As we wrote last August, some governments are watching political developments in Venezuela more closely -- and with more anxiety -- than others. For the past decade, that country's Petrocaribe program has helped 18 Central American and Caribbean leaders avoid the kinds of tough economic choices that sometimes drive angry citizens into the streets -- and helped Hugo Chávez extend his regional influence. Each of these countries has benefited from concessional financing schemes for their imports of Venezuelan crude oil, as well as Venezuelan support for infrastructure projects and social programs. Beneficiaries, especially Cuba, will be watching closely as Venezuelans go to the polls on April 14 to elect Chávez's successor.
They can expect good news and bad news.
The good news for them is that acting-President Nicolas Maduro, Chávez's hand-picked successor, is highly likely to win. Opposition leader Henrique Capriles Radonski is back for another run after losing to Chávez in October, but following a campaign that is likely to prove nasty, brutish, and short, Maduro will benefit from still-strong popular support for Chavismo, public sympathy for those close to Chávez, and fear that the opposition would reverse the late president's most popular policies. Maduro and his allies will also have the resources and political leverage to boost spending and mobilize supporters.
The bad news is that policy is unlikely to improve under a Maduro administration, and political conditions within the country could deteriorate over time as internal dissent becomes more difficult to manage and worsening economic conditions stoke social unrest. Maduro is likely to maintain Petrocaribe, but in the medium term, domestic fiscal constraints may well force him to reduce foreign aid, since among the spending commitments of state-run oil firm and government piggy bank PDVSA, help for foreign governments is the easiest area to cut. Maduro will have to care more about support at home than friends abroad.
Venezuela is currently giving away about one-third of its oil production at below-market prices, including as part of the Petrocaribe program. At today's prices, the volumes that go to Petrocaribe partners amount to more than $6 billion in lost revenue -- about 2 percent of Venezuela's total GDP.
The new president will probably prioritize aid to Cuba, since the Castro brothers are strategic allies and high-profile friends who likely played a role in vetting him for the presidency. Maintaining strong relations with the Castro regime is also a means for Maduro to protect his revolutionary credentials as he works to establish himself as Chávez's legitimate political heir.
But for other Petrocaribe countries, aid reduction will likely be substantial. The Dominican Republic and Nicaragua would likely face the toughest economic challenges, forcing policymakers to make sharp policy adjustments. Reduction or elimination of Petrocaribe financing would put the DR's Danilo Medina in an especially tight spot. Given the size of its economy and its access to international financial markets, the Dominican Republic is better placed than Cuba or Nicaragua to weather the storm, but Medina is already looking for new sources of state revenue.
Cuts to Petrocaribe would also be bad news for Daniel Ortega's government in Nicaragua. Some estimates have Venezuelan support -- in the form of direct loans to Ortega, energy projects, and oil -- at about $500-600 million a year. That's 7-8 percent of Nicaragua's GDP. Petrocaribe has allowed Ortega to subsidize electricity rates and public transportation, boost public sector wages, spend on infrastructure improvements, and enhance food security. A significant cut to Petrocaribe might even persuade Ortega to make new friends in Washington.
These are a few of the reasons why there will be so much international interest in Venezuela's election -- and in what comes next.
Risa Grais-Targow and Heather Berkman are analysts in Eurasia Group's Latin America practice.
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By Risa Grais-Targow
Beginning what he says will be his final five-year term as Cuba's president, Raul Castro surprised Cuba observers this week by appointing Miguel Diaz-Canel as first vice-president. At 52, Diaz-Canel is a spring chicken compared to Jose Ramon Machado Ventura, his 82-year old predecessor, and it appears generational change within the leadership might finally be on the agenda. Though Raul Castro, 81, appears in good health, Diaz-Canel would automatically assume the presidency if Castro is forced to step aside before 2018.
What does all this mean for policy? In the near-term, probably not much. Under Raul's leadership, the government has embarked on an incremental path toward economic liberalization while keeping a tight lid on political reform, and that's unlikely to change anytime soon. Diaz-Canel seems to have been selected precisely because he is both a trusted Communist Party loyalist and a proven manager who can balance the delicate process of gradual economic opening with the need to work closely with the still-influential first generation of revolutionaries within Cuba's politburo. Diaz-Canel, a former education minister and an engineer by training, has slowly worked his way through the party ranks. He served two years in the military and reportedly maintains close relations with top brass. He is not particularly charismatic, but, then again, neither is the man he's now in line to replace, who assumed power after older brother Fidel relinquished the reins in 2006.
The appointment suggests the Castro regime knows it must finally address the issue of succession. Raul has repeatedly called for a "rejuvenation" of Cuba's Communist Party but seems to have struggled to find an appropriate mix of loyalty and reformist credentials, particularly within the generation born after the 1959 revolution.
Still, there is no guarantee that Diaz-Canel will be Cuba's next leader. Other would-be heirs -- most notably Carlos Lage and Felipe Perez Roque -- have been groomed for succession in the past only to fall from grace after demonstrating an excess of personal ambition or clashing with Raul and Fidel. Moreover, though Diaz-Canel has the legitimacy that comes with Raul's backing, his last name is not Castro, and any transition will likely be challenging, particularly given Cuba's deep economic troubles, tensions within the ruling party, and intense pressure from the international community to implement political reforms.
Still, promoting Diaz-Canel suggests that despite the Castro brothers' seeming immortality, the regime is truly committed to "updating the model" to ensure the system they built continues after Raul and 86-year old Fidel are gone. This also includes continuing economic reforms aimed at slowly and carefully expanding the size of the private sector and reducing state payrolls.
Whether these reforms can keep the regime in power beyond the Castros, however, remains to be seen.
Risa Grais-Targow is an analyst in Eurasia Group’s Latin America practice.
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By Risa Grais-Targow
With Venezuelan President Hugo Chavez gravely ill and the Castro brothers in their twilight years, debate has begun to focus on the future of Chavez's brand of leftist politics in Latin America. There is widespread speculation as to which leader might assume Chavez's role in the region, even though his influence has arguably been on the decline. Among the possibilities bandied about is Ecuador's President Rafael Correa. Correa easily won a third term in the Feb. 17 elections, beating his closest opponent, Guillermo Lasso, by more than 30 percentage points. Correa also expanded his base of support in the National Assembly, where his Alianza Pais looks likely to achieve an absolute majority. Correa, like Bolivia's Evo Morales and Nicaragua's Daniel Ortega, owes much to Chavez, who served as a model for socialist policies, anti-imperialist rhetoric, and doled out hundreds of millions of dollars to his regional allies. While Correa may aspire to use his strong mandate to assume leadership of the Chavez-created Bolivarian Alliance for the Americas, his ability to do so will be limited.
First and foremost, Correa simply lacks the resources. Ecuador is a relatively small country (its GDP is about 20 percent of Venezuela's), and while it is a major oil producer, it does not boast the quantity of oil that can sustain Chavez-like regional "petro-diplomacy" and aid programs. Moreover, in the likely event that Chavez's chosen successor, Vice President Nicolas Maduro, wins a new election, there is no evidence to suggest that he doesn't want to fill Chavez's regional leadership role himself. So far, Maduro's actions suggest that he will represent policy continuity. He is close with the Cuban regime and has imitated Chavez's playbook thus far, including cracking down on the private sector and suggesting that foreign agents were planning an assassination attempt against him.
That doesn't mean that Correa won't try. He boasts much of Chavez's charisma, and has taken every opportunity to vault himself, and Ecuador, onto the international stage, typically at the expense of US policy interests. This has been particularly true since Chavez first became ill in June 2011. Correa boycotted last year's Summit of the Americas in protest of Cuba's absence, and more recently made headlines by granting Julian Assange political asylum. While Venezuela grapples with its internal transition challenges, rather than its regional agenda, Correa could heighten his anti-imperialist rhetoric. Regardless, however, Correa's decisive victory-along with the endurance of Morales in Bolivia, Ortega in Nicaragua, and more center -- left governments in Peru and Brazil -- suggests that the left in Latin America has staying power, with or without Chavez.
Risa Grais-Targow is an associate in Eurasia Group's Latin America practice.
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Note: Today is the first in a series of posts that detail Eurasia Group's Top Risks for 2013.
Since the onset of the financial crisis in 2008, investors and companies have focused mainly on risks in developed world markets. But as conditions in the U.S. and Europe continue to improve in 2013, the most worrisome risks will again come from emerging market countries. These countries are fundamentally less stable than their developed world counterparts, and some of their governments used a period of favorable commodities prices and the benefits from earlier reform to avoid the tough choices needed to reach the next stage of their political and economic development.
Some of these emerging market nations face more difficult challenges than others, and much depends on the degree of political capital each leader will have in order to make unpopular but necessary changes. These countries can be divided into three broad categories according to the complexity and immediacy of the risks they face and the longer-term upside they offer.
The first category includes the best bets:
The second category of emerging market economies are at risk of considerable volatility.
Lastly, there are the underperformers, those countries where risks will overshadow returns.
On Friday, we'll profile Risk #2: China vs Information.
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By Daniel Kerner and Risa Grais-Targow
The Bolivarian revolution in Venezuela is rapidly approaching its biggest test yet: The defiant Hugo Chavez, the man who has personified Venezuelan politics for 14 years, has publicly admitted that his days as president may be numbered. His movement has a slight edge in elections that are likely to be called within months, but much will depend on the president's ability to transfer his personal appeal to his chosen successor.
