back from Toronto. I should have checked the dates. My mistake.


______________________________________

Original post: I was quite happy with Harper's visit to Brazil and the region, but a bit of news kind of disturbs my bliss...

I have just received a funny press release from the Department of foreign affairs. The title is enticing: "Ministry of State [for the Americas] Ablonczy Successfully Concludes Outreach Tour." First thought: WOW!!! These guys are serious: while Harper is working the regions' Presidents, Ablonczy, no doubt with top bureaucrats from the department, works around him, visiting other countries, laying the ground for the next big show.

Well, I should have stopped at the title, because the rest is a sad joke: While the PM is in the region, the Minister responsible for the region has just spent, "successfully," three days IN TORONTO, "to establish a good dialogue with key stakeholders."

In other words, not only was she not in other countries of the region or at the very least with the PM, building links that presumably she could use as the main person charged with the follow up to his visit, but she was instead in Toronto, doing things that she should have done well before. Worst still, the biggest players in Toronto, beginning with Scotia's Rick Waugh were, well, with the PM in South America.

Sad.

Harper in Brazil: inglorious--but useful--foray

In Brazil's main newspapers -- the Estado de Sao Paulo, the Folha de Sao Paulo, O Globo and the Correio Brasiliense-- the only article I could find that was specifically devoted to Harper's visit is a Folha piece revolving around his hiding a bathroom to get the Brazilians to change the timing of his speech... The episode is also the one thing about his trip that was picked up by the US press. Obviously, his arriving in a Brazil shaken by corruption scandals, on a dark day for global stock exchanges, and with London ablaze, kind of doomed the poor man to relative invisibility. But there is something real and true behind the apparent fiasco: there was not much for Harper to do there, although what was to be done he did.

Let's start with the not much: as he put it himself, trade between between Brazil and Canada, two of the world's ten largest economies, with a joint GDP of $4trillion (his numbers), is only $6bn, "little more than one tenth of one per cent of our joint gross domestic product." Joint investments are worth $23bn, not negligible but not impressive at all when you consider that Canada's global stock of investments is about $640bn. Now, Brazil's large economy and rapid growth mean huge opportunities for everybody to jump in and many are indeed interested: Scotia is getting a foothold in the banking sector and RIM will be producing smart phones locally, to mention only two of the 400 or so companies already there. But things are not easy for foreign companies in Brazil.

Brasilia is very keen on strengthening its own firms, holding equity in many and offering them subsidized credit. The National Bank for Economic and Social Development even helps Brazil champions to acquire foreign companies... The whole endeavour is explicit: on August the 2nd, the governament launched the "Greater Brazil Plan"--the Plano Brazil Maior--an industrial policy program involving "Buy Brazil" measures, tax cuts as well as targetted grants for business, in particular for the montadoras, i.e. the multinational corporations--Volkswagen, Ford, GM, Peugeot, etc.--that produce cars in Brazil. The plan is openly meant to protect  the national economy and compared to it Canada's past ventures in industrial policy look decidedly timid. Note that this type of initiative is also very popular, with most critics charging that Brazil Maior was "insufficient," and even the small-l liberal Estado de Sao Paulo basically agreeing with the importance of significant government support for local companies. To say the least, while this doesn't mean that foreigners are kept out--take the montadoras--it means that when foreigners compete with locals, the field is decidedly not level.

Trade is similarly hampered. Once again, Brazil is not a closed market. But since a big liberalizing shock at the beginning of the 1990s, little progress has been made and barriers, of all kinds, abound. The project of a free trade agreement between Brazil and Canada, which has been floated in the Canadian press, is patently absurd at the moment and probably for a while. Brazil, as a member of Mercosur, shares external tariffs with Argentina, Paraguay, Uruguay, and soon, with Venezuela, which means that any free trade arrangement has to involve all of them. In other words, as soon as the Paraguayan Senate relent and votes to let Venezuela in, which all other governments of the bloc have already done, Hugo Chavez will have a veto on any such agreement. In other words, unless global multilateral trade is freed up at the WTO--not in the cards for now--up and until Mercosur dissolves or morphs into a free trade area--which would be the same dissolving--Brazil is out of bound for free traders.

The main obstacle to change on both these fronts is that Brazil is doing really well right now, pursuing these kinds of policies. Poverty and inequality down, domestic demand up, GDP up, inflation down, FDI piling in in spite of the obstacles and Brazilian companies expanding out into the world. Why change what works to please Canada? Substance was thus missing, and the aggreements on tourism,  science and tech, fig leaves all, work well only because there is no much to hide.

