All posts tagged Business & Finance

Behind Argentina’s Making up with its Creditors

By Arturo C. Porzecanski*

Pensive Macri

Photo Credit: Mauricio Macri / Flickr / Creative Commons

A recently concluded agreement in principle between Argentina and most of its holdout creditors is part of a 180-degree turn in economic policy that the new administration of Mauricio Macri is attempting to make in order to end five years of economic stagnation, 10 years of double-digit inflation, and 15 years of isolation from the international capital markets.  President Macri has to navigate very carefully, however.  First, he does not have a majority in either congressional chamber, so he has to work hard to persuade legislators to support his policy initiatives.  Second, the judiciary and the Executive branch are packed with political appointees from the Néstor and Cristina Kirchner administrations, and while some of them have been fired, Macri and his economic team must still tread cautiously.  Third, all the key economic institutions, such as the government’s commercial and development bank (BNA), the central bank (BCRA), and the social security administration (ANSES) have been stuffed to the gills with either risky or unprofitable assets (from bad loans to government IOUs), thereby compromising their effectiveness.  Last but not least, Macri must be mindful of his very fickle electorate: over the past seven decades, Argentines have periodically voted non-Peronists into office to clean up the mess left behind by the Peronists, but then they have soured and yanked their support.  It is a sobering fact that not a single non-Peronist government has ever made it to the end of its constitutional term in office.

This is why the Macri administration is going for some “quick wins” rather than for major structural reforms or the necessary dose of fiscal austerity and monetary restraint.  And this is the context within which his willingness to “bury the hatchet” with private and official creditors must be understood.  As a former businessman, Macri realizes that if one takes over a money-losing enterprise – in this case the public sector, which is running a deficit equivalent to more than five percent of GDP – one needs to cultivate sources of interim financing until the enterprise can be turned around.  After all, the prior government had been living hand-to-mouth on loans from the BNA, the BCRA, and ANSES, with increasingly inflationary consequences.  Having lost official international reserves and seen the currency depreciate rapidly after abolishing capital controls, the authorities are now under great pressure to obtain interim financing from abroad to help stabilize international reserves and support the weak currency.

President Macri faces a very difficult governance challenge in the months and years ahead.  His ability to mend fences with private creditors – Argentina has been in arrears to all its bondholders since mid-2014 – as well as with the IMF, multilateral development banks, and official creditors such as the Ex-Im banks – is crucial to the restoration of financing to the private and public sectors and the fostering of an investment-friendly climate.  Macri’s agreement in principle with most holdout creditors is a big step in the right direction, but he must now secure the requisite congressional approvals to dismantle Kirchner-era legislation inimical to a settlement and obtain interim financing at reasonable interest rates to clear all overdue debts.  These are early and relatively easy tests for a government that is yet to adopt most of the divisive and unpopular austerity measures that circumstances warrant.

March 10, 2016

*Dr. Porzecanski is Distinguished Economist in Residence at American University and Director of the International Economic Relations Program at the School of International Service.

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by clalsstaff on March 10, 2016  •  Permalink
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Posted by clalsstaff on March 10, 2016

https://aulablog.net/2016/03/10/behind-argentinas-making-up-with-its-creditors/

Brazil: Not-so-Happy New Year

By Matthew Taylor*

Brazil Basta

Photo Credit: Antonio Thomás Koenigkam Oliveira / Flickr / Creative Commons

A vicious combination of corruption scandal and economic malaise suggests a troubled new year awaits Brazil.  Economists estimate gross domestic product has contracted 3 percent this year and will decline a similar amount in 2016, while inflation and weak government finances hamper efforts to stimulate growth.  Two of three big rating agencies have cut Brazilian debt from investment grade to junk. Unemployment has risen from under 7 percent a year ago to nearly 10 percent, with forecasts of 12 percent on the horizon.  Efforts to reform fiscal policy are getting nowhere, and the champion of fiscal reform, Finance Minister Joaquim Levy, has just resigned.  The bonanza launched by the 2003-2010 presidency of Lula da Silva – seemingly setting Brazil on a unique path of state capitalist development – is long over.

The country’s interconnected scandals cast shadows on many of the leading players on the national stage, including President Dilma Rousseff.