Throughout multiple treatments for what appears to be cancer, Chavez had refused to publicly acknowledge that he may be too weak to lead his country. But on December 8 he announced that he would need a fourth round of surgery in Cuba, and named Vice President Nicolas Maduro as his successor, setting in motion plans for a potentially rapid transition.
According to the Venezuelan constitution, new elections must be held within 30 days should the president be forced to step aside before inauguration day (January 10) or during his first four years in office. Maduro would likely face Miranda Governor Henrique Capriles Radonski, whom Chavez defeated by about 10 percentage points in the October 7 presidential election.
Anointing a successor is a clear admission by Chavez that he is unlikely to complete his six-year term, making an election inevitable. There are three main reasons the government will likely call for a vote as soon as possible.
The future of Chavismo depends on Chavez's ability to transform a movement that is largely based on a cult of personality to one that can survive without him in perpetuity. Chavez remains popular, despite the fact that a majority of the public thinks poorly of the government's ability to solve problems. Chavez therefore needs to aggressively make the case to the Venezuelan people that Maduro has the talent and vision to carry on the revolution. Chavez's ability to campaign for Maduro is uncertain, but it will only lessen with time.
Second, foreign exchange dynamics are untenable for much longer. The country has an unorthodox three-tiered exchange system, with two different official rates for businesses and individuals needing dollars, as well as a parallel (illegal) rate. Black-market rates indicate that the bolivar should be much weaker than it is in the official windows, and dollars are becoming increasingly scarce.
The government would likely prefer to hold fresh elections before a devaluation, which would propel already-high inflation and be politically costly for Maduro's candidacy. In the meantime, the government can rely on domestic and foreign debt issuance to meet fiscal and foreign exchange needs to buttress the political environment in Maduro's favor.
Finally, Chavismo wants to capitalize on an opposition that remains weak and divided following Capriles Radonski's defeat, by forcing it to compete before an official candidate selection process can take place. Capriles Radonski faces a gubernatorial election on 16 December, which he is likely to win. But if he does not, the opposition will have to scramble to coalesce around a new candidate in a short amount of time.
That said, the opposition is likely to take advantage of its best chance to win since Chavez came to power by uniting around a single candidate. It is far from certain that Chavez will be successful in transferring his personal appeal to Maduro, but Chavismo retains a slight edge in the coming election.
Regardless of who wins, Venezuela faces a very challenging 2013. Maduro would be forced to make difficult economic adjustments and manage divisions within Chavismo. An opposition president would have to make the same adjustments before setting out on a reform course, but would face even more obstruction from Chavismo stakeholders across the state apparatus.
Daniel Kerner is an analyst in Eurasia Group's Latin America practice. Risa Grais-Targow is an associate in the firm's Latin America practice.
By Heather Berkman and Risa Grais-Targow
The state of Hugo Chávez's health has prompted plenty of speculation and debate across Washington and among the Venezuelan president's universe of Twitter followers, but for some of his regional friends, the stakes are particularly high. For the past decade, Chávez's Petrocaribe program, which provides heavily discounted Venezuelan oil and finances a slew of infrastructure projects around the region-has helped a handful of Central American and Caribbean leaders avoid the kinds of tough economic choices that drive angry citizens into the streets. Yet, with the approach of elections in October, Chávez now faces some tough challenges-to the state of his country's own finances and to his ability to sustain both his political and personal strength.
Dominican Republic, the loss of help from Venezuela would put the new Danilo Medina administration in a
tough spot, particularly since Chávez's patronage allowed the outgoing Leonel
Fernandez administration to avoid painful belt-tightening, in particular, by
bailing out the state-owned electricity company and keeping money flowing to
privately owned generators who threatened to shut off the lights. If Chávez
exits and Petrocaribe is cut off next year, Medina's government will have to
finally force consumers to pay for their electricity (or at least stop stealing
it), and tap domestic financial markets or turn to international creditors to
avoid leaving its people in the dark. Access to foreign financial markets can
probably help the new government keep the lights on, but that will leave
Medina's government with less of the financial capital it needs to begin
building its political capital.
For Nicaragua, the loss of Venezuelan aid would be much more serious. By some estimates, Venezuelan support amounts to 7-8 percent of Nicaragua's GDP, a sum that has allowed President Daniel Ortega to subsidize electricity rates and public transportation, boost public sector wages, and finance lots of popular social programs. Ortega has few other friends he can turn to. US and European donors have scaled back aid amid accusations of electoral fraud and concerns that Ortega is running roughshod over Nicaragua's fragile democratic institutions. Without help from his friend in Caracas, Ortega would probably have to make conciliatory moves toward skeptics in Washington and seek additional help from the multilaterals.
But, of course, no government would be harder hit by the loss of Chávez than the one in Cuba, where billions of dollars in infrastructure investment and 115,000 bpd of Venezuelan oil help the Castro regime go slow on economic reform while keeping a tight lid on demands for new political freedoms. With the collapse of its Soviet benefactor in 1991, Cuba entered what state officials still call the "special period," a time of extreme hardship and anxiety that brought the Castros as close to the abyss as they have ever been. The brothers are now in their 80s, and a replay of that era would almost certainly yield unprecedented pressure for change.
Since beginning a process of gradual liberalization in 2010, Raul Castro has taken two steps forward and one step back in his bid to cut public payrolls and allow for limited private enterprise. Without money from Venezuela, however, the Castro regime would likely be forced to push the pace of economic liberalization, making it more difficult to contain demands for political reform.
Venezuelan opposition leader Henrique Capriles has warned that his administration would end preferential oil deals for Chávez's friends, which he estimates will save Venezuela about $6.7 billion per year. The Cuban government continues to hope that oil discoveries of its own in the waters around the island might ease the need for a foreign patron, but early exploratory wells have come up dry. Even if Cuba discovers significant amounts of recoverable oil, it will take years for production to come online. That may be more time than Chávez has left.
Though a physically robust Chávez would probably win in October, he has undergone three cancer operations in the past year, and we can't know how long he might be strong enough to govern. We can say with confidence, however, that Venezuela cannot afford its president's generosity indefinitely-and, of course, that no man lives forever.
Heather Berkman and Risa Grais-Targow are analysts in Eurasia Group's Latin America practice.
JUAN BARRETO/AFP/Getty Images
By Adam Siegel
As part of a recent crackdown, Colombian authorities have seized some of the latest tools favored by drug trafficking groups. Forget private planes, speedboats, and homemade submarines. These guys are investing in backhoes and bulldozers -- because some of Latin America's best organized criminal gangs have gone into the mining business.
Colombia's drug trafficking organizations -- from rebel groups like the FARC and ELN to paramilitary successor gangs known locally as Bacrim -- are methodically asserting control over illegal mining operations in the country, including the unlicensed extraction of gold and other metals thought to compose at least 30 percent of Colombia's total mineral exploitation. Current Minister of Mines Mauricio Cardenas has argued that unlicensed mining "should be given the same treatment as drug trafficking," while the recently-retired chief of the National Police, General Oscar Naranjo, calls the involvement of drug gangs with mining the greatest future challenge for Colombian law enforcement.
With Latin America in the midst of a new "gold rush" (and the price of gold rising from $270 to as much as $1,800 per ounce over the past decade), expanding to mining is in many ways a logical step for Colombian gangs. Profit from mining operations is high and relatively low-risk compared to other revenue-generating activities like cocaine trafficking, extortion, or kidnapping for ransom. In a mineral-rich region like Antioquia- -- here royalties from legal gold mining already provide over 45 percent of state revenue -- the governor is clear about the changing calculus for drug gangs: "Gold is now more lucrative than coca."
Unauthorized mining itself is not new in Colombia, where small-scale, artisanal mining has been practiced for hundreds of years with relatively little interference from the state. Many of the illegal mining operations are plainly visible, but Colombian authorities are often reluctant to shut down mines because they don't want to trigger unrest by depriving poor miners of their livelihoods. These miners are treated more as opportunists than as criminals, lack of permits notwithstanding.
But this laxity has opened doors for criminal gangs, whose physical presence at the mines is (in many cases) minimal. Reports from local media and authorities detail a number of methods used by groups like the FARC or prominent Bacrim like the surging Rastrojos: Some charge a five to 10 percent "tax" on daily production or monthly earnings, while others charge "protection" fees or make money by providing heavy machinery, like the aforementioned bulldozers.
Yet the sheer scale of these illegal armed groups' involvement in the industry is quickly changing the government's calculus. President Juan Manuel Santos called the new trend "a cancer," and his administration has launched a number of offensives aimed specifically at shuttering these operations. In the Cordoba department, for example, the first phase of Operation Trojan ended in July with more than 400 arrests, 87 mines closed, and 155 bulldozers in state hands. In all of 2011, Colombian authorities shut down 276 mines and arrested more than 1,200 people. By May 2012, an unofficial accounting by the National Police showed 363 closed mines and at least 900 arrests.
The urgency of the Santos administration underscores some serious security challenges: Revenue from mines helps bankroll a decades-long insurgency, while competition for access to resources stokes violence among illegal groups and within the local communities already burdened with poverty and high levels of forced displacement. The environmental impact, in the form of mercury runoff and pollution, is severe.
The alarm is being raised in neighboring Peru as well, where the business consulting firm Macroconsult recently issued a headline-generating report estimating that illegal mining profits surpassed those of drug trafficking last year. With Peru's coca economy again on the rise and less concrete evidence that the rebel group Shining Path is making the same mining inroads as insurgents in Colombia, the issue of illegal mining still has the "social problem" and "economic issue" veneer seen previously in Peru's northern neighbor. Mexican authorities, meanwhile, have taken a more aggressive stance, opening a number of investigations into the escalating ‘protection' fees that drug traffickers like the Gulf Cartel and Los Zetas are said to be charging local mine operators.
