A New Development Model?

Claire Berlinski reports from the other half of Hispaniola: Santo Domingo, Dominicana:

Unlike Haiti, the Dominican Republic made a series of wise political and economic decisions. It didn’t cut down all its trees, it made the place safer to visit, and when it built up its economy, it focused on growth industries: drug trafficking, money laundering, and sex tourism. It’s impossible to take a photo in Santo Domingo that doesn’t involve a massive pair of breasts. I try, but the damned things are everywhere. ...

[A]fter living in Turkey, I’m just grateful to be around people who don’t seem driven enough to plot conspiracies or foment coups. I’m aware that the country has seen both, but it doesn’t seem plausible.

Revisiting the 1982 Global Banking Crisis

Somebody in my Google Reader (I think Chris Blattman) pointed to this hour-long 1983 Canadian documentary on the 1982 sovereign debt crisis that threatened the global banking system. It's pretty good. The first half is mostly about the bailout of Dome Petroleum, which affected Canadian banks much more than others. Think auto bailouts in the U.S. for analogue. The last 15-20 minutes are more interesting to me, however. A lot of parallels to the current crisis, including the politics of bailouts, who funds international institutions (and therefore who calls the shots), the need for international coordination but difficulty in reaching it, etc. All common themes on this blog.

Anyway, it's a nice perspective on the last major global banking crisis, while it was ongoing.

Just How Socialist Is Latin America?

Is there a "centrist-socialist" category? Greg Weeks reports:

Yet even in countries that are supposedly Hugo Chávez satellites, such as Ecuador, 35 percent approve of U.S. leadership, and 33 percent of Venezuelan leadership. On the flip side, despite all the talk of a rightward tilt, 22 percent of Chileans approve of Venezuelan leadership. And 35 percent of Venezuelans even approve of U.S. leadership!

So we end up with the unsurprising conclusion that in the aggregate, Latin Americans very often want the state involved in the economy and, like most people in the United States, do not simply want free market capitalism. But the Venezuelan model does not necessarily appeal to them.

Has anybody contrasted political attitudes in Latin America to those in other regions like Europe? How much is this effect is a product of diffusion? It seems like there are quite a lot of interesting research questions raised by these two questions. I'm sure some of them already have answers, but my knowledge of the Latin American literature is sparse in the best of times. If anybody knows of related material, please post it in the comments.

Is Chavez Losing His Grip?

Chavez's popularity is dropping. Why, you ask?

Hugo Chavez's support has declined in the polls as many Venezuelans say they are fed up with 27 percent inflation, a stagnant economy, faulty public services - and a government they see as incapable of doing much about it.

Despite that, Chavez still has a 53% approval rating, and just won a new mandate in February. And he is still the most popular politician in Venezuela, and he intends to keep it that way:

Yet Chavez still faces no strong political opponents with anywhere near as much support. To win back popularity, Chavez is likely to boost public spending in the coming months, especially on visible projects like fixing up hospitals and stocking state-run markets with subsidized food.

Chavez's mismanagement of the economy and state bureaucracy hasn't hurt him more because he is able to place blame for the poor economy on external enemies (i.e. the U.S.), and claim that he is working for the poor in Venezuela. And he has expanded access to education and health care.

Perhaps more importantly, Chavez has been able to consolidate power in the government while his opposition remains fractured and divided. None of Chavez's potential challengers are perceived as being viable to a majority of Venezuelans, and Chavez can always denounce dissident movements as extensions of U.S. imperialism.

So Chavez stays in power despite the fact that Venezuela is in a downward spiral and is likely to remain so unless oil prices spike again.

Did CAFTA Cause the Honduran Coup?

That's the allegation of a post at Eyes on Trade:

The situation in Honduras has a number of important implications: Fair traders have long argued that NAFTA-style deals promote instability and now Honduras, a signatory to CAFTA, has suffered Central America’s first coup since the Cold War. CAFTA was approved in Honduras by local elites, the same interests who are threatened by Zelaya’s progressive policies. The instability in Honduras is an illustration of how NAFTA-style trade agreements can undermine democratic governance in member nations.

What's the evidence for this claim? Honduran "elites" supported CAFTA and opposed Zelaya's populism, so obviously the two must be linked.