  • Petrobras, the crown jewel of Brazil’s state capitalist model, is at the center of allegedly massive corruption schemes. Rousseff, who was chair of the Petrobras board at the time of the alleged wrongdoing, has claimed absolute ignorance.  But the charges implicate Brazil’s leading political and business elites, many of whom have been jailed in recent months.
  • A feud between Dilma and the president of the Chamber of Deputies, Eduardo Cunha, reached a new low this month after Cunha’s approval of impeachment proceedings against her. (His own ethics problems continue to fester.)  The charge against Dilma is not of personal corruption but rather that Rousseff flouted budget laws by using public banks to cover up unauthorized debt issuance and off-books spending.  Rousseff supporters have argued that the impeachment charges represent the worst of golpismo, or coup-mongering, and a constitutional overreach that threatens to undermine democracy.

For Brazil, 2016 will be dramatic and unpredictable – as the country weathers the most dangerous political crisis since the impeachment and resignation of President Fernando Collor in 1992.  Dilma’s opponents will have difficulty convincing two-thirds of the Chamber and Senate to oust her, but the crisis is already creating significant fissures in the democratic system.  The parties have been turned upside down.  Even if Dilma survives in office, she faces nearly impossible odds in restoring the credibility of her administration and party, the Partido dos Trabalhadores, or PT.  There are early indications that the PT will face a bloodletting in the 2016 municipal elections, and former President Lula, the party’s once-ironclad standard-bearer, has the highest rejection rate (55 percent) of any potential candidate in the 2018 presidential contest.  The PMDB, Dilma’s coalition partner, is threatening to break with the government, but is internally divided. The opposition PSDB is facing scandals, protests, and troubles of its own in the states it governs.  The newfound proactivity of prosecutors and judges is making democratic checks and balances work as never before – and is largely welcomed by Brazilians – but Brazil’s old party system may not be able to keep pace.  Rumblings for a rethinking of the political system will grow louder in the new year, as the crisis deepens.

December 21, 2015

*Matthew M. Taylor is associate professor at the School of International Service at American University.

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by clalsstaff on December 21, 2015  •  Permalink
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Posted by clalsstaff on December 21, 2015

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Cuba’s Limited Absorptive Capacity Will Slow Normalization*

By Fulton Armstrong

Photo Credit: PBS NewsHour / Flickr / Creative Commons

Photo Credit: PBS NewsHour / Flickr / Creative Commons

As the U.S. embargo – the main obstacle to expanding U.S.-Cuban economic ties – is relaxed by presidential regulatory action and eventually lifted by Congress, limits on Cuba’s own willingness and ability to conduct trade, absorb investment, utilize information technology, and even accommodate tourists risk putting a brake on the normalization of economic relations.  Five decades of embargo and failed socialist models have rendered key sectors in Cuba ill-equipped to take advantage of the surge in U.S. business interest in the island.  In some areas, the political will to open up and reform is crucial.  These problems do not translate into a rejection of normalization but rather into a slower timeline than many on and off the island would hope for.

The advantages of economic engagement are well known.  Foreign investment will help provide the $8.7 billion Cuba wants for its “Portfolio of Foreign Investment Opportunities” – some 246 projects in energy, tourism, agriculture, and industry.  Havana also wants growth rates to rise to 4-5 percent per year (from an estimated 1.5 percent in 2014), fueled by at least $2 billion in annual foreign investment.  Trade, investment, and tourism are all potentially powerful engines for growth and employment in Cuba.  Private farmers have long out-produced their state competitors and many cooperatives, making them ideal for engagement under current U.S. regulations if the Cuban government facilitates it.  The small private sector, currently employing over a million people, could – with a more supportive infrastructure – provide many more vital goods, services, and employment that the Cuban government years ago admitted it could not provide.  Sectors utilizing Cuba’s specialized and skilled human capital, such as biotechnology, could also benefit quickly and generously from the new U.S. relationship.

Cuba has a lot going for it – such as its deep reserve of potential human capital – but it is also is held back by a variety of problems, many of which are prolonged by political caution.