The details of the problem vary from country to country, but there are implications for Latin America as a whole -- and for the region's mining industry, with more than $425 billion in investments already announced over the next ten years. As demonstrated in Colombia, the profits from supporting and extorting illegal mining are too large (and too easy) to pass up. By some estimates, in the past five years the FARC has transitioned into making some 20 percent of its total earnings from mining operations and 35 percent from drug trafficking. Put another way, that's hundreds of thousands of dollars in monthly income (for relatively little work) going to the rebel group's locally operating fronts. Countless additional illicit funds from drug trafficking are also laundered through these operations because they ultimately produce a legal item.
Organizations like the FARC, with operatives in Ecuador and Venezuela, are well-positioned to extend their mining ventures into those countries. In fact, there is evidence they already have. Groups like the Zetas are present in Mexico and Guatemala, and they have shown no hesitation in taking on new activities as they expand through Central America. Indeed, a key lesson here is that even in Colombia -- long the cocaine-producing capital of the world -- traffickers are always looking for ways to keep their income fluid and diversified (and, according to some reports, are even willing to team up with rivals to do so).
For the global mineral market, it is unclear whether the trend is toward dominating the "illegal" industry or extorting the legal one. Either way, the presence of these groups may create an unwelcome new "gold standard" for the region: greater violence, more corruption, and a higher cost of doing business.
Adam Siegel is a researcher in Eurasia Group's Latin America practice.
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By Joao Augusto de Castro Neves
When Brazilian President Dilma Rousseff travels to Washington next week, she won't be looking for a free trade deal or military assistance. Her country, the "B" that begins the "BRICS," primarily wants recognition -- specifically U.S. support for a permanent seat on a revamped U.N. Security Council. But this time around, Rousseff won't even be getting a state dinner.
Washington, due mainly to bureaucratic inertia, isn't ready to give Brazil the recognition it wants. Its reluctance may actually encourage other nations to behave in ways contrary to U.S. interests.
Years of macroeconomic stability, sustainable economic growth, and a cluster of successful social policies gave rise not only to a new and thriving Brazilian middle class, but also to Brazilian multinational companies, the so-called national champions. Externally, these changes translated into greater confidence -- inside and outside official circles -- and a wider scope of international ambitions.
Brazil is beginning to display the characteristics of a regional hegemon -- it has attracted more illegal immigrants from surrounding countries, and helped Colombia's government conduct rescue missions for hostages held by the FARC. And since 2004, Brazil has been leading the U.N. stabilization mission in Haiti. But Brazil's "holy grail" remains a seat at the Security Council table. And it won't get recognition (yet) from the most important member of the Permanent Five, whose support it very much covets.
According to many foreign policy specialists in Washington, Brazil does not deserve a place in the top echelons of the U.N. because it is not a nuclear power and is unwilling to share the burden of leadership. Another line of reasoning highlights the fact that the U.S. does not endorse Brazil's bid -- as it did with India -- because South America is not a very relevant region in the U.S. strategic chessboard. The remaining argument point to the fact that a potential endorsement could hurt U.S. interests with other key allies in the region, specifically Mexico and Colombia.
Even if some of these considerations may hold elements of truth, at the end of the day they hamper the deepening of relations between the two largest democracies and economies in the Western hemisphere. Brazil could do a better job explaining to the U.S. -- and the world -- how it would behave as a permanent member of the Security Council; but the U.S. could also rethink some of its arguments against Brazil.
The fact that Brazil is not a nuclear power and that South America is not a relevant strategic hotspot should count in favor of Brazil's aspirations, not against. If the region is relatively calm, it is because of the collective effort of Brazil and Argentina to end their economic and military rivalry in the 1980s. As a matter of fact, the rapprochement also defused the nuclear component of the rivalry, something that India and Pakistan were not able to do. The U.S. decision to endorse India's bid and ignore Brazil's sends a perverse message. It awards a country that snubbed every major nonproliferation regime while punishing a country that willingly adhered to these very same regimes.
Although the repercussion of the endorsement of Brazil's bid over U.S. interests with key allies in the region is likely to be negative, its importance is widely overplayed. Even nuclear Pakistan's outright resistance did not factor in U.S. geopolitical calculus when it endorsed India's bid. In addition, for some time now, the U.S.-Latin American agenda is in fact a collage of increasingly specific bilateral relations. Any dissatisfaction, therefore, could be dealt with bilaterally without any relevant repercussion on the regional agenda.
Next week's visit by Rousseff is likely to pass without the words that Brazil wants to hear from President Barack Obama. Those words will eventually come from Obama or a future U.S. president, but their absence in the short term will keep relations between the Western Hemisphere's two most important democracies from reaching their productive potential.
Joao Augusto de Castro Neves is an analyst in Eurasia Group's Latin America practice.
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By Adam Siegel
Colombian president Juan Manuel Santos is likely to open the Sixth Summit of the Americas in Cartagena next month with a standard welcome for Barack Obama and the 33 other leaders of the Western Hemisphere, but maybe there's a more fitting greeting for the U.S. president: "This is an intervention." After decades of partnering with the U.S. to pursue an aggressive, often controversial 'war on drugs,' a number of Latin American leaders say they're ready to discuss major shifts in regional anti-drug policy. Some of them have begun talk of "decriminalization" -- and they want to do it at the Summit, where the United States will have no choice but to talk up the merits of the prohibition policies it has long favored.
The former presidents of Brazil, Colombia, and Mexico generated headlines in 2009 by jointly declaring that "the war on drugs has failed" and calling for decriminalization of marijuana, but the commentary was dismissed in some quarters as an easy argument to make for men no longer politically accountable as heads of state. Since then, however, several sitting Latin American leaders (on both the left and right) have called for candid debate of current drug policy. Among them: Mexico's Felipe Calderon, Costa Rica's Laura Chinchilla, Argentina's Cristina Kirchner, Guatemala's Otto Perez Molina, and Colombia's Santos -- who told Britain's The Observer last year that "A new approach should try and take away the violent profit that comes with drug trafficking... If that means legalizing, and the world thinks that's the solution, I will welcome it."
Santos' caveat -- "[if] the world thinks that's the solution" -- nods to the global reach of Latin America's drug trafficking organizations, underscoring the desire for a debate that includes producers and consumers (who are concentrated in the U.S. and Europe). This distinction is important; indeed, personal consumption of drugs like marijuana and cocaine is already technically decriminalized in Mexico, Costa Rica, and Colombia, while the total number of convictions for personal drug possession in Guatemala and Argentina combined was just 161 in 2009, according to the Inter-American Drug Abuse Control Commission. So when an ex-military general like Perez or a former defense minister like Santos talks about decriminalization, it's not because they care so much about personal liberties. Rather, they have one major goal in mind: choking off the resources that fuel drug cartels and the violence they practice.
As Perez explained recently in advance of a Central American conference on alternative drug strategy sponsored by his administration in Antigua, "drugs are expensive precisely because they are prohibited...traffickers will lose if they cease to be profitable." While no detailed proposal is yet on the table, his idea of decriminalization is clear: create a legal framework to make the production and transport of cocaine legal, at least throughout Central America -- a region through which approximately 80 percent of the cocaine heading to the United States stops. Bringing the business of this $37 billion industry out into the open, it is assumed, would reduce the imperative of traffickers to corrupt public officials and their need to use violence against both governments and rivals for access to the best trafficking routes.
Other leaders, from Vice President Joe Biden to Nicaraguan president Daniel Ortega, have rejected the decriminalization proposals out of hand. Nevertheless, the coordinator of Obama's trip to Colombia recently indicated that the U.S. was "ready to have a good dialogue between all countries to hear their views," though he reiterated that U.S. opposition to any legalization will not change. Of the suggestions offered at the Guatemala conference last weekend, some could be endorsed by the U.S. -- such as the creation of a regional Central American court for trying traffickers that would reduce local corruption and relieve pressure on national justice systems, while others -- mandating that the U.S. take "co-responsibility" and pay individual countries for every drug raid or plant eradicated -- don't stand a chance.
Obama's challenge at the Summit will be to offer policy alternatives to the status quo. Latin American leaders warn that Washington has asked them to take tough choices over the years, and they want to see the U.S. demonstrate the political courage to consider a few of their own. Latin Americans are far from united on decriminalization or any other single solution, but the gathering in Cartagena will make clear that they have become increasingly willing and able to propose new ideas they know that Washington won't like. If Guatemala's Perez Molina gets his way, we'll even see him start discussions on a formal drug transit corridor for moving cocaine between South America and the United States.
Wartime U.S. presidents talk often of the need to "listen to the generals on the ground." In coming years, beginning in Cartagena, Washington can expect its "frontline partners" in the war on drugs to offer up strategies and ideas that U.S. policymakers won't like. Some Latin American leaders may give Obama a break during an election year, but they aren't prepared to wait much longer.
Adam Siegel is a researcher in Eurasia Group's Latin America practice.
LUIS ROBAYO/AFP/Getty Images
By Michal Meidan
A growing economic juggernaut and rising political power, China has many reasons to look to the Middle East: to import oil, extend its diplomatic influence, diversify its trade ties, and undermine U.S. hegemony. In that context, it seems hardly surprising that Beijing (alongside Moscow) vetoed a recent U.N. Security Council resolution on Syria and set aside its commercial dispute with Iran to conclude an oil import deal -- undermining U.S. and European sanctions on Tehran.