Except... not so much. Zelaya was deposed because he wanted to alter the Constitution to allow himself to stay in office. Honduras' Congress, Supreme Court, and even Zelaya's own party (Partido Liberal) opposed this move, and it was ruled illegal. Zelaya was undeterred and scheduled the referendum anyway. So the Supreme Court ordered the Honduran military to remove Zelaya from office (and from the country). There is no indication that this had anything to do with CAFTA.

Ironically, one of Zelaya's biggest supporters since the coup has been the United States, a CAFTA signatory. Oh, and Zelaya himself was a "vocal proponent" of CAFTA, much to the chagrin of Latin American leftists. And the U.S. and Dominican Republic are considering using CAFTA-legal sanctions to force Zelaya back into office.

Zelaya's ousting had nothing to do with CAFTA, and CAFTA might actually help him get back to power. This kinda undercuts the argument that "NAFTA-style trade agreements can undermine democratic governance" doesn't it?

The Importance of Accurately Modeling Politics

The World Bank's Private Sector Development blog notes that relaxing labor regulations (i.e. making it easier for employees to hire and fire workers) in Latin America would lead to more employment:

[O]n a net basis, making labor regulations more flexible in most countries will result in a net gain in employment. More workers will be fired, but even more workers will be hired as a result of increased flexibility. Only one country in the study (Nicaragua) would see no net gain, and a number of countries would see large net gains (e.g. Colombia and Paraguay).

So why not do it?

The tricky part is that workers who already have jobs will be naturally opposed to more flexible labor regulations. But there is a better solution than rigid regulations that keep marginal workers out of formal labor markets. As Dave argues, unemployment insurance could go a long way to softening the blow for those who lose their jobs.

At first glance, this seems like a plausible enough compromise, and perfectly in line with what John Ruggie called "embedded liberalism": a system of public institutions that smooth the convulsions of market economies while still retaining the dynamism and incentive structures that make market economies more productive than command economies. Variations of this approach still dominate the mixed systems of the industrialized world even after the collapse of the Bretton Woods system that first inspired Ruggie to coin the phrase.

But it's not clear that there is a direct link between the strength of a social safety net and attitudes towards labor market regulations. In many Western European countries, labor regulations are stronger than those in the U.S. and the safety net is more generous. This leads to dual rigidities in both systems. In much of Europe, workers with good jobs (esp. public sector jobs) tend to never lose them, and potential workers on the dole tend to stay there because their opportunities for employment are rarer and the generous welfare benefits incentivize stasis. In the U.S., easy hiring and firing in most industries leads to a more dynamic system, but less-generous unemployment benefits make transitions more painful and incentivizes workers to take the first job they can get even if it doesn't maximize their skills. So the European model leads to more structural unemployment, while the U.S. model leads to more cyclical unemployment. Both systems sacrifice some productivity in the bargain.

Many Latin American countries have chosen neither approach, instead protecting labor in the hopes that a social safety net won't be needed at all. This is fine if you are fortunate enough to get a good job, but it hurts those who cannot. Not only are the unfortunate often unable to break into the labor cartels, but they are also not protected by a welfare state. In many ways, this is the worst of all worlds. But it isn't clear that a flexibility-for-safety-net bargain is feasible. It will be difficult to persuade workers who benefit from the current system that reform is necessary. After all, most of them will never need a safety net; their jobs are secure in the status quo. Moreover, a stronger safety net will have to be paid for through higher taxation of those currently employed. A campaign platform of "increasing job insecurity + higher taxes" is not likely to garner much support.

In other words, political compromises are not made in a vacuum. The sort of grand bargain envisioned by the World Bank folks may make plenty of sense in the abstract, but only because they assume an unrealistic starting point for negotiations. When one considers the true positions of the parties involved, such a compromise looks almost impossible.

There's a reason why systemic transformations (like a re-organization of labor markets) tend to follow things like major wars and economic collapses: in normal times the status quo is entrenched; after crises there is no status quo. This is not to say that marginal improvements are not impossible in normal times, but major reforms are very difficult to achieve.

The Other Coup

Honduras is in turmoil after the President was removed by the military after the President tried to hold a referendum that was deemed unconstitutional by both the National Congress and the Supreme Court. I know nothing about this, but these rundowns at Global Voices and The Field have a lot of information and reactions from Honduras (ht: Dish).

The impression that I get is that the President enjoys much popular support, but was prevented from seeking another term by the Honduran constitution. Hence the referendum to re-write the constitution to allow Zelaya to run for office again. President Zelaya ignored the rulings by the congress and courts, removed the top general of the Honduran army from his post, and tried to hold the referendum yesterday. At which time, the military removed Zelaya from the presidential palace and put him on a plane to Costa Rica.