  • Cuba is updating laws governing investments, property, and labor – a new foreign investment law in March 2014 and related regulations are steps in the new direction – but the multi-year, incremental process has been too slow to keep ahead of burgeoning opportunities. Regulations on how foreign firms select, pay and release Cuban employees are also antiquated.  Paperwork for approving foreign direct investment remains formidable and must pass through multiple levels.  The country lacks the basic institutions necessary to license import and export transactions for beneficiaries outside government ministries.  Much of the bureaucracy – chronically underpaid and, during periods of party dominance, neglected – has yet to grow into a new, more professional role.
  • Unifying Cuba’s two national currencies is absolutely essential but, despite the government’s repeated declarations of intent, it has still not been done. The existence of a different, lower exchange rate for state enterprises creates distortions that will worsen as demand for imports rises.  The financial system, moreover, is too over-burdened, secretive, and lacking in agility, and continued blocks to Cuba’s access to IMF, World Bank, and Inter-American Development Bank (IDB) funds deny it important breathing room to reform.
  • Cuba lacks an information and communications technology (ICT) framework capable of harnessing and nurturing its human capital and driving growth and efficiency – which will retard progress in a number of priority areas.
  • De-industrialization over the past 25 years has further reduced Cuba’s absorptive capacity. Many key sectors – including textiles, clothing, metals, machinery, transportation equipment, and more – have contracted between 50 and 100 percent.  Much of the infrastructure is dilapidated.  The transportation sector is in dire need of repair and modernization; and the construction industry is inefficient and poorly resourced.

Cuba’s challenges in taking advantage of new opportunities are not insurmountable – with political will and time.  The pace of reform and corresponding expansion of Cuba’s absorptive capacity may be maddeningly slow for many Cubans and Americans alike.  But insofar as the U.S.-Cuba normalization process is irreversible, so too is the conviction in Cuba on the need to “update” the system through reform in order to take advantage of the opportunities it brings.  Cuban national pride and the Communist Party’s fear of losing control could very well be assuaged as the island experiences the benefits of engagement.  Foreigners, especially the United States, who push too hard, too fast, and too haughtily could fail and even delay this aspect of normalization, just as Cubans who move too passively, too slowly, and too skeptically could stymie the process as well.

October 27, 2015

*This blog post is excerpted from the third in a series of policy briefs from the CLALS Cuba Initiative, supported by the Christopher Reynolds Foundation.  Read the full brief here.

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by clalsstaff on October 26, 2015  •  Permalink
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Posted by clalsstaff on October 26, 2015

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Argentina Presidential Campaign: Harbinger of Deep Change?

By Federico Merke*

Candidates, left to right: Daniel Scioli, Mauricio Macri, and Sergio Massa. Photo Credits: Cgazzo, Inés Tanoira, and Tigre Municipio, respectively / Wikimedia Commons / CC BY 2.0

Candidates, left to right: Daniel Scioli, Mauricio Macri, and Sergio Massa. Photo Credits: Cgazzo, Inés Tanoira, and Tigre Municipio, respectively / Wikimedia Commons / CC BY 2.0

As the 2015 presidential race begins to take shape in Argentina, the leading candidates – Daniel Scioli (Frente para la Victoria, FPV), Mauricio Macri (Propuesta Republicana, PRO), and Sergio Massa (dissident Peronist faction Frente Renovador, FR ) – have already begun to outline their visions, but sweeping change doesn’t yet appear on the horizon.  According to early polls, Massa had a strong start in the runup to the August 5 presidential primary, but his popularity has faded, making Scioli and Macri appear to be the real contenders.  Originally considered an unexciting three-way race, it has now become a polarized contest.  It should come as no surprise if campaign speeches start to follow a continuity-versus-change line.

Several developments suggest the presidential race will be close:

  • The fact that Scioli has named Carlos Zannini, President Cristina Fernández de Kirchner’s legal secretary, as his running mate has been a game-changer. The Scioli-Zannini effort to bridge two different factions of the FPV, namely the left-wing Kirchnerites with more business-friendly Peronists, will demand tons of rhetoric.  This ticket casts them as guarantors of continuity: el modelo with some modifications.  Yet in electoral politics, almost everything is about framing – explaining to core and potential supporters how new decisions, which for all their twists and turns, remain faithful to the flags of the party.  This is when Peronism gets real.
  • The Zannini gambit on the Peronist side prompted Macri to follow a pure PRO formula, naming Gabriela Michetti, a former deputy-major of Buenos Aires City, as his vice-presidential candidate. This ticket bets on the idea that most Argentine voters reject the government and want substantial change, while polls suggest that many just opt for moderate adjustments.  Macri’s record indicates that he would propel a more pro-business government than that of Fernández de Kirchner, but his victory would not portend a return to the neoliberal heyday of the Menem years during the 1990s.
  • Sergio Massa, on the other hand, is the plain-speaking candidate of the dissident Peronist faction who’s challenged by the FPV and PRO candidates to duke it out over the issues. Polls indicate that he will draw 15 percent of the votes in the election – making him an important powerbroker.