But Beijing's Middle East strategy is hardly the coherent, well-thought-out doctrine that some believe. Instead, it's the product of a number of (sometimes competing) domestic interests that must be coordinated each time a crisis unfolds. Worryingly for Beijing, as China's commercial ties to the Middle East increase, it will inexorably become more involved in the region's politics. In the process, the risk of antagonizing an important commodity supplier, getting on the wrong side of Washington, or fueling unwanted domestic debates will become more costly and more complicated.
Some argue, simplistically, that when China blocks pressure on Iran to protect its commercial relations with that country, it pays no price for it. The reality is not nearly that simple.
First, Beijing's decisions on Iran and Syria have clearly irked Washington. Secretary of State Hillary Clinton dubbed the Syria veto "despicable." Moreover, ongoing oil trading between China and Iran has already led Washington to slap sanctions on a Chinese trader. In a year of presidential elections in the U.S. and political turnover in China, when both sides are trying to keep tensions at bay, Middle East politics will burden an already complicated relationship with an unwelcome irritant.
But Beijing has more than the United States to worry about. Take China's ties with Saudi Arabia, which provides China with almost one fifth of its oil. Beijing's reluctance to support Western-led sanctions on Iran isn't going down well in Riyadh either. Nor has China's decision to veto the U.N. Security Council's Syria resolution, a choice that Beijing claims was intended to prevent the situation on the ground from escalating further.
Finally, several diplomatic principles -- non-interference in a third country's sovereignty, support for non-proliferation, China's rise as a responsible stakeholder -- are increasingly being called into question by other governments. The decision to veto the U.N. Security Council resolution on Syria may have been motivated by diplomatic principles of non-interference in a country's sovereignty and by Beijing's desire to prevent the situation from getting worse, but it has plainly damaged popular perceptions of China elsewhere in the region, and Premier Wen Jiabao's criticism of the Iranian nuclear program rings hollow to Western ears.
When thinking about its foreign policy goals, does Beijing really want to provide the security framework for the Middle East? These are difficult debates that Chinese leaders must have, but they will certainly want to postpone them until after Beijing's leadership transition is complete next year.
In short, the more deeply Beijing becomes involved in the Middle East, the more complicated its foreign relations and internal policy-making processes become -- and the more China has to lose. The choice between alienating an oil supplier, challenging an important trade partner and a global political power or opening up its diplomatic principles for debate is one that Beijing would like to avoid. But as its global reach extends, so will the trade-offs it has to make.
Today, we turn to the last in our series of posts on Eurasia Group's Top Risks for 2012 and answer the most common questions we've gotten about it.
Here's a summary:
Venezuela -- A lose-lose election. No matter who wins the October 7 presidential election, Venezuela's political and economic conditions are likely to worsen. President Hugo Chavez would maintain the same distorting economic policies, and the economy would struggle to overcome the effects of a large pre-election increase in spending and debt issuance. An opposition win would likely lead to an eventual improvement in economic policy, but the transition could produce instability as Chavez supporters, who would still control most of the state apparatus, try to counteract reform.
Q- Can Chavez win another election? What will affect the outcome?
A- Chavez has the edge because of his relatively persistent popularity despite a growing dissatisfaction with the status quo. The president's popularity (his approval ratings are currently around 50 percent) comes despite high inflation (estimated at nearly 28 percent in 2011), low growth, good shortages, and an electricity crisis. To alleviate these negatives, Chavez will likely engage in a massive campaign spending spree, fueled by high oil prices. His government will also issue a large amount of debt to provide dollar-denominated assets to curry favor and counteract dollar shortages. The major wild card is Chavez's health. He announced in July that he was diagnosed with cancer, but little is known about the severity of his illness. Should his health deteriorate significantly, Chavez's reelection chances will diminish, as the public's faith in his ability to lead drops.
Q- Who is the opposition?
A- The Coalition for Democratic Unity (MUD) will select its presidential candidate when it holds primary elections on February 12. Miranda Governor Henrique Capriles Radonski, a young and popular governor from one of Venezuela's most important states, is the favorite. The opposition hopes to capitalize on the growing dissatisfaction with Chavez and to continue the momentum from the 2010 legislative elections, when a unified opposition list of candidates won 54 percent of the popular vote against the president's United Venezuelan Socialist Party (PSUV). The MUD would promote more orthodox macroeconomic policies, likely leading to lower inflation and more fiscal stability in the long run. The opposition would also adopt oil-related policies that are more attractive to foreign investment.
Q- What are the different risks arising out of the election outcome?
A- A Chavez win would mean a continuation of the same economic policies that have produced widespread market distortions and a strained relationship with foreign oil companies. It will be even harder for the country to recover from the large uptick in spending and debt Chavez is likely to push to improve his election chances. Given Chavez's wide-ranging power within the government, however, it would be easier for a Chavez government than a more fragmented opposition to make some economic adjustments, such as devaluing the currency or tweaking the foreign exchange system.
An opposition win, while positive for long-run growth, could paradoxically lead to more instability in the short-run. The government would be opposed at every turn by Chavez allies, contributing to policy paralysis. The most stable outcome would probably occur if the opposition wins, and Chavez's health makes it difficult for him to continue leading his movement behind the scenes. The most unstable environment would likely arise from a rapid deterioration in Chavez's health, causing him to abandon the presidential race and creating a power vacuum that would roil both the governing party and the opposition.
JUAN BARRETO/AFP/Getty Images
By Heather Berkman and Adam Siegel
Panama's booming economy and newly acquired investment grade status have made the tiny tropical country a market darling. A number of factors, including a slew of corporate tax incentives, the government's efforts to get Panama off the OECD's grey list of tax havens, and the ongoing expansion of the Panama Canal, have enticed investors over the past few years, and the World Economic Forum just bumped up Panama's competitiveness ranking. But beneath the glittering veneer of economic progress lies reason for skepticism: President Ricardo Martinelli's recent antics.
A conservative supermarket chain owner and the leader of the right-of-center Democratic Change party (CD), Martinelli promised to "build a government of national unity" when he won the 2009 election. Since then, however, Martinelli has engineered a series of defections from rival parties in congress, raising the number of CD representatives and bringing him tantalizingly close to the 36-member majority that would free him from having to forge alliances. And while Martinelli has followed through on promises to boost pensions and ease transportation bottlenecks in Panama City, the self-proclaimed "loco" leader has also proven to be brash and mercurial.
On Aug. 30, Martinelli issued a terse press release relieving the Panameñista vice-president, Juan Carlos Varela, from his duties as foreign minister. The spark was a seemingly innocuous reform proposal: to introduce a second-round run-off in the presidential election. But many politicians felt that Martinelli's motivation was less about reform and more about keeping his party in power in 2014, when his term ends. The opposition Democratic Revolutionary Party (PRD) has the most support nationwide (when measured by the number of registered voters), and the CD and the Panameñistas made a pact to join forces for the 2009 and 2014 elections to avoid splitting the conservative vote. A potential second-round run-off has already emboldened the CD to ditch the pact and run its own candidate in 2014. The party figures that it has a good chance of finishing second to the PRD candidate in the first round and winning with the full conservative vote in the second.
These calculations were clear to the Panameñistas, who balked at letting the reform through the assembly, demanding instead that Martinelli get it approved via a public referendum. In response, the president simply sacked Varela and forced other Panameñistas out of government. An unrepentant Martinelli then tweeted that "politics is the art of making false friends and true enemies," and relations between the formerly allied parties have only grown more contentious. The president has been accused of attempting to blackmail Panameñista leaders and participating in corrupt land deals, while senior Panameñistas formerly in the administration report that they have been prevented from accessing their offices and computer files.
In the face of such turmoil, it's unclear how much Martinelli will benefit from his determination. Sure, he now has the numbers in congress to push through his reform. But a host of spurned Panameñistas are looking for payback, and opposition parties are threatening to fight the reform both in court and on the street. Martinelli said this week that he would put the reform to a public referendum in 2012, even if it passes the assembly, but his popularity has taken a hit and voters are unconvinced by his proposal. A recent poll found that the president's approval rating fell 20 percentage points in the past month, and that nearly 80 percent of the country's voters are not in favor of a second round. Together, the crumbling of Martinelli's governing alliance, the sharp drop in public support, and the uphill battle to pass the electoral reform suggest that policymaking could continue to be turbulent for the remainder of Martinelli's term.
Heather Berkman and Adam Siegel are part of Eurasia Group's Latin America practice.
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By Daniel Kerner
President Cristina Fernandez de Kirchner scored a clear victory in Argentina's first ever open primary election on August 14, setting the stage for her to sweep the October 23 presidential election. Fernandez de Kirchner's win in the primary came on the back of Argentina's strong economic growth. That growth, however, is based on unorthodox economic policies that are unlikely to change if Fernandez de Kirchner wins reelection, and that implies macroeconomic concerns in the future.
Fernandez de Kirchner is in a very strong political position. Popular support for her is at the highest levels since she came to office in December 2007. Moreover, several indicators suggest voters are content with the status quo and that there is little demand for change. Fernandez de Kirchner's 50.06 percent of the primary votes compares favorably to the 45.6 percent she won in the 2007 presidential elections. The increase is mostly because of robust economic growth and the opposition's weakness.
Fernandez de Kirchner's overwhelming victory bodes very well for her chances in the October elections. Participation was high at more than 77 percent, which means that these results should be taken as indication of how voters are likely to behave in October. In fact, support for her could even grow as her front-runner status attracts additional voters.