I've seen a few bloggers express dismay that the Iranian uprising has garnered so much more attention than the Honduran uprising. There is a clear reason for this: Iran is a large, geopolitically important country in the most unstable region in the world and has long been an antagonist of the West. Honduras... not so much. Still, it seems clear that the referendum should have been allowed to go forward, and the removal of democratically-elected presidents by the military is pretty much never a good thing.

At least we know the U.S. government wasn't involved. We can't even get the military on the phone. From the Times:

Obama administration officials said they were working with other members of the Organization of American States to ratchet up pressure on the Honduran military to end the coup and dismissed the prospect of outside military intervention in the matter.

“We think this can be resolved through dialogue,” said the senior administration official. However, he admitted that the Honduran military was not responding to calls from the American government.

UPDATE: Sanchez wonders which side is right:

Without pretending to any expertise on the Honduran political scene, here’s what I’ve gathered to be the context: Zelaya was pushing for a national referendum on whether he should be able to seek reelection, though the constitution limits him to a single term due to end in January. The country’s Supreme Court declared this move illegal, and the congress recently passed legislation similarly barring any such plebiscite, but Zelaya was apparently undissauded. This weekend, under an order from the Supreme Court, the military spirited Zelaya off to Costa Rica. The line of succession was observed, and the president of the congress, a member of Zelaya’s own party, ascended to the presidency with the confirmation of the legislature.

Grant that this is a mess either way, that this is hardly an outcome that a liberal democrat should feel comfortable with, and that there are almost certainly aspects of this that I’m missing. Is it actually obvious that Zelaya is on the side of “democracy” here?

Yes, that much is obvious. He wanted a referendum, and nothing is more democratic than a referendum. If Zelaya won, the constitution would have been effectively modified via a democratic process and power would have been redistributed from the National Congress and Supreme Court to him (which, presumably, is why they struck the referendum down). If Zelaya lost the referendum then (again presumably) he would have stepped down.

What Sanchez means to ask, i think, is whether liberal-minded people should always and everywhere support the "will of the people" when that involves tearing down legitimate political institutions. I don't think there's an general rule that answers this question satisfactorily in all cases. I tend to side with institutions more than popular whims, but that's because I think that durable institutions can serve the polity much better than a democratic society that careens from one extreme to another every decade or so. However, if the institutions are not legitimate -- if they do not reflect the will of the people -- then they should be reformed.

In this case I don't know whether referendums of this sort are allowed by the Honduran constitution. It's quite possible that they aren't, and that Zelaya was violating the law by pushing for one. But saying that is not the same as saying that he is acting undemocratically.

Lessons from Brazil

Brazil's financial system has made it through the financial crisis relatively unscathed, which is somewhat surprising given their history of financial instability. The broader Brazilian economy has taken a hit as demand for their commodities and manufactured exports has slowed, but the financial system has stayed afloat. How? It seems to be a combination of a poorly-developed financial system (i.e. a system with less systemic importance for the broader economy), draconian reserve requirements, somewhat higher prudential regulations, and a generally cautious approach to financial development:

Mr Tombini points out that Brazil endured several periods of severe volatility in recent decades, although it has become more stable since runaway inflation was conquered in the 1990s. “We are used to dealing with challenging environments, for our institutions and our regulations,” he says. “Everything we have done since the mid- 1990s has tended to take a more cautious approach.”

For example, many countries’ banks are obliged to maintain capital ratios – capital as a percentage of assets – of at least 8 per cent, the minimum recommended by the BIS. Unfortunately, says Ross Levine, an economist at Brown University, “almost all countries have taken the Basel minimums as the norm. They’ve been a lot less cautious than they might have been.”

In Brazil, the minimum required is 11 per cent but many banks keep levels of 16 per cent or more.

Perhaps more question-able are Brazil’s very high reserve requirements – the share of their deposits that banks must park at the central bank. Many countries have phased these out but in Brazil they are about 30 per cent of all deposits.

Francisco Vazquez, a specialist in banking regulation at the International Monetary Fund, says Brazil’s reserve requirements should be replaced with more modern instruments, such as deposit guarantee funds. “The system is so complex that it’s hard to get a good idea of what the cost to banks really is,” he says. It is also one reason why borrowing costs are so high in Brazil.