These early stages of the campaign reflect a recurrent pattern in Argentina’s political landscape: a tendency of ruling party candidates to move away from incumbents with lofty rhetoric but little specificity on the one hand, as opposition candidates issue harsh criticism while at the same time manifesting a reluctance to embrace radical change.  Scioli seems to be going all-out Kirchnerite, but it’s too soon to judge whether the electorate will follow, or whether once in office he would govern as if it were Cristina’s third term.  He and Macri both aspire to grab Massa’s 15 percent, as it could enable them to win the presidency in the first ballot rather than having to contest a second round of voting between the two top vote-getters.  But he hasn’t stated a credible price, and neither Scioli nor Macri seems ready yet to begin bargaining with him.   President Fernández may have avoided plunging the economy into crisis before she steps down, but her successor will definitely have to make tough choices because the country is mired in recession and cannot access foreign investment.  Macri might initially enjoy some leeway to introduce austerity measures that would clean up a good part of the macro-economic mess and reopen Argentina to international capital markets, but even he – like Scioli – is likely to be constrained by embedded Kirchnerism in Congress and in the ministries.  Those in Argentina and beyond who have dreamed that Kirchnerism’s days are numbered will have to wait to see.  Kirchnerism, Argentina’s latest “ism,” has profoundly altered the political and ideological landscape – and, at this early point in the campaign, it appears likely to continue to be part of the country’s political ethos into the future.  It could even turn out to be the dominant force in the administration that takes office in 2016.

July 2, 2015

*Federico Merke directs the Political Science and International Relations Programs at the Universidad de San Andrés in Buenos Aires.

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by clalsstaff on June 30, 2015  •  Permalink
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Posted by clalsstaff on June 30, 2015

https://aulablog.net/2015/06/30/argentina-presidential-campaign-harbinger-of-deep-change/

Puerto Rico: Debt and Budget Crisis

By Fulton Armstrong

Photo Credit: Erica Feliciano / Flickr / Creative Commons

Photo Credit: Erica Feliciano / Flickr / Creative Commons

Puerto Rico’s debt and budget crises – worsened by the legislature’s rejection last week of the governor’s proposed fiscal reforms – threatens to plunge the island into a deeper, longer-term depression and is already causing tensions with Washington.  The government and state-run corporations are $73 billion in debt, with little prospect of paying it off.  The Puerto Rican Electric Power Authority (PREPA) alone owes investors, mostly based on Wall Street, about $9 billion.  Last year, the government restructured about $19 billion of PREPA, the water company, and the highway administration’s debt – giving itself barely a year’s breathing room.  The inability to make good has caused internal political tensions and thrust the government into the danger of defaulting, which would shut off access to much-needed credit for potentially years to come.  Hedge funds and others have been buying Puerto Rican paper at deeply discounted rates.

No solution seems possible to make good on such monstrous debt.  Governor García Padilla last year took steps to rein in spending and dramatically reduce the deficit – from $2.2 billion to $200 million a year.  Government personnel have declined by 16,000 positions without disruptive layoffs.  But such measures have barely made a dent in the $73 billion in outstanding liability.  García Padilla has been reluctant to fight PREPA over its inefficient management structure, force it to shift away from expensive hydrocarbons (which account for 98 of electricity production), and adopt renewable energy sources.  The legislature last week killed the centerpiece of his budget reform – a 16 percent value-added tax – and further complicated efforts to persuade lenders that the debt will be paid.  A broader economic slowdown over the past decade, with even tourism registering declines, has been a key factor.  The Governor’s biggest hope at this time seems to be legislation in Washington, introduced by Puerto Rico’s non-voting member in the U.S. House of Representatives, that would allow the corporations to declare Chapter 9 bankruptcy – which Puerto Rico (unlike the 50 states) is forbidden to do under current federal law.

The economic crisis is triggering a political crisis on the island and potentially in relations with Washington.  As Argentina’s failure to make good on its debts has demonstrated, U.S. hedge funds have extraordinary clout and will use it to block anything that lets Puerto Rico off the hook, reducing the chances that Representative Pedro Pierluisi’s bill will pass to practically nil.  The United States may press the island harder to reform its inefficient corporations, but it will ultimately have no option but to watch the crisis deepen.  The situation will give greater urgency to another referendum on Puerto Rico’s status, which the Governor said will take place in 2016, with two contradictory trends at play.  While many Puerto Ricans undoubtedly resent aspects of Washington’s attitudes toward the island, polls show no change in single-digit support for independence.  Most Boricuas, if nothing else, value their U.S. citizenship and the ability to move stateside if conditions on the island get much worse.  Even if the debt crisis frays relations with Washington, inertia argues for no redefinition of the relationship.  There is little indication that Washington will clarify the island’s status unless Puerto Ricans become a factor in Florida during the 2016 presidential campaign.