In contrast, the opposition is in disarray. There is a substantial distance between Fernandez de Kirchner and other candidates and no other candidate is likely to emerge as serious competitor. Ricardo Alfonsin obtained only 12.7 percent of the votes, a former president, Eduardo Duhalde, got 12.6 percent, and the socialist candidate Hermes Binner received 10.27 percent.
There is some speculation that opposition parties could coalesce behind a single candidate in October. That is unlikely. All three opposition candidates were close and there is little incentive for any of them to step aside. Additionally, any decision to leave the race would mean abandoning that party's candidates for legislative and local elections, and that would be resisted. Barring a major economic or social deterioration in the run up to the October elections, Fernandez de Kirchner is favored to win. In fact, the primary is likely to generate the perception that Fernandez de Kirchner is unbeatable.
With Fernandez de Kirchner on track to win reelection, attention now turns to what might happen during her next term. There is unlikely to be any major change or improvement in economic policy after the election, in fact, quite the opposite. Strong growth and popular support mean that the government perceives little need to adjust policy. Fernandez de Kirchner's likely victory in October (and probably with a comfortable margin) will only reinforce this feeling. In addition, the profile of some of the individuals that seem to be gaining strength within government suggests that Argentina's unorthodox economic policies are likely to continue, which bodes poorly for the country's macroeconomic outlook.
Daniel Kerner is an analyst in Eurasia Group’s Latin America practice.
By Heather Berkman
Guatemala's presidential campaign has been full of twists and turns, with the most recent bump coming on Wednesday, when the indigenous organization Waqib Kej presented a letter to the United Nations denouncing former Army General Otto Perez Molina for his alleged involvement in acts of genocide and torture during the country's long civil war. Perez Molina also happens to be the right-of-center Patriot Party presidential candidate and favorite to win Guatemala's September 11 election. His competitor is former first lady Sandra Torres, who last March divorced her husband, current President Alvaro Colom, in order to "marry the people of Guatemala" -- or, in other words, to claim eligibility for her own presidential bid. The turbulent campaign only mirrors Guatemala's larger woes. And no matter who secures the presidency, the country seems unlikely to get it together anytime soon.
Guatemalan politics over the past few years have been reminiscent of a dark and twisted telenovela. This is the country where a lawyer planned his own death and posthumously released a video blaming the government for it, and where just last week famed Argentine singer Facundo Cabral was gunned down in his car. Since the May 2011 start of the election period, more than 30 candidates for office -- ranging from local councils to mayorships -- have been murdered, and members of the supreme election tribunal have received death threats. The alarming events led Jose Miguel Insulza, the secretary general of the Organization of American States, to express concern about rising tensions leading up to the national elections.
The country's troubles are also what have enabled Perez Molina to soar to the top of public opinion polls. While the allegations of human rights abuses are nothing new, little concrete evidence has been presented to date, and Perez Molina has capitalized on his anti-crime stance to curry favor with voters. Torres, meanwhile, is waging an uphill battle to reverse the election tribunal's decision that her former marriage makes her ineligible to run for president.
But whatever happens on election day, the new administration will have a tough time lifting Guatemala out of the morass it finds itself in. Since he entered office in January 2008, President Colom has seemingly lurched from one disaster to the next and has failed to build enough support in Guatemala's unruly and fragmented legislature to pass much-needed tax reforms. Meanwhile, drug traffickers from Mexico have extended their networks through the country, crime and violence have sapped government resources and stymied investment, and the government repetitively has had to turn to multilateral financial institutions and foreign governments for support. Perez Molina may promise to usher in change and a heavy hand on security, but following through on his agenda and bringing Guatemala back on track may be more than what this former military man has bargained for.
Heather Berkman is an analyst in Eurasia Group's Latin America practice.
JOHAN ORDONEZ/AFP/Getty Images
By Risa Grais-Targow
Cuba. Oil. Two words that tend to get U.S. politicians hot under the collar, though usually not in the same sentence. That could change as the 2012 campaign season heats up in the U.S. and as Cuba's plans for offshore oil exploration materialize. The Chinese-built, Italian-owned Scarabeo 9 rig is scheduled to enter Cuban waters in August or September, and a consortium of international oil companies is set to begin drilling soon after. The struggling island nation, which currently depends on generous oil deals from its friend and neighbor Venezuela, has high hopes that its potential offshore resources might rev up its sagging economy. (Cuba claims that it has 20 billion barrels of "probable" oil in the continental shelf just off Havana, while the U.S. Geological Survey thinks that number is closer to 5 billion barrels.) But as the rig makes its steady way from Singapore, officials in Washington are getting anxious. Many lawmakers doubt that Cuba has the regulatory capacity or expertise to drill safely, particularly without the U.S.-manufactured equipment that the more than 50-year-old embargo has kept out of Cuban hands. And with BP's spill in the Gulf of Mexico still fresh in the U.S. public's mind, politicians are flagging the possibility of a Macondo-like spill 50 miles off the Florida coast.
The specter of such a disaster has already prompted several legislative efforts to punish foreign firms that drill in Cuba -- or at least those who chose not to comply with U.S. safety standards. Since January, Congressional hardliners from Florida have introduced three bills proposing to deny contracts to such firms or visas to their employees. The bills are designed to appeal to anti-Castro constituencies in the run-up to the elections, but widespread haggling over the issue is set to increase as Cuba's drilling plans progress, and the issue could become a talking point for presidential candidates in battleground states. For its part, Cuba will keep scrambling to convince the international community that it will uphold international safety standards. But those PR efforts will do little to cool the heated debate brewing on the Hill.
That said, none of the bills is likely to move anytime soon, given another powerful constituency: oil. Pro-drilling legislators in the House will be wary of punishing foreign oil companies (some of which have U.S. operations). The issue will also be overshadowed by pre-election priorities such as job creation. In the absence of Congressional action, the administration will likely take an ad-hoc approach. It might twist companies' arms behind closed doors, as it recently tried to do with Spain's Repsol, to get them to abandon their plans altogether. Or, if that doesn't work, it might simply push for guaranteed safety compliance. Measures that involve engaging directly with Cuban officials are unlikely, leaving room for less controversial alternatives such as allowing companies that specialize in emergency response to contract with Cuba and creating some kind of exception to the embargo that allows Cuba to use certain U.S.-manufactured equipment to prevent or minimize spills.
Risa Grais-Targow is a member of Eurasia Group's Latin America practice.
ADALBERTO ROQUE/AFP/Getty Images
By Risa Grais-Targow and Daniel Kerner
Venezuela's President Hugo Chávez is currently recuperating in a Cuban hospital after emergency surgery on a pelvic abscess. Or so goes the official story. However, in the three weeks since the June 10 operation, rumors have metastasized into full-blown speculation that he is in critical condition (perhaps with prostate cancer) and that Venezuela is on the verge of having to find a successor to the man who has run the country for 12 years.
Chávez's uncharacteristic quiet since the surgery has been feeding the rumors. With the exception of several tweets and a call into a local television show immediately following his surgery, Chávez has maintained complete silence. Also contributing to the uncertainty has been mixed messages from his close associates. Foreign Affairs Minister Nicolas Maduro recently said Chávez was "fighting for his health" while Vice President Elias Jaua downplayed the severity of his illness. If Chávez remains absent during the upcoming July 5 independence day celebrations, it will confirm that his health situation is grave.
If Chávez is indeed seriously ill, a number of scenarios present themselves, all of which result in greatly heightened short-term political and economic uncertainty. If he is forced to step down in the near term or if he abandons the 2012 presidential race, his Chavista movement will face significant challenges. There is no clear successor. Influential figures, such as Jaua (next in line if Chávez were to die or resign) or Maduro, lack popular appeal. Others, such as Finance Minister Jorge Giordani or PDVSA President Rafael Ramirez, strongly influence particular sectors but lack his political skills or clout. Interestingly, Chávez's younger brother Adan has ramped up both his revolutionary rhetoric and his public visibility, suggesting that he may be preparing himself for a transition. In the end, however, Chavismo's political survival would be in question if Chávez leaves the scene.
Infighting could also undermine policymaking. Venezuela faces serious policy issues. The country's electricity grid is failing and power supply does not meet demand, and the oil sector desperately needs additional investment in order to boost production (the government's principal revenue source). Squabbles could also distract from delivering on social programs, the cornerstone of the movement's popularity.
All of this is, however, potentially good news for the opposition. The opposition has been struggling to establish a united front ahead of what was already shaping up a tight election. If Chávez is out of the running, the opposition would have a better chance of winning. More importantly, if they were to win, they would have an easier time managing the transition than if Chávez were to lose the race.
Risa Grais-Targow is an associate with Eurasia Group's Latin America practice. Daniel Kerner is an analyst with Eurasia Group's Latin America practice.
JUAN BARRETO/AFP/Getty Images
By Daniel Kerner
Venezuela's President Hugo Chávez faces the real possibility that he may lose the 2012 presidential election after more than a decade in office, in part because of his administration's failure to ensure adequate power supplies. Venezuela was forced to implement strict rationing in 2010, which thwarted the country's economic recovery. But while last year's problems were caused mostly by shortfalls in rain that stressed hydropower reservoirs, the problems are now the result of the government's failure to meaningfully address capacity and transmission problems.
