Latin America

By Ian Bremmer

Brazil's development as an emerging market power reached a crucial moment in October 2002, when voters chose Luiz Inacio Lula da Silva as their president. Just as only Nixon could go to China, only a president widely considered a "leftist" could have helped forge a consensus across Brazil's political spectrum in favor of disciplined macroeconomic policy and greater openness to foreign investment. Lula, a former labor negotiator, has given Brazil a new self-confidence at home and abroad, and his government's approval ratings have climbed above 80 percent.

So it's a little curious that polls also show Lula's chief of staff and preferred successor, Dilma Rousseff, trailing far behind Sao Paolo state governor Jose Serra in the race to replace him next October. According to latest figures from Ibope, a respected Brazilian polling firm, 34 percent of respondents say they plan to vote for Serra. Just 15 percent pledge to vote for Dilma, who has recently struggled through a spate of bad publicity and a serious cancer scare. She's never run for office, lacks Lula's charisma, and must hold together a fragmented coalition.

Don't bet against her, though. First, elections are a year away. Dilma hasn't yet fully emerged from Lula's shadow, and Brazilians are only now learning to place the face with the name. Next year's vote is liable to be a referendum on how Brazil is doing, and as the official candidate of Lula's government, she's very likely to be the campaign's primary beneficiary from a strong post-financial crisis economic recovery. Consumer confidence is already improving, despite a year of flat growth. When the economy really begins to pick up steam next year, Lula's government will smell like roses. A vote for Serra will be a vote for change. But by next fall, Brazilians are more likely to embrace a favorable status quo. Finally, Lula has barely begun to sing Dilma's praises. His support will likely make an enormous difference. 

To be sure, Serra won't be easy to beat. Widely known and well-liked, he's built a reputation as a hard-working and capable public servant. His expertise on issues that Brazil's growing middle class cares about, like health care, is formidable. As governor of Sao Paulo state, he has a strong base of popular support. There's also a potential wildcard in the race. Ciro Gomes, leader of Brazil's socialist party (PSB), who is at 17 percent in the Ibope poll, could throw his hat in the ring, undermining Dilma by dividing the left. But he won't take the leap unless Dilma looks especially weak early next year. By then, Brazil's economy, Dilma's broader name recognition, and Lula's backing will probably have already begun to boost her candidacy. Even if Gomes runs, he's not going to go after Dilma. He knows he will have no role in a Serra government but that he might win new influence if Dilma becomes president. That's why he's much more likely to go gunning for Serra.

Why should outsiders care who wins? When it comes to macroeconomics, Lula has sharply reduced the gap between left and right. Dilma would likely rely on many of the same market-friendly faces and disciplined economic policies that have helped Lula bridge that divide. But the outcome will matter a lot for the future of key sectors of the economy. A Dilma government will push hard to strengthen key Brazilian state-owned enterprises and develop industrial policy.

More important from a market perspective, the election outcome will shape the way Brazil's government approaches development of one of the world's largest new crude oil discoveries in recent years. Best estimates place Brazil's proven oil reserves at about 14 billion barrels. According to Dilma, the so-called pre-salt oil region off Brazil's southern coast could hold anywhere from 25 to 100 billion barrels, more than enough to transform the country into a major international oil exporter. With new wealth to manage, Brazilian lawmakers have begun debating a proposal to rewrite the law governing oil development.

If Serra wins, he's likely to quickly approve auctions allowing energy multinationals to acquire new exploration and production rights to maximize revenues for the state. A Dilma government will want to maintain maximum control of the oil sector, keeping state-owned Petrobras in charge of operations. Given that Petrobras is already struggling to develop its existing concessions, this move would significantly delay Brazil's ability to move large quantities of crude oil from the seabed into production, with long-term consequences for Brazil's revenue and for global oil markets.

EVARISTO SA/AFP/Getty Images

By Ian Bremmer

Sometimes there's less to a story than meets the eye. Take Venezuelan President Hugo Chávez's announcement last week that he would freeze diplomatic and commercial relations with Colombia. There's nothing new about tensions between these two governments, but markets responded badly to what sounded like a drastic step. This story is much ado about almost nothing.