May 7, 2015

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by clalsstaff on May 7, 2015  •  Permalink
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Posted by clalsstaff on May 7, 2015

https://aulablog.net/2015/05/07/puerto-rico-debt-and-budget-crisis/

Honduras: Charter Cities Lurch Forward

By Fulton Armstrong

Choluteca, Honduras Photo Credit: Jonathan D. / Flickr / Creative Commons

Choluteca, Honduras Photo Credit: Jonathan D. / Flickr / Creative Commons

The Honduran government expects to get the green light this month from a Korean consulting firm for a master plan to hand governance of several small communities over to private investors to develop them, but concerns about the plan run deep and appear unlikely to fade.  Called ZEDEs – the Spanish acronym for “Employment and Economic Development Zones,” the specially designated areas are also called by their proponents charter cities, model cities, and startup cities.  The first tranche of towns facing conversion are in the southern Honduran departments of Valle and Choluteca, with a new port built on the Gulf of Fonseca.  The government says that the affected communities will remain an “inalienable part of the Honduran state,” but amendments to the Constitution, laws, and regulations permit their governing body – which is unelected – to establish “policies and regulations” and their own police and other public services.  Called the “Committee for the Adoption of Best Practices,” the board is dominated by representatives of Honduran millionaires and an even greater number of non-Hondurans of predominantly libertarian ideology.  Among them are American anti-tax crusader Grover Norquist; former President Reagan’s son Michael; and Michael Strong, chief executive of Radical Social Entrepreneurs.  The ZEDEs’ guiding principle is to liberate communities from government taxation, oversight, and corruption in order to attract investment and stimulate prosperity.

The ZEDEs initiative has been plagued by opposition since its inception, however.  Numerous reports underscore that the affected communities were never consulted, and demands for a referendum have repeatedly been rebuffed.  Honduran implementation of the model has been rejected by the U.S. economist who proposed it, Paul Romer (formerly of Stanford University; currently at New York University).  He withdrew because of the lack of Honduran transparency, including secret deals with interested U.S. parties.  The Honduran Supreme Court initially voted 4-to-1 against a Constitutional amendment allowing creation of ZEDEs in 2012, but the Congress impeached the four dissenters and replaced them with supporters who voted unanimously in favor.  There are numerous reports of intimidation of local civil society leaders, who deem them credible in view of clashes between wealthy businessmen and campesinos in other areas resulting in hundreds of deaths in recent years.

Honduras has a desperate need for economic growth – two-thirds of the population lives below the poverty line – and its model of national governance, riddled with corruption and non-transparency, is indeed in crisis.  But there’s no evidence that fighting one form of corruption with another non-transparent system will help anyone but the big investors.  Indeed, Honduras has ranked among the most violent countries in the world for several years, with the term “failed state” looming darkly over it – making it perhaps the worst place to experiment with provocative new models of governance without popular consultation or support.  Critics seem to have a good case: real reform and economic stimulus would focus on cleaning up the government and holding accountable the elites that have brought the country to ruin and now are trying to impose this model on their fellow citizens, rather than usurping the affected communities’ sovereignty.

March 19, 2015

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by clalsstaff on March 19, 2015  •  Permalink
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Posted by clalsstaff on March 19, 2015

https://aulablog.net/2015/03/19/honduras-charter-cities-lurch-forward/

Nicaragua’s “Great Canal” Draws Opposition

By Fulton Armstrong

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Protestors opposing the Chinese-Nicaraguan canal confront police / Jorge Mejía Peralta / Flickr / Creative Commons

Although questions continue to swirl around whether the Chinese-Nicaraguan canal – which its main investor called the “most important [project] in the history of humanity” – will be built or not, its opponents are taking it all very seriously.  A CID-Gallup poll in January showed that 41 percent of Nicaraguans interviewed strongly support the project, while another 21 percent and 17 percent back it somewhat and a little, respectively.  But another poll by the same firm suggested ambivalence:  asked if they supported the National Assembly vote giving the Chinese firm leading the project, HKND, a concession for the 278-km right of way for up to 100 years, some 39 percent of respondents said no.  Some political voices are growing more sharply opposed as well.  The powerful business group COSEP, for example, has gone from agnosticism about the project to a position of open disapproval.