The recent measures to address the situation are unlikely to solve the sector's problems. On June 13, the government announced it will offer up to 50% reduction in rates to households who reduce their consumption by up to 20%, but will also fine consumers 200% of their bill if they increase consumption by over 20% from a 2009 baseline. In addition, commercial users have been asked to install their own generating capacity, and face surcharges or electricity cuts if they do not. Finally, illuminated billboards will be shut off after midnight. The measures could contain demand, but do not address the fact that the system cannot meet peak demand.
The government has promised to increase generation capacity, the only real solution to the current structural problems. But it is unlikely to deliver given financial and logistical challenges, and Venezuela will still face transmission bottlenecks. The country is estimated to have around 24,000 MW of installed capacity; effective capacity, however, is around 17,000 MW. The government claims it installed 1,250 MW of new capacity in 2010 and will install an additional 2,568 MW in 2011, but the data's reliability is suspect -- the government stopped publishing data on Venezuela's power system last year, a tacit admission that the problems are severe. The government has also promised to invest some $21 billion in the sector over the next several years, but a long list of spending commitments and the government's proven inability to manage the electricity sector means these promises are hard to take seriously.
The shortages are likely to have a dramatic impact on an economy that is only now slowly recovering -- it grew by 4.5% in the first quarter, the first positive figure in a year and a half. Similar measures in 2009 and 2010 helped cut industrial activity by 6.4% in 2009 and 3.4% in 2010. Energy saving measures could limit industrial production, and blackouts could disrupt oil output.
Higher energy prices and electricity shortages, however, pose a serious political liability for Chávez's hopes of reelection, especially if they affect economic growth. In 2009, power shortages helped reduce his approval ratings from 61% to around 50%. A variety of opinion polls show that Chávez has lost support. The government has done its best to protect Caracas from the power shortages as a means of avoiding the political costs. But the state of Zulia, which recently suffered a day-long blackout, is home to the country's second largest city, Maracaibo.
Chávez will still likely have an edge over the opposition, however. He does have a strong group of core supports among the rural poor who are over represented in the legislature and he is gearing up to expand debt-fueled spending on social programs. But the election is shaping up to be the tightest of his decade-long run as president and Chávez is more vulnerable than ever before to economic and social problems.
Daniel Kerner is an analyst in Eurasia Group’s Latin America practice
JUAN BARRETO/AFP/Getty Images
By Risa Grais-Targow
Votes are still being tallied for Ecuadorean President Rafael Correa's May 7 constitutional referendum (to his own 2008 constitution), which asked voters to weigh in on 10 issues ranging from banning bullfighting and gambling to granting Correa greater control over the media and the judiciary. As this went to press, voters looked likely to approve the bulk of the proposals, though two of the most important were up for grabs. The referendum has caused a few jitters, in part because of the precedent set by Correa's northern neighbor, President Hugo Chávez, who enjoys broad control over Venezuela's media and institutions and convinced voters to abolish term limits in a 2009 referendum. But even if the final count enhances Correa's powers, he won't be the next Chávez.
For one, Correa is likely to get closer rather than more hostile to the United States in the aftermath of the referendum. Bilateral relations have been shaky since April, when Correa declared U.S. Ambassador Heather Hodges persona non grata after WikiLeaks released cables suggesting that Correa was aware of corruption in the upper echelons of his police force. The accusation undermined Correa's campaign rhetoric about sprucing up Ecuador's tarnished justice system. In retaliation, U.S. President Barack Obama expelled Ecuador's ambassador, even while the renewal of the decades-old Andean Trade Promotion and Drug Eradication Act (ATPDEA) remained outstanding. The trade preferences expired in February, just in time for Ecuador's flower exporters to lose out on the Valentine's Day market. They and other exporters are still clamoring for ATPDEA to be renewed. Once Correa's campaign for more control has subsided, he'll likely heed those calls and sidle up to the United States again in order to hold onto the U.S. market.
Moreover, the referendum is essentially a popularity contest -- and one from which Correa is likely to emerge victorious. He is an appealing candidate and a good campaigner, and he has an approval rating of 57 percent. Winning yet another contest should bolster his confidence further by reinvigorating his mandate -- which, maybe paradoxically, will make him less inclined to behave rashly.
That said, if the unexpectedly close outcome gnaws at Correa, there could be a few bumps in the road ahead. The two items in the referendum that would clinch a Chávez-like power grab for Correa are those pertaining to the media and the judiciary. They are the two he likely cares most about and are also the most closely contested. The proposal regarding the judiciary would allow Correa to essentially handpick judges, concentrating ever more power in the executive and limiting the checks on the president's authority. If the measure is approved, Correa could also wield his dominion over the courts to curb any serious political threats. The question pertaining to the media, meanwhile, would create an oversight body to regulate "discriminatory media" -- as defined by the president. But the close race suggests that Ecuadoreans are less enthusiastic about enabling a strongman than Venezuelans were. That's a good sign, even if Correa wins this round.
Risa Grais-Targow is an associate in Eurasia Group's Latin America practice.
RAUL ARBOLEDA/AFP/Getty Images
By Risa Grais-Targow
By all rational measures, Cuba is effectively irrelevant to the United States. The island is small, its economy is about the size of New Hampshire's, and since the collapse of the USSR it poses no strategic threat. Yet the Castros have a habit of popping up in the headlines. In part, that is because of the inevitable fascination with a small country that has been a foreign policy irritant for the United States since 1959 and, more recently, its outsized role in Florida politics. But change is coming to Cuba, slowly but surely, and with change comes the possibility of unexpected volatility.
Cuba is gearing up for the first Cuban Communist Party (CCP) congress in 14 years, to be held April 16-19. Much of the event will be focused on formalizing Raul Castro's small steps toward economic liberalization (e.g., trimming the state's workforce and allowing more room for entrepreneurs) outlined in a November 2010 wish-list of 300 reforms. Another, perhaps more important, development will be the identification of the next generation of leaders, including the appointment of a new second-in-command for the CCP (the second most powerful position in Cuba). The long delay since the previous CCP congress suggests that there has been much internal wrangling over that issue.
The Castros are clearly on the way out (Fidel is 84 and Raul is 79), and the CCP has promised that the congress will usher in a new generation of leaders. Just how new and young they will be remains to be seen. On March 25, Raul Castro announced that the 50-year-old Economy and Planning Minister Marino Murillo, who has been the architect of much of the economic reform agenda, would now oversee its implementation as a sort of economic czar, signaling Raul's devotion to the reform process. The CCP may, however, simply shuffle senior party members into new positions rather than appoint younger reformers.
Such developments could also be important for the U.S. and perhaps trade with Cuba. Unless Congress decides to revisit the issue, the Helms-Burton Act of 1996 stipulates that the Cuban embargo cannot be lifted while the Castro regime is still in power. A shift in the leadership could also open the way to dealing with other potential concerns. For example, Cuba is actively exploring for oil in the Gulf of Mexico, raising U.S. concerns about how it would handle disasters similar to the 2010 Macondo well blowout.
But the CCP faces deeper challenges than this round of leadership refreshment. Most young Cubans are disenchanted with the regime. They have spent most of their lives in post-Soviet Cuba dealing with grinding economic hardship. Finding true believers among that generation is likely a difficult task and the regime's ability to implement meaningful reforms will affect the stability of Cuban politics further down the line.
Risa Grais-Targow is an analyst in Eurasia Group's Latin America practice.
ADALBERTO ROQUE/AFP/Getty Images
By Erasto Almeida
News that reputable surveys show nationalist candidate Ollanta Humala is the frontrunner in Peru's presidential race after overtaking former president Alejandro Toledo forced a recalibration in markets about the dynamics in the race and its possible implications. But concerns about Humala are overblown and he is unlikely to join Presidents Evo Morales of Bolivia, Hugo Chavez of Venezuela, and Rafael Correa of Ecuador as a populist president. There is in fact less to this than meets the eye. While Humala's rise in the polls reflects a desire for change among the electorate that most have observers have underestimated, he is unlikely to win, if, as appears likely, he faces former president Alejandro Toledo in a run-off.
The latest opinion polls show Humala continuing to gain ground. According to an Ipsos/Apoyo poll released on March 27, Humala now leads with 21 percent support (up from 17 percent a week ago and 15 percent two weeks ago), while support for former president Alejandro Toledo has dropped to 20 percent (down from 23 percent a week ago and 26 percent two weeks ago). Keiko Fujimori ran third with 19 percent and was followed by Pedro Pablo Kuczynski with 15 percent and Luis Castaneda with 14 percent. Another poll with ballots conducted by Datum and released on 25 March showed Toledo still ahead with 19.4 percent support, followed by Humala with 17.6 percent, Pedro Pablo Kuczynski with 17.5 percent, Keiko Fujimori with 16.1 percent, and Luis Castaneda with 15.5 percent. The results suggest the race is very tight, but recent trends indicate that Humala will probably be in the run-off.
The question is who he will face. The odds that Toledo will make it to the run-off have diminished, but the chances of him winning in the second round are still slightly above 50 percent. Toledo appears to be losing support among the poor, which is problematic for him. If current trends continue and Humala gains ground, Toledo could fall to third behind Fujimori. But Toledo's appeal balances change and centrist moderation and could staunch any further declines. He could also benefit from campaign dynamics. As the frontrunner, he faced more attacks than other candidates, something his opponents may also face as the race tightens. If Fujimori loses support to Humala among the poor, Toledo could actually benefit. Also, potential Kuczynski voters may shift to Toledo.
If Toledo makes it to the run-off, he would probably be able to isolate and defeat Humala as President Alan Garcia did in 2006. In fact, Toledo's centrist profile puts him in a better position than Fujimori or Kuczynski to repeat President Alan Garcia's strategy in 2006. The 2006 run-off was not a choice between radical change and the establishment. Garcia instead sold himself as representing moderate change while questioning Humala's nationalism by pointing to his ties with Venezuelan President Hugo Chavez.