Brazil has suffered through some nasty financial crashes in the last few decades. Because of that, they've erected an institutional structure that prizes stability and low inflation over growth in the financial sector. Some of these regulations -- like the extremely high reserve requirements and bans on short selling -- have probably done little more than make financial transactions more costly and inefficient.

Another aspect is the composition of assets held by banks. This World Bank study [pdf] shows that in 2007, 43% of all bank assets was sovereign debt, while credit was 34%. The above study also shows very high interest spreads between corporate and retail loans. In other words, access to credit for common borrowers is limited, and comes at a high cost. This should mean that credit is rationed primarily to borrowers of a very low credit risk, but that does not appear to be the case: Brazil's non-performing loan rate is fairly high even by Latin American standards.

One thing does stand out. In 2007, Brazil's banking system held assets equal to roughly 75% of GDP (see above study). This number is relatively high for Latin American countries, but low relative to many other countries. In Spain, for example, banking assets totaled over 200% of GDP, and Spain's financial system has been decimated by the financial crisis. Before its implosion, Iceland's banking sector was so large relative to its economy that "it made no sense to calculate the percentage". It's possible, in other words, that Brazil (and much of the rest of Latin America) has had fewer adverse effects from the financial crisis not because of tighter regulations, but simply because its financial sector was smaller than in OECD countries.

If any readers know of any studies that look at this question, please post them in the comments.

Lagged Effects of the International Credit Crunch on Latin America

The Latin American Shadow Financial Regulatory Committee (CLAAF), a group of economists from Latin America that includes former finance ministers and central bank governors, released a statement after meeting today in Washington, estimating that Latin American governments will need roughly $250 billion just to repay maturing debt and support budgets in 2009. 

The Financial Times reports:

The statement described a marked deterioration of the region’s economic prospects in the past few months caused by a flight to high quality assets and the freezing up of international credit. The region would suffer from a sharp slowdown in the world economy and falling export prices, it said.

Unless credit found its way to the region, the economists said governments would be forced to choose between two unappetising alternatives: painful fiscal adjustment that would reinforce the downturn or distortive measures, such as import restrictions and capital controls.

“In the absence of adequate international actions, beggar-thy-neighbour policy responses may be politically inevitable, seriously undermining the basis of the global co-operative system that emerged in the aftermath of World War II [that] allowed for unprecedented rates of growth of trade and incomes and a reduction in global poverty.”

Although Latin America has not been directly affected as a result of the liquidity and credit crises that have affected the American and global economies over the past year, as detailed previously on this blog, the future may see indirect effects as Latin American nations may be "crowded out" of international credit markets as Western nations expand their borrowing and run large fiscal deficits. 

Latin America and the Financial Crisis

Many of you are well aware of the popular phrase, "When America sneezes, the rest of the world catches a cold." This was especially true for Latin America, when any small sniffle used to send ripple effects throughout the region. 

However, why is it that this time around, 

not a single bank or financial institution [has gone] bust in the region while the United States and Europe [have] faced [the] collapse of companies and banks with turnover of more than that of the GDP of many of the Latin American countries.

None of the Latin American countries have gone to the IMF for rescue, even as some East Europen countries have done so. While Iceland, situated far from the epicenter (USA) of the financial earthquake collapsed and had to seek rescue from Russia, none of the Latin American countries, which are in the proximity of the earthquake zone have suffered serious damage. There has been no panic summit meetings or rescue packages or nationalization of banks in Latin America.

This is truly a very interesting puzzle. Was the decoupling theory partially right, in that certain regions, rather than the entire world, is no longer completely at the whim of the American business cycle?

From the UN Economic Commission for Latin America comes the finding that:

Compared to previous shocks in the United States economy and the world at large, Latin America and the Caribbean(LAC) is much less vulnerable than in the past, with a current account surplus, sounder public finances, a lower level and better profiles of public and external debt, and larger international financial reserves. Considering the severity of the global shocks, LAC economies are, on average, weathering the crisis significantly better than in the past.

Has Latin America simply insulated itself from external shocks by amassing large amounts of reserves, lowering their debt levels, and implementing sound fiscal and monetary policies? Has the financial crises simply not reached Latin America yet? Has Latin America finally emerged from the Lost Decades (1970-2000)? Over the next few weeks, these are some of the questions I will explore, in a special series on Latin America and the Financial Crisis.