Groups concerned about the project’s impact on the environment and rural residents have already held protests involving up to several thousand participants, and – despite the government’s promise that the canal will bring prosperity throughout the country – organizing efforts appear unlikely to fade.  Skepticism about HKND and the government’s commitment to protecting the environment, fueled by their off-the-cuff dismissal of concerns, is so deep that even a balanced comprehensive impact study by the British Environmental Resources Management, due next month, may fail to calm nerves.  Environmentalists cite studies warning that dredging Lake Nicaragua from its current depth of nine meters to the 27 meters necessary for cargo ships will stir up many layers of toxic materials, with catastrophic consequences for marine life and surrounding agricultural areas.  Other groups are rallying behind the 29,000 residents who are to be evicted from properties along the canal route.  Demonstrations have turned violent, with protestors injured by tear gas and rubber bullets.  Graffiti and banners demanding “fuera chinos” are common.

In the hemisphere’s second poorest country, the promise of growth spurred by the $40-50 billion project is still a powerful card in the government’s hand.  Many skeptics still wonder, however, if the whole scheme is a ruse to fleece the Chinese investors, who’ll bring in a couple billion dollars before realizing that the project will get bogged down in Nicaraguan political quicksand.  But opposition to the canal goes far beyond the usual Managua political game of fighting over corruption dollars and obstructing each other’s priorities.  President Ortega’s endorsement of the canal contradicts his own statements years ago that he wouldn’t compromise the lake’s eco-system “for all the gold in the world.”  According to The Guardian newspaper, the dredging will move enough silt to bury the entire island of Manhattan up to the 21st floor of the Empire State Building – which no one is prepared to deny will have serious environmental implications.  China’s Three Gorges Dam, completed five years ago, displaced 1.2 million inhabitants – proportionally twice as many Nicaraguans displaced by the canal – but Nicaragua’s ability to resettle them, give them jobs, and suppress their dissent is small compared to China’s.  The project may not be the greatest in the history of mankind as HKND claims, but it may provoke a crisis as great as any in Nicaragua.  For starters, if COSEP’s opposition persists, it threatens to unravel the modus vivendi under which Daniel Ortega has stayed in power, and could portend much deeper tensions.

March 5, 2015

Click here to see our previous article about the canal.

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by clalsstaff on March 5, 2015  •  Permalink
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Posted by clalsstaff on March 5, 2015

https://aulablog.net/2015/03/05/nicaraguas-great-canal-draws-opposition/

Bracing for Economic Pain in Brazil and Beyond

By Kevin P. Gallagher*

Brazilian Real

Mark Hillary / Flickr / Creative Commons

Brazilian President Dilma Rousseff’s warning to U.S. Fed Chairman Ben Bernanke in 2012 – that his monetary-easing policies were creating a harmful tsunami of financial flows to emerging markets – was spot-on.  U.S. growth and interest rates have been appreciating currencies, causing asset bubbles, and exporting financial instability to the developing world.  Brazil and other emerging-market countries may soon be facing capital flight and exchange rate depreciation that could lead to financial instability and weak growth for years to come.  From 2009 to 2013 countries like Brazil, South Korea, Chile, Colombia, Indonesia and Taiwan all had wide interest rate differentials with the U.S. and experienced massive surges of capital flows.  The differential between Brazil and the U.S. was more than 10 percentage points for a while.  According to the latest estimates by the Bank for International Settlements (BIS), emerging markets now hold a staggering $2.6 trillion in international debt securities and $3.1 trillion in cross-border loans – the majority in dollars.

Now the tides are turning.  Many emerging market growth forecasts are continually being revised downward.  China’s economy is undergoing a structural transformation that necessitates slower growth and less reliance on primary commodities.  The prices of oil and other major commodities are stabilizing or declining.  As growth and interest rates pick up in the United States, the dollar gains strength – and emerging market currencies fall.  Brazil’s real hit a 10-year low last week, down to 2.87 to the dollar, amid continuing predictions of zero growth for the country this year.