But if Toledo doesn't make it to the run-off, Humala would have the edge. None of the other candidates are likely to run a viable race. Keiki Fujimori has problems casting herself as pro-change given her family connections, while both Kuczynski and Castaneda are too closely tied to the establishment.
Even if Humala were to win, the issue is how much he could push policy to the left. He would probably push the limits on macro and microeconomic policy, but radical change is unlikely given his own preferences (he has repeatedly stressed a commitment to stability) and significant institutional constraints. His party would not have a majority in congress, so it would be difficult to, for example, undermine the autonomy of the central bank or abrogate contracts. The end result would probably be a gradual deterioration in the policy outlook, but not the populist regimes seen in in some neighboring countries.
Erasto Almeida is an analyst in Eurasia Group's Latin America practice group.
ERNESTO BENAVIDES/AFP/Getty Images
By Christopher Garman
The turmoil in the Middle East and Japan has almost completely overshadowed U.S. President Barack Obama's trip to Latin America, but his visit to Brazil is a strategic down payment on improved relations with an emerging world power.
Under former President Luiz Inacio Lula da Silva most of Brazil's foreign policy initiatives were driven primarily by the Ministry of Foreign Affairs (Itamaraty) with a long-standing preference for improved South-South ties or by Lula personally.
Brazil's President Dilma Rousseff, however, is more interested in economic concerns and there are already signs that such issues will have more impact on her foreign policy, perhaps yielding a better relationship with the United States. Some of that shift can be explained by Rousseff's economic training and her many years as a government technocrat. Equally important, however, is her underlying pragmatism, something that many pundits failed to identify during the presidential campaign.
Her more skeptical view of China yields the clearest evidence of this change. Under Lula, Brazil sought to strengthen its relationship with Beijing driven in part by a desire to counter-balance U.S. geopolitical clout. By contrast, under Rousseff, private sector concerns over how Chinese imports are undermining the competitiveness of Brazil's manufacturing are surfacing more strongly in Brazilian policy. Where Lula blamed the U.S. Federal Reserve's quantitative easing for global imbalances, Rousseff has placed equal blame on China's managed currency policy.
It would be a mistake, however, to think this new focus will translate into a wholesale transformation of the relationship. Rousseff is not about to work jointly with the United States, either bilaterally or in multilateral settings such as the G-20, to pressure China on its currency policy.
Additionally, even though Brazilian policymakers are signaling a desire to supply the U.S. market with exports from its vast new oil deposits, Brazil's new statist exploration and production framework designed to develop the country's pre-salt reserves is much less attractive to U.S. majors. In fact, there seems to be more room for cooperation on renewables and environmental regulations in deep-sea drilling than in upstream E&P.
It comes as no surprise that Obama did not support Brazil's push for a permanent seat on the U.N. Security Council in the same way it supported India's bid. The United States may want to deepen its relationship with Brazil, but the ill will generated by Iran episode (Lula's attempt to broker a nuclear deal with Tehran) hasn't yet completely faded. Obama also remains constrained on trade, given protectionist pressures in the U.S. Congress that gives him little room to deliver either reduced U.S. agricultural subsidies or lower ethanol tariffs, both of which are high among Brazil's priorities in the bilateral agenda.
But with pragmatists leading the two largest countries in the Americas, relations look set to improve.
Christopher Garman is the director of Eurasia Group's Latin America team.
PEDRO SANTANA/AFP/Getty Images
By Heather Berkman and Sean West
U.S. Trade Representative Ron Kirk told the House Ways and Means Committee on Feb. 9 that the Obama administration is serious about progress on the South Korea, Panama, and Colombia free trade agreements. He wouldn't commit to a timeline, but we think Congress will pass all three deals this year -- though not without a round of serious political deal making.
Obama campaigned on the need to extract additional concessions from South Korea, Colombia and Panama before any of these deals, all of which were negotiated and signed by President George W. Bush, deserved ratification. For example, automakers and the United Auto Workers complained that the South Korea deal opened the U.S. auto market to Korean imports without securing reciprocal liberalization.
The United States took two years to tell South Korea exactly what it wanted changed, but the two sides have finally negotiated a side deal in which the Koreans made additional concessions. With the new agreement providing political cover, Obama now officially endorses the deal and will send it to Capitol Hill for ratification soon.
The path forward for the Panama and Colombia FTAs is a bit murkier. The Panama deal -- which, frankly, will have negligible economic impact on either country -- was first held up because Pedro Miguel Gonzalez, who later became leader of the Panamanian National Assembly, was indicted by a U.S. grand jury on charges he shot and killed a U.S. serviceman in 1992. When Gonzalez left government in 2009, U.S. trade skeptics shifted their criticism to Panama's alleged role as a tax haven, forcing the Ricardo Martinelli administration to reluctantly sign a Tax Information Exchange Agreement with the Treasury Department.
The Colombia deal faces a more difficult battle. U.S. labor unions loudly oppose the pact because so many Colombian trade unionists and labor leaders have been murdered by paramilitary organizations. The number of murders has fallen in recent years, and though Colombia probably still has the highest murder rate of union members in the western hemisphere, it probably also has the highest rate of murders of priests, schoolchildren, and bus drivers. In short, despite significant government progress in cracking down on armed groups and reducing the homicide rate, Colombia remains an intensely violent place -- for labor leaders and many others. There's no way to solve that problem in the context of a trade negotiation.
By pushing these trade deals forward, the Obama administration is making a political bet. The White House knows the left has a long list of gripes with the president, and that pushing hard on trade deals will add fuel to the fire. But presidents benefit from the economic boosts provided by trade -- and Obama views the deals as a way to reach out to the independent and moderate voters he'll need in 2012.
Aware that Washington can't expect much more from these countries, the Obama administration will court reluctant Democratic lawmakers by extracting relatively minor concessions -- like a pledge from the Panamanian government to ratify a tax treaty or from the Colombian government to put more of those who kill union leaders on trial.
What will Democratic lawmakers want in return? They may well call on the White House to work much harder to enforce existing agreements before moving forward with new ones. That means moving forward with antidumping and countervailing duty cases against China -- both at the World Trade Organization and through domestic remedy.
With so little expected from a divided Congress, the White House will trumpet these deals as important accomplishments. But it will have been the U.S. political context that changed -- not the content of the deals.
Heather Berkman is an analyst in Eurasia Group's Latin America practice. Sean West is a U.S. political risk analyst with the firm.
NICHOLAS KAMM/AFP/Getty Images
By Heather Berkman
During last month's State of the Union address, President Obama said little about the region south of the border. There was no reference to Mexico, unless you count acknowledgment of the need to tackle immigration reform. There was the expected call for a congressional push on trade deals with Panama and Colombia. The White House's recent move to lift some restrictions on US travel to Cuba thankfully remained under the radar. He did announce that in March he would visit three countries in the region: Chile, Brazil, and...El Salvador.
Chile is one of the region's most dynamic emerging markets, one that has signed trade agreements in recent years with Japan, China, South Korea, and the European Union. Brazil is Latin America's heavyweight and an increasingly important player in international politics. But why is the president visiting El Salvador?
Central America's smallest country has a population of about 6 million, less than a third the population of metropolitan Mexico City. Locals call the country the "pulgarcito" (little thumb) in honor of its size and shape. Its economy depends heavily on remittances from the two million Salvadorans living in the United States and on U.S. consumers buying its exports. El Salvador is a member of the U.S. - Central America Free Trade Agreement, but its trade impact on the United States is negligible. Plagued with gang violence and high levels of organized crime, the country suffers from one of the highest murder rates in the world, and it has appealed to the United States for help in combating crime.
El Salvador's president, Mauricio Funes, has made strong relations with Washington a priority, and the country's current president of congress was photographed hugging a cardboard cutout of Obama shortly after he won the election in 2008. Flattered though he may be, this hardly explains why the real President Obama chose El Salvador for a presidential visit.
A broader look at the region brings the country's importance for Washington into sharper focus. U.S. policymakers have become increasingly concerned with the rise of drug trafficking in Central America, especially as Mexico's efforts to crack down on drug cartels have pushed traffickers and their operations into remote areas of Guatemala and Honduras. Both those countries share a border with El Salvador.
The U.S. military coordinates with Salvadoran authorities at the country's Comalapa Air Base to plan drug interdiction operations, which some Salvadoran officials say has helped their country avoid the spike in drug-related violence that plagues its northern neighbors. In addition, El Salvador has remained politically stable. Honduras is still regrouping following the ouster of President Manuel Zelaya in 2009. Guatemala's government lacks the resources and the political will to effectively combat drug traffickers. Throw in the likely reelection of Daniel Ortega in Nicaragua this year, Washington's ongoing tensions with Panama's mercurial President Ricardo Martinelli, and Costa Rica's lack of regional political weight, and El Salvador begins to look more like Washington's foothold in the region.
During the Cold War, U.S. policymakers watched Central America carefully for signs of communist encroachment. Today, it's mainly drug trafficking that Washington cares about, a less immediate priority. But if U.S. officials really want to see progress on that front, a deeper commitment to El Salvador's stability might be a smart use of resources. Obama's visit could be a useful step in that direction.
Heather Berkman is an analyst in Eurasia Group's Latin America practice.
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By Ian Bremmer and David Gordon
A wave of money flooding into emerging markets has lifted many boats. But when the tide goes out, certain countries -- and the investors betting on them -- may be left high and dry.