Chávez is angry that Colombia has invited a few hundred additional US troops into the country, granting them access to three Colombian military bases. (There are currently about 300 American soldiers in the country. Colombia's government insists it will not amend an existing bilateral agreement that caps the total of US troops at no more than 800.) Colombian President Alvaro Uribe insists the troops are there to help target narcotics trafficking, but Chávez has warned his people of an impending Yanqui invasion. Meanwhile, Uribe accuses the Venezuelan government of selling military materiel to FARC guerillas inside Colombia.

There's nothing new about any of this tension. Trade between Venezuela and Colombia briefly shut down in 2005 after Colombia captured a FARC spokesman in Caracas. It happened again in 2008 after a Colombian bombing raid killed FARC's second in command inside neighboring Ecuador, a Venezuelan ally. In both cases, trade between Colombia and Venezuela briefly halted but was quickly restored.

That will happen again this time, because the two governments need the commerce more than they need the conflict. About 14 percent of Venezuela's imports come from Colombia. Venezuela needs these products, particularly processed food, because the tight price controls Chávez has ordered and his ongoing threats to nationalize companies and entire industries have depressed production levels inside his country. Closing the door to inexpensive and easily accessible Colombian imports would worsen already significant shortages and put extra pressure on inflation and fiscal accounts.

The dependence works both ways. About 18 percent of Colombia's exports go to Venezuela. President Uribe has fewer political vulnerabilities than Chávez, and with an election next year, some fear he might take a tougher than usual line -- rallying core supporters, riding out protests from the export sector, and boosting his chances of securing a third presidential term.

But Uribe will probably abandon hopes for a third term, since he's unlikely to win support from lawmakers to launch the referendum he would need to remove constitutional term limits. Uribe already faces criticism that he hasn't done enough to refloat the country's floundering economy. It makes little sense for him to make economic matters worse, just as he's moving into retirement.

It's one thing for Chávez and Uribe to stir up nationalist fury in a bid to change the subject from tough economic times. It's quite another to launch a mutually damaging trade war that can only make matters worse.

JUAN BARRETO/AFP/Getty Images

By Ian Bremmer

It's been a rough year for Mexico. The global economic downturn has inflicted heavy damage by reducing demand for Mexico's oil, depressing tourism, and limiting the flow of remittances into the country from Mexicans working in the United States. These are Mexico's three largest sources of foreign currency. The broader economy has taken a serious hit, one that will probably be worse than the officially expected 5.5 percent contraction.

Throw in swine flu, which has killed more than 100 people inside the country, sickened 6,000 more, and cost Mexican tourism billions of dollars on top of that. Add the government's war against drug cartels, which has killed thousands of civilians in recent months. And then Earthquakes in April and May contributed to a feeling that everything has gone wrong at once.

But Mexico is no failed state. President Felipe Calderon enjoys domestic approval numbers in the mid-60s, in part because a majority says his government is making progress in battles with the drug gangs. His National Action Party (PAN) will probably lose some seats in July's lower house elections. But those losses will profit the centrist Institutional Revolutionary Party (PRI), not the populist Party of the Democratic Revolution (PRD). In fact, after threatening to bring Mexico's government to a standstill following his very narrow loss in the 2006 presidential election, PRD heavyweight Andres Manuel Lopez Obrador has succeeded mainly in marginalizing himself. Government handling of swine flu won't be much of a factor in the elections, because some of the most seriously affected areas are governed by opposition parties.

The drug war could seriously complicate U.S.-Mexican relations by spilling over the border to a degree that the U.S. mainstream media can no longer ignore. And Calderon's government is unlikely to make more than marginal progress on key economic reforms for the foreseeable future. The fiscal picture just isn't quite dire enough to force the political compromises on which serious liberalization will depend.

Still, there are plenty of reasons why Mexico remains on a long-term path toward growth and greater prosperity. First, dependence on exports to the United States isn't such a good thing for the moment, but over the longer term, it will push Mexico to new heights. The U.S. economy will recover. Mexico's economy will follow. That's good for exports, remittances and tourism. U.S. investment will continue to flow into Mexico, particularly as U.S. market access to China becomes more difficult in years to come as the Chinese leadership begins to more actively favor Chinese companies at the expense of foreign competitors.

But the best news for Mexico became obvious during that much disputed 2006 election. Following Lopez Obrador's loss (by less than one percent of the vote), he declared victory and challenged the official result in court and in the streets. For days, tens of thousands of his supporters brought traffic to a standstill in central Mexico City. Yet, Mexico's courts and legislative bodies continued to function and markets avoided sustained damage. The election proved that Mexico's people have enough confidence in the country's public institutions to allow the democratic process to run its course.