The traditional tools for weathering the storm may not be available or enough for developing economies.  Floating exchange rates and the resulting depreciation can cause the debt burden on firms and fiscal budgets can bloat overnight, especially in a lower growth environment.  Increasing competitiveness would have helped boost exports, but an IMF study shows that Latin America failed to use one of the biggest commodity windfalls in its history to invest, hindering competitiveness to ride out the tsunami in short-term inflows.  Local bond markets help, but most debt is indeed in dollars, and most local debt is held by foreigners who are always the first to dump such debt.  Interest rate hikes can also be dangerous; they don’t reverse flight and can choke off what little growth there is to be had in a downturn.  Depleting foreign exchange reserves doesn’t always work; increasing debt could bring financial instability but threaten prospects for growth and employment.  Having no good options, emerging-market and developing countries may need to resort to regulating the outflow of capital alongside these other measures.  Such moves have traditionally been shunned by international institutions and capital markets, and new U.S. trade agreements such as the Trans-Pacific Partnership have stripped out balance-of-payment exceptions that allow nations to regulate capital.  But new research in cutting edge of economics by the IMF and others now justifies such measures to prevent or mitigate a full-blown crisis.  If we have learned anything from the global financial crisis since 2008, it is that nations need as many tools at their disposal to prevent and mitigate financial instability.  Instability anywhere can lead to instability everywhere, so we need all tools and hands on deck.

February 19, 2015

* Kevin P. Gallagher is an associate professor of global development policy at Boston University’s Pardee School for Global Studies, where he co-directs the Global Economic Governance Initiative.  His new book is Ruling Capital: Emerging Markets and the Reregulation of Cross-Border Finance.

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by clalsstaff on February 17, 2015  •  Permalink
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Posted by clalsstaff on February 17, 2015

https://aulablog.net/2015/02/17/bracing-for-economic-pain-in-brazil-and-beyond/

Cuba: Can Official Labor Meet the Needs of Private Workers?

By Geoff Thale*

Alberto Yoan Arego Pulido / Flickr / CC BY-NC 2.0

Alberto Yoan Arego Pulido / Flickr / CC BY-NC 2.0

As Cuba embraces a new but still undefined economic model, it’s unclear whether or how the country’s old labor laws and regulatory systems will be adapted to accommodate the interests of employees in the growing private and cooperative sectors, or in the newly autonomous state enterprises.  The trade union structure cannot play the social role it played in the past with the emergence of businesses owned by both individuals and cooperatives, a growing role for foreign investment, and increasingly decentralized state enterprises.  During a recent trip to Cuba, our research team met with representatives and staff from a range of officially recognized trade unions.  We met with the national labor federation – the Central de Trabajadores de Cuba (CTC) – and with national and local officials from some member unions, including the national president of the health care workers’ union; local trade union officials in the hotel and restaurant workers union in the tourist sector in Old Havana; and local officials representing self-employed and small-business owners who have joined the union for retail and commercial workers.  A Labor Code approved by the National Assembly in December 2013 changed some aspects of the legal framework for labor relations.  It continued to privilege the CTC as the sole labor federation, while also taking some steps to recognize the new issues that confront workers in the emerging sectors of the economy.  It established a maximum number of hours of work (44) for private-sector employees, required the self-employed or small-business owners to pay into a social security fund and ensure social protections – health care, pensions, etc. – for employees.  And it guaranteed private-sector employees seven days paid vacation per year (though less than the one month given to state-sector workers).

Our interviews, however, turned up more questions than answers.  Newly autonomous state enterprises have greater latitude in setting wages, incentives and working conditions, but it remains unclear how these decentralized enterprises will handle labor relations issues, and what kind of negotiations might take place on compliance with regulations on workplace safety and protection, wage requirements and employment opportunities.  Indeed, it is unclear how the current worker organizations will represent workers in these decentralized enterprises.  The growth of the private sector presents another challenge.  The CTC has sought to organize the self-employed into the unions in the industries in which they are functioning – the food service and restaurant union, the retail and commercial sector union, and so on – but it is unclear how the union will represent the interests of both owners of independent small businesses – cuentapropistas – and the 15 percent of “self-employed” who are actually employees in those enterprises.  Similar queries are popping up in the cooperative sector and in enterprises run as joint ventures with foreign corporations or as wholly foreign-owned companies.

