Drugs: Our time to lead?

The is one the Globe and Mail has missed: at last, a field we really dominate.

The 2011 edition of the UN's World Drug Report has great news for Canadians: we top the rankings for drug consumption. Here is the data for youth (Grade 10-12), in % who have ever used the particular drug and, in brackets, Canada's rank among all the countries for whom stats are available (minus island micro-states where, for some reason, consumption is often stratospheric):

Canabis:  47.3% (1st)
Extasy group: 13.2 (1st)
Cocaine:  7.2% (2nd)
Amphetamine group: 12.4 (3rd)
Heroin:  2.3% (8th)

And the bad Americans? They better us--barely--for cocaine, and that's it. We're the best!

Now, consider the following: Drug consumption has been going down slowly in this country, Canada has one of the lowest homicide rate in the world, and a declining crime rate. Clearly--unless you want to argue that addiction makes people nice--there is no direct link between drug consumption, the trafficking that underlies it, and violence. Perhaps we should be worried about rocking the boat with a big stick policy...

Latin American DIS-integration: Brazil's contribution

In previous posts, I have insisted on the structural dynamics and policy initiatives that are taking South America's Pacific countries away from the rest of the continent. Well, all the fla-fla around Mercosur and UNASUR notwithstanding, Brazil is also doing its part in the dis-integration of the continent.

Two illustrations: 

1) Petrobras, Brazil'soil giant, has just announced that they would build the Ipojuca oil refinery, in the northeastern state of Pernambuco, alone, i.e. without PDVSA, Venezuela's national oil company. On the surface, nothing is more justified as the Venezuelans have still contributed nothing to the joint project. Now, dig just a little bit and things get more interesting: PDVSA is being bled to death by Chavez, with its own domestic investment programs paralyzed, its production down, and its future bleak. How could it invest non-existing funds into the joint venture? Well, by borrowing, which is just what it tried to do, going to the biggest player in Latin America, Brazil's very own development bank, the government-controlled BNDES. The latter, however, judged a few months ago that PDVSA did not offer sufficient guarantees or repayment, and turned down its request, leaving the Venezuelans with... nothing. By the way, who is financing Petrobras' investment in the refinery? Yes, you are right, the BNDES.

Adding insult to injury, Petrobras has announced that the refinery would not use Venezuela's heavy crude, which is more expensive to refine than Brazilian oil. In other words, there is no point building a pipeline between the two countries, because nobody in Brazil could even use what Venezuela has to sell.

2) The Council on Foreign Relations, in its recently published report on "Global Brazil and U.S.-Brazil Relations," points out that "Brazil is escalating investment and trade throughout [South America]" (p. 56). Well, this is true, but extraordinarily misleading. I have been doing a bit of research on Brazil's global stock of investments, using data from the Banco Central. The numbers are truly interesting and they tell a very different story:

In 2010, South America as a whole represented 7.8% of Brazil's total stock of investments abroad, well after... Austria (22%), the Cayman Islands (17%), the British Virgin islands (8.7%), and the Bahamas (7.3%), all places best known for keeping banking secrets and not taxing much the capital that lands on their shores. With $5.1bn in Brazilian investments (3% of the total), Argentina is the only country of South America to make it to the top 10. In other words, Brazil's investments in the region are growing, but they don't matter much for Brazil. 

Two caveats: 

1) Nobody ever said that Chavez' PDVSA was a good credit risk and Brazil probably did what Canada, France of the US would have done. But that is the point: regional integration works when the biggest player is willing to pay, and Brazil clearly is not. Moreover, refusing to even set up a capacity to refine Venezuela's oil deepens that country's dependence on refining installations in Colombia and especially in the US: not much of a contribution to energy and infrastructure integration, leaving aside the bad blood.

2) Brazilian investors are doing what everybody else is doing: sending their money abroad to avoid paying taxes. Canadian investments in the region are also parked overwhelmingly in a few Caribbean tax havens, notwithstanding the big lie that one can read on Foreign Affairs website and in many "experts" writings pointing to the large and growing importance of Latin America and the Caribbean for the Canadian economy. Still: nobody seriously argues that Latin America is Canada's main foreign policy priority, while this is a song one hears a lot in Brasilia.

Lessons from Latin America: Greece must dump the Euro and the world should approve

[This piece was written with my colleague Yiagadeesen Samy, a conflict and development economist at Norman Paterson]

A few months ago, the economic powers that be chose France’s former finance minister Christine Lagarde over Mexico's Agustin Carstens to lead the International Monetary Fund.  One factor often mentioned in her favour was her better acquaintance with the tribulations currently shaking Europe's financial system, with Greece in particular, but also Ireland, Portugal and Spain on the brink of disaster.  Arguably, however, the relevant knowledge to face the crisis lies not in Europe but in Latin America, where Carstens and ilk in the region's finance ministries have literally grown up with hyper-inflation, brutal devaluations, humongous external debts, massive structural adjustments, huge and often violent social resistance to those, and debt repayment suspensions. 

Much of what is unthinkable in Europe today has been thought and tried many times in Latin America; for example, Argentina defaulted on its debt and devalued its currency in 2001/2002, which ultimately led to increased exports and economic growth later on.  Latin America, accustomed to debt crises, is now a continent going through a period of growth with quickly decreasing poverty and inequality.

Three relevant lessons can be drawn from Latin America's experience: overly strong currencies kill growth prospects; the poor are the ones who pay for adjustments; and lending and investments always come back if there is money to be made.

Right now, richer European countries, Germany in particular, are trying to save their banks by bailing Greece and company so that the latter can keep paying those banks.  The idea is to give as little as possible and to force local governments to draw as much as possible on their own countries’ resources, essentially by cutting services and putting people, especially public servants, out of work.  The outcome will be a massive recession in those countries that will make the weight of debt service even larger for governments whose tax base shrinks, imposing further cuts, and so on.  Social resistance will understandably ensue, as is already the case in Greece, limiting the ability of the government to implement those cuts, forcing in turn richer European countries to invest a bit more in the bail-outs.

There is another solution: Greece could move out of the Euro and reintroduce its own currency, possibly followed in that movement by Portugal and perhaps even Spain.  The new currencies would not be worth much, making it impossible for those governments to pay their debts, which will continue to be in Euros.  This, however, would only introduce a dose of reality in current discussions: Southern European countries, which face not only a problem of liquidity but also of solvency, cannot pay what they owe, they will not do it in the end, and the world needs to deal with it.

The flip side of the Euro exit, moreover, is that local governments won't have to make as deep a cut in their spending, lessening the social cost of the crisis and the political instability that results.  Meanwhile, local products and services will suddenly become competitive as these economies move from being high-cost but low-productivity holes, to low-productivity but also very low-cost heavens. The world would flock to Southern Europe's beaches and their agricultural products would flood global markets, all for the good of the local economies and, for agricultural markets, for the good of the world. Oh, and by the way, investments would follow and if Europeans are not interested in a suddenly competitive tourism sector, well, Asians and Latin Americans will be.

Meanwhile, Germany and other creditor countries would be confronted to saving their banks, which is basically what they are trying to do right now anyway. The only difference is that the checks, instead of going through Athens (and possibly Lisbon and Madrid), would move directly from Berlin to Frankfurt and Dusseldorf.