Mexico is having a bad year. Recovery will take time. But it will recover its position as a politically stable and dynamic emerging market and a sound long-term investment bet.

By Eurasia Group analyst Heather Berkman

Does the recent White House announcement on relaxation of U.S. policy toward Cuba signal bigger things to come? Probably. But while these first steps were easy to take, high political hurdles lie ahead -- and substantial change in U.S.-Cuban relations is not yet on the horizon.

These moves represent real change. The Obama administration announced it would lift restrictions on remittances, allow Cuban-Americans to travel freely to the island, and ease telecommunications regulations. The announcement wasn't surprising, given Obama's campaign trail rhetoric, and it was probably timed to establish a cooperative tone leading up to this week's Summit of the Americas.

But the White House is also testing the political waters for further changes to its Cuba policy and will probably wait to see if Congress takes the lead on removing the travel ban for all Americans. Obama has the power to sidestep lawmakers by issuing executive orders that don't require congressional approval that encourage person-to-person communications and the exchange of information with the island. But there are bills pending in the Senate (the Freedom to Travel to Cuba Act) and the House of Representatives that would abolish the travel ban altogether. The White House knows these laws might well pass, though they will face a long road through committees and procedural votes. Congressional action would provide Obama with useful political cover.

Cuban leaders would welcome a lifting of the universal travel ban, since it would provide a huge boost for the country's tourism industry. But they also know there's an element of White House strategy at work here. The changes to telecommunications policy will allow U.S. companies to work with Cuban carriers to establish fiber-optic cable and satellite telecommunications facilities linking the two countries, provide roaming services, and offer satellite radio and television service. Cuba's low level of telephone usage (11 percent of the population, according to one estimate) and broadband subscription reveal huge growth potential in telecommunications.

This leaves the Cuban government with an uncomfortable choice: Open Cuba as never before to ideas and information from the United States, or keep the door closed and accept greater responsibility for Cuba's international isolation. With Obama administration rhetoric aimed at promoting democracy on the island -- ostensibly at the expense of the Castro regime -- the Cuban government will remain cautious toward increased and unrestricted communication with the United States.

Despite these (significant) first steps, outright repeal of the 47-year-old economic embargo is not yet on the horizon. Domestic political considerations will continue to weigh heavily on congressional action, despite changes in Cuban-American demographics and evolving political attitudes among Cuban-American communities. A poll conducted in December 2008 by FIU-Brookings suggests that a small majority (55 percent) of Cuban-Americans now favor ending the embargo. But congressional action is required to rescind the Cuban Liberty and Democratic Solidarity Act of 1996 (known as Helms-Burton) that wrote the embargo into law, and the Obama administration will have to think long and hard about how much political capital it wants to spend on a broader diplomatic opening to Cuba.

Given other foreign-policy and domestic priorities, it won't be an easy choice. The Castro regime could make the process easier with changes that address criticism of its human rights record and authoritarian governance. Raul Castro, who officially replaced his brother as president in early 2008, has enacted limited economic reforms, but Fidel continues to cast a very long shadow. Until both Castros leave the scene, government tolerance for genuine democratic reform on the island will remain limited.

The good news is that Fidel says Havana is ready for talks with Washington. The bad news: the aging revolutionary probably remains more interested in monologue than dialogue. 

 By Preston Keat

On March 5, the Venezuelan government surprised many observers when it nationalized a rice processing plant owned by the U.S. food company Cargill. Following his recent referendum victory, President Hugo Chavez is feeling emboldened, and this nationalization, along with new controls over food production, are part of his plan to give relief to his lower-income supporters. The short-term political logic is compelling. The moves will help Chavez's core constituents get basic food staples at more affordable prices, but they also risk undermining future production and investment in the agriculture and food processing sectors.

In spite of these obvious risks, these moves are in line with Chavez's longstanding agenda to increase the role of the state in the economy and to enlarge wealth redistribution. Many did not foresee that Chavez would take on "non-strategic" sectors like food production -- after all, the most notable nationalizations tend to be in strategic sectors like energy that generate high revenues that the government can tap into immediately. They reasoned that Venezuela had already nationalized strategic sectors like energy, utilities, telecom, and banking, and it might end there. Plus, the broader trend in recent years has seen governments around the world privatizing rather than nationalizing companies, particularly in consumer and retail sectors.