Cuba’s new labor policies are clearly a work in progress, but they signal recognition that there is an emerging stratum of non-state sector employees – and that they need social protections.  It also reflects a balancing act between ensuring stable employment and benefiting from the flexibility that private sector employment models provide.  The new Labor Code requires, for example, that employers sign year-long contracts with employees while guaranteeing them access to health care, parental leave and other benefits during that period.  New challenges will emerge, especially in terms of the structures that represent the interests of these groups and advocate for them.  But for now, there appears to be progress in establishing a system of social protections for the self-employed and for their employees under the new labor code.  Concerns about the burden of compliance appear likely to be muted for at least the near term because, as it was clear to us during our visit, the self-employed and their employees are earning substantially higher incomes than are workers in the state sector.

*Geoff Thale, program director at the Washington Office on Latin America (WOLA), in October led the research team’s fifth visit to Cuba examining the impact of economic change on workers.

December 9, 2014

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by clalsstaff on December 9, 2014  •  Permalink
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Posted by clalsstaff on December 9, 2014

https://aulablog.net/2014/12/09/cuba-can-official-labor-meet-the-needs-of-private-workers/

Post-Snowden Challenges for U.S. Information and Communication Technology Firms

By Robert Albro

infocux Technologies / Flickr / CC BY

infocux Technologies / Flickr / CC BY

A year after Edward Snowden’s dramatic disclosures about NSA surveillance in Latin America, U.S. companies hoping to make inroads into the region’s fast-growing information and communication technology market are running into increasing obstacles.  If the political costs were immediately forthcoming, especially in Brazil, the fallout for Silicon Valley’s tech giants has taken longer to assess. The biggest problem is the lingering lack of trust resulting from the revelation that the U.S. companies enabled the NSA’s eavesdropping by giving it direct access to their servers.  A 2014 NTT Communications survey found that, in response to the Snowden affair, 88 percent of information and communication technology decision-makers around the world, including Latin America, have changed their buying behavior around large-scale data storage.  In Brazil, Argentina, Mexico and Chile, “data sovereignty” has become a major issue, in the form of new data privacy and disclosure laws now shaping the direction of the region’s developing market.

According to the Information Technology & Innovation Foundation, U.S. software firms are expected to lose $35 billion in sales overseas through 2016. Forrester Research, an independent technology and market research company, puts potential losses as high as $180 billion.  Latin American investors have been questioning the wisdom of using US data storage companies, and established U.S. dominance in the cloud computing sector has already taken a hit. Cisco’s last quarterly earnings, for example, were down 7 percent – 27 percent in Brazil – even as the cloud computing market in Latin America is predicted to grow at a 26 percent clip through 2018.  The emergence of Miami as a major global tech hub and gateway to Latin America’s fast-growing information technology markets is threatened by a proposed EU-Brazil trans-Atlantic cable to circumvent the city as a key node for Latin American access to the global internet.  As investor e-news service 4-Traders has reported, Chinese tech giants like Baidu, Alibaba and Tencent are establishing and expanding beachheads in Latin America, while China’s government pursues cooperative partnerships with Latin American counterparts to accelerate the development of the region’s information infrastructure.  Meanwhile, US-based data mining and analytics firms like Choicepoint Inc., currently major players in the region’s business intelligence and online security markets, have become the subject of investigation by skeptical governments and privacy advocates in the region.

The U.S.-centric view of the internet as “free and open,” a basic feature of the business model of U.S. tech firms, is being challenged in Latin America, where the regulatory balance between free expression and privacy is increasingly tilting toward the latter.  Despite the fact that the region’s online population is the world’s fastest growing and that it boasts a dynamic tech start-up movement, U.S. internet technology firms should expect more such challenges.  Regional trends in internet governance are largely anti-American, focused on displacing U.S. commercial dominance of the internet, and promoting open-source software as alternatives to U.S. products and services.  As Latin America builds out its cloud computing market, it is doing so in ways poised to compete and not collaborate with U.S. companies.  Privacy controls and requirements to conform to local laws already create new and costly disincentives for U.S. companies, which might opt to pull up stakes.  Meanwhile, business models for Latin American start-ups are not copycatting U.S. models as frequently as in the past.  If Latin American entrepreneurs have maintained close ties with U.S. centers of innovation and investors, they are now more focused on developing their own intellectual property, instead of technology transfer, to meet specific demands of their local and regional markets.  What just yesterday seemed wildly improbable – that U.S. tech giants might lose their edge in Latin America – has become a credible scenario.

October 23, 2014

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by clalsstaff on October 23, 2014  •  Permalink
Posted in Regional Snapshot, United States
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Posted by clalsstaff on October 23, 2014

https://aulablog.net/2014/10/23/post-snowden-challenges-for-u-s-information-and-communication-technology-firms/

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