Obviously, with an economy just this side of $2tn, crumbs can be huge and Harper's visit, along with the bilateral business council that he announced, may and probably will help Canadian companies pick them up. This is the second point I want to make: what could be done he did. The trip's potential lied on the political side of the ledger, both for bilateral relations and for Canadian foreign policy writ large. Harper was there to pay his respect to the new power on the bloc, essentially acknowledging that Brazil has arrived in the centre of global politics and, implicitly, that Canada, on its way out, recognizes it. The visit itself, particularly Harper's gushing speech in Sao Paulo, did the trick, coming on top of the massive diplomatic effort that spanned the better of the last ten years and that culminated in reciprocal visits of high-level civil servants from both governments in the last year. Brazil and Canada now have a mature relationship, one that recognizes the changed stature of each and that, without denying different and sometimes conflicting interests and views, won't be derailed by trade disputes or by the involvement of some loony expat in kidnappings, as it was before. Dilma Roussef's return visit, hopefully in the coming year, could once and for all turn the page.

Drug legalization? No panacea

The case for drug legalization has always looked tight to me: make it all legal, unclog prisons of people who were either having fun or a health problem, leave the first alone if they don't bother their neighbours or run people over with their car, and get treatment for the others. In the process, take criminal networks out of the equation, avoid gang violence, and use the police for really serious stuff. On top, you get regulated products, avoiding problems of purity and possibly better conditions of consumption as people don't have to hide to do drugs.

Now, if the goal is to reduce human suffering, a new study of Florida by the US Centers for Disease Control suggests that things may not be that simple, even if suffering is defined, in the narrowest possible way, as avoiding death.

The study shows a death rate for prescription drugs of 13.4 per 100,000 people, compared with 3.4 per 100,000 for cocaine and heroin taken together (there was no significant number of marijuana-related death). Now, to put this in perspective, remember that the homicide rate for the US is about 5 per 100k, for Canada 1.6, and for France 1.3. In fact, up and until President Calderon launched his War on Drugs in Mexico, that country's homicide rate was hovering around 10 per 100k.

In other words, legal prescription drugs may be more lethal than illegal ones--even when both trafficking-related and overdoses are considered together.

Fortunately for legalizers, a number of caveats warrant mention: 1) marijuana, the drug most commonly and realistically contemplated for legalization, is not particularly dangerous, and possibly less damaging--though it depends on consumption rates--than alcohol or cigarettes; 2) the study only regards Florida and some factor may make things worse there (the study mentions that similar trends were found in Kentucky though and a Toronto Star investigation sees a similar explosion of oxycontin-related deaths in Ontario...); 3) during the period covered by the study (2003-2009), prescription drug deaths had increased by 84%, from 7.3 to 13.4 per 100k, i.e. current rates do not reflect some kind of stable status quo; and 4) much of the increase is driven by three drugs: oxycodone (+264% during that period), alprazolam (+ 233.8%) and benzodiazepines (+ 168%), which implies that measures specifically targeting this trio could have a large impact on the overall death rate for prescription drugs.

The case against legalization is not closed, in other words, but there is still much to mull about.

[Thanks to Freakonomics for the tip on the study...]

Why Latin America's Pacific bloc should worry Brazil

Last week-end, Colombian president Juan Manuel Santos was visiting Felipe Calderon, his Mexican counterpart. The meeting was explicitly linked by the leaders to the "Deep Integration Agreement" with Peru and Chile that was launched last April through the "Lima Declaration." Progress along those lines has to be worrying for Brazil, because if it gains any traction, the resulting bloc of fast growing and relatively large economies would represent a real alternative to Mercosur, with open economies and healthy relations with the United States, unlike poor, troubled and increasingly isolated Alba.

Checking a few numbers is a bit shocking in fact: both the total GDP of the Pacific bloc and its average GDP per capita (ppp) are slightly larger than Brazil's and so is the population of the bloc. Even its military budget is comparable, if slightly lower.

As I have noted earlier, Peru under Humala is a bit iffy and seems to be very keen on better relations with its big amazon neighbour. Moreover, Brazil "has" Mercosur, and once that bloc--essentially Argentina--is brought into the equation, things look much better.

Now, in 2011 Mercosur is "celebrating" 20 years of existence, but nobody seems to be particularly keen on celebrating. Those 20 years have seen trade grow, but since the mid-1990s, even trade within the bloc is down in relative terms. As to regional value chains, the real nuts and bolts of integration today, they are still a dream. Argentina and Uruguay are patching up their paper-mill war, and nobody seems to be particularly keen on deepening the relationship and moving towards coordinated policy. Many in Brazil, consider in fact that Mercosur is an obstacle to an effective trade policy, and things will get worse once Venezuela is finally admitted--Paraguay's senate at some point will have to yield.

What is left is UNASUR which, very cleverly for Brazil--and Venezuela-- excludes Mexico and guarantees Brazil's prominence. But UNASUR is not Brazil's thing. In fact, the secretary-general of the Union, Colombia's María Emma Mejía, has declared, not a bit mischievously, that Brazil cannot become a power without support from the region.  

Add to this the negative perception of Brazil among its neighbours, documented recently by the Fernando Henrique Cardoso Foundation, and you get a sense that Brazil's South America project, launched in 2000 by Cardoso, but aggressively pursued under Lula, could well be unraveling.