But it is unlikely that Cargill's leaders were startled by the developments last week. The reality is that most corporations and investors do not have the luxury of claiming that they could not have known about an expropriation risk. Below is an excerpt from The Fat Tail:The Power of Political Knowledge for Strategic Investing in which Ian Bremmer and I discuss the history and some of the underlying drivers of nationalization that are relevant for contemporary cases such as Venezuela:

Venezuelan President Hugo Chávez has always stirred Latin American resentment against Washington to bolster his popularity. In the name of resistance to "imperialism," in 2004 he began to demand that U.S. and other foreign oil companies pay higher taxes and royalties to his government. He met little resistance and continued to push for more, using the new profits to tighten his control on domestic political power. Ecuador's Rafael Correa and Bolivia's Evo Morales have consciously followed the same model.

In Venezuela, the state oil firm PDVSA once pumped substantially more oil than it does now. A strike in 2002 and 2003 by oil workers, angry over Chávez's heavy-handed policies, induced the president to fire 10,000 of them -- including a large percentage of the company's most experienced and talented engineers. The company has not recovered. Venezuela's problem is not limited to oil. In 2002, Chávez ordered that land be redistributed to squatters and the unemployed, who would then grow the food that would feed Venezuela. But the haphazard way in which the program has been implemented has damaged Venezuela's economy. The country is now more dependent on food imports than before, because farmers, fearful that their land could be seized at any moment, have been unwilling to plant crops they may not be allowed to harvest.

Since the late 1980s, academics and policymakers have increasingly assumed that the risk of expropriations was waning. With the end of the Cold War there has been a general trend towards government protection and promotion of ownership and investment rights. The privatization of previously nationalized property became a core component of the process of economic liberalization in the states of the former Communist bloc and Latin America, and even in developed states like France and Britain.

Yet, the risk of expropriations refuses to die. Witness the surge in state expropriations of privately owned assets that make headlines around the world these days. The Russian parliament passes a law that limits foreign investment in "strategic sectors" of the Russian economy and expropriates existing investment. Venezuela squeezes foreign oil companies, takes land, and nationalizes electrical and telecommunications firms. Ecuador seizes the assets of Occidental Petroleum, the country's largest foreign investor. Zimbabwe's Robert Mugabe orders the large-scale expropriation of white-owned farms.

In fact, we are not witnessing a clear "convergence" process in which economic liberalization and privatization become the order of the day. If anything, the global foreign investment environment is becoming more varied and complex.

Governments expropriate for many reasons. And "expropriation" can take a variety of forms, from the creation of predatory tax regulations to the nationalization of an entire economy. The causes can be varied and complex, and understanding this allows both companies and foreign governments to better plan for handling this type of risk. Overall, the forces that induce governments to expropriate generally include some combination of international politics, economics, ideology, domestic politics, and nationalism. In Venezuela all of these factors have come into play.

Ideology has historically been a key driver of expropriations. This was the case not only for Communist states (Cuba, the Soviet Union, etc.) but for a number of socialist or statist-minded developing countries like India, Sri Lanka, and Mexico -- and, in the 1940s and 1950s, for developed countries like Britain and France. With the end of the Cold War and the retreat of Communism, ideology has significantly diminished as a driver of nationalizations, though it remains a factor in places like Venezuela, where the Chávez government's stated goal is to create a socialist society. Fortunately, expropriations driven by ideology are relatively predictable, because those who build political movements on demands for the nationalization or expropriation of private property are usually not shy about broadcasting their intentions.

Some assume that governments expropriate investments for the "public good," to restore the national wealth to the nation's people. Political motivations for expropriation are often far more selfish -- there is usually a basic domestic political economy game in play. Expropriated property can be used to build popular support and political capital, to placate interest groups and constituencies, or simply to enrich public officials. This is at least part of the story in Venezuela.

In difficult economic times, expropriation (usually surrounded by nationalist or ideological rhetoric) can provide a government with a quick infusion of cash. Not surprisingly, some analysts point out that there is a relationship between lack of economic growth and expropriations. Governments may expropriate firms as a response to economic problems, which they may blame on foreign firms. In the current global environment, expect to hear this justification for nationalization more frequently.

Excerpt reprinted with permission from The Fat Tail: The Power of Political Knowledge for Strategic Investing published by Oxford University Press.  Copyright © 2009 by Oxford University Press, Inc.