There are very different risk profiles among emerging markets, and even beyond the increasingly turbulent Middle East, not all are going to perform well this year. The risks facing these countries include negative economic policies (fiscal imbalances in some, premature austerity in others) as well as more purely political risks (including contentious elections and political violence). As these problems play out in 2011, they will contribute to poor investment outcomes, ranging from adverse regulatory changes to asset bubbles to weak stock market performance.
The most notable underperformers are Argentina, Hungary, Peru, South Africa, Sri Lanka, and Thailand.
In Argentina, investors appear overly optimistic that policy will improve -- either as a result of President Cristina Kirchner losing her re-election bid or a change in direction if she wins. In fact, she is likely to win, but policy is unlikely to change, leading to higher inflation and more populism.
In Hungary, markets have recently turned south, but still do not seem to be pricing in the scope of the potential impending crisis as the Fidesz government attacks asset holders across a range of classes. Hungary may once again have to turn to the IMF, but Prime Minister Viktor Orban has walked himself into a political corner with his vitriolic anti-IMF rhetoric.
Investors in Peru underestimate the potential for populist candidate Ollanta Humala to make a serious run at the presidency. He's a decided underdog to be sure, but it's too early to write him off. Even if the more market-friendly Alejandro Toledo wins, we're likely to see more resource nationalism -- and mild capital controls if the Peruvian sol continues to appreciate.
Despite its aspirations, South Africa won't improve its investment climate in 2011. Growing political pressure on President Jacob Zuma ahead of municipal elections in April-May and the ruling party leadership contest in 2012 will increase the risk of government inertia and erratic policy-making and reinforce the African National Congress (ANC)'s "single party rule" mentality."
Many people have become overconfident that the end of Sri Lanka's civil war will usher in a period of political stability. But President Mahinda Rajapakse, insecure in his position, is centralizing power while failing to address the country's structural challenges. That's a recipe for resurgent political and ethnic tension, and it will dampen growth prospects.
Finally, 2011 promises to be a year of political tension in Thailand, especially given the king's failing health. Allies of former Prime Minister Thaksin Shinawatra remain popular in much of the country, raising the risks of a violent, flawed election or a military intervention. There's real potential for serious and sustained unrest involving Thailand's incumbent elites and the pro-Thaksin "red-shirt" movement.
Ian Bremmer is president of Eurasia Group. David Gordon is the firm's head of research.
By Eurasia Group's Latin America practice
Following a solid economic recovery in 2010, most Latin American countries are looking ahead to a favorable 2011. Several elections are approaching, but there are no potential political upheavals or major economic policy shifts on the horizon. In Argentina and Venezuela, incumbents will attempt to muddle through with existing policies. Cuba will try to liberalize its economy, but with little near-term success. The region's riskiest areas are in Peru, Colombia, and Mexico, while Brazil remains the region's good news story.
In Argentina, former president Nestor Kirchner's fatal heart attack in October had a profound impact on the country's political dynamics. He was Argentina's most important political figure and its main decision-maker -- especially on economic issues -- in his wife's government. But his death is unlikely to change the overall direction of policy next year, given the growing likelihood that President Cristina Fernandez de Kirchner will win reelection in October as a result of her rising popularity and Argentina's strengthening economy. The president's advisers may be more willing to consider economic policy changes than when her former husband was alive, but only at the margins.
In Venezuela, deteriorating economic conditions, rising crime, and pervasive shortages of electricity and basic consumer goods have pushed President Hugo Chavez's popularity numbers lower over the past two years, and political tension and uncertainty is bound to increase in the run up to the crucial 2012 presidential elections. His most recent electoral setback in the November midterm legislative election provides a check on his administration and its policies. But Chavez has not moderated his politics or economic policy in response, and though Venezuela has one of the worst growth outlooks in the region, his administration will likely push forward without major policy changes in 2011. Growth will be slow and inflation will remain high. Authorities will continue to intervene heavily in the economy and could resort to a new round of company takeovers to combat rising inflation and worsening food shortages.
Sluggish economic growth and dwindling state finances will encourage Raul Castro's government to slowly liberalize elements of the Cuban economy in 2011. The economic reform plans are ambitious, but Cuba is not moving toward political change, and the island's inability to trade with the United States will continue to hinder its recovery. Any change in U.S. policy toward Cuba is extremely unlikely, especially as Republicans take control of the House of Representatives and a longtime supporter of the embargo, Representative Ileana Ros-Lehtinen (R-FL), assumes the chairmanship of the House Committee on Foreign Affairs.
Brazil will probably surpass expectations. President-elect Dilma Rousseff will assume office on January 1 and may surprise some of her critics with continuation of the sort of economic pragmatism that made her predecessor successful. Her administration will make a genuine effort to control spending in payrolls and pensions, which will be critical to limiting inflation and taking pressure off monetary policy. She is also likely to advance a microeconomic reform agenda designed to deepen capital markets and overcome the hurdles for infrastructure investments and tax reform.
The key political event next year in Peru, one of the region's fastest-growing countries, will be the April presidential and congressional elections. The result is likely to be policy continuity, but there is a chance that populist candidate Ollanta Humala could become more competitive in coming months. If Humala wins, he is unlikely to shift away completely from the current macroeconomic policy mix, but he would seek to greatly expand social programs and infrastructure investments, and raise taxes to finance spending, particularly on extraction industries.
In Colombia, popular newly elected President Juan Manuel Santos will make progress on reforms that improve the likelihood that rating agencies will upgrade the country's standing to investment grade status. But approval of the government's reform agenda will take time.
Mexico will face economic-reform paralysis in 2011 driven by pre-electoral politicking in the run-up to the 2012 elections. The battle against the drug cartels will occupy much of the government's time and resources. The Felipe Calderon administration is gaining ground in its fight against organized crime, but cartels could engage in higher-profile attacks as they feel more pressure from the government. There will be a rising risk of more high-profile events, including terrorist-like attacks aimed at security forces and public officials. But the violence will likely remain concentrated among drug traffickers themselves and mostly confined to key drug-producing and -trafficking regions along the northern border and west coast.
This post was written by analysts in Eurasia Group's Latin America practice.
ADALBERTO ROQUE/AFP/Getty Images
By Ian Bremmer
Some of the information from those WikiLeaked U.S. diplomatic cables is interesting, or at least entertaining. But will the revelations actually have an impact on the conduct of international politics? Looking around the world, I've seen one policy so far that looks to be changed as a consequence of WikiLeaks.
On Dec. 6, Uruguay and Argentina joined Brazil in announcing they would formally recognize a Palestinian state, following the failure of Obama administration efforts to jumpstart talks between Israeli and Palestinian leaders.
Brazil's decision is interesting only in that it provides more evidence that major emerging market countries are carving out their own approaches to the world's big diplomatic conflicts, including in the Middle East, which is not a place where Latin American countries have many vital interests at stake. Remember when Brazil joined Turkey in direct engagement with Iran on its nuclear program? Or when outgoing President Lula invited Iranian President Mahmoud Ahmadinejad to visit Brazil? That was a pretty clear statement that Brazil would not simply follow Washington's lead on every issue.
Argentina is more of an eyebrow raiser. After all, for reasons historical and cultural, Argentina is traditionally more sympathetic toward Israel than any of its Latin American neighbors. So why this shot across Israel's bow? Or was it the Obama administration's bow?
Argentine President Cristina Fernandez de Kirchner can't have been pleased to read that one of the cables exposed by WikiLeaks revealed that U.S. Secretary of State Hillary Clinton had questioned her "mental state" and how she was "managing her nerves and anxiety." Making matters worse, the cables were written a year ago, but they went public one month after Kirchner lost her husband, former president Nestor Kirchner.
The leaks also revealed that a U.S. embassy official in Buenos Aires found her government to be "to be extremely thin-skinned and intolerant of perceived criticism." Maybe he had it right. Maybe the leaks explain, at least in part, why Argentina has decided to recognize a Palestinian state.
Ian Bremmer is president of Eurasia Group and author of The End of the Free Market: Who Wins the War Between States and Corporations?
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Reading Ian Bremmer's post below on the idiosyncrasies of Kim Jong-Il and Saparmurat Niyazov, I'm reminded that one of the toughest challenges for any analyst of politics is in predicting how an individual leader will make a particular decision. It's especially dangerous to assume that the president, prime minister, great dictator or "dear leader" sees his available options as we see them -- and that the key to accurately forecasting his choice is simply to find the most rational solution to his problem. He's not us, and we're not him. It's also dangerous to dismiss certain leaders as "madmen" whenever they surprise us and take some action that undermines our interpretation of their interests.
Six months ago, my friend Geoff Porter and I wrote a piece on Muammar al-Qaddafi. In it, we argued that the Libyan leader loves to spring surprises, but that his political calculations are not as crazy as they appear. Similar arguments can be made for Kim Jong-Il and Mahmoud Ahmadinejad -- though the Iranian president made things a little tougher this week with a broadside attack on Paul the World Cup prognosticating octopus.
But what to make of Venezuelan President Hugo Chávez's recent decision to exhume the remains of Simón Bolívar, the revolutionary giant credited with liberating Venezuela, Colombia, Panama, Peru, Ecuador and Bolivia from Spanish imperial rule? Conventional wisdom among historians is that tuberculosis killed Bolívar in 1830. But three years ago, not long after losing a public referendum he expected to win, Chávez began claiming that his hero had been murdered by a Colombian rival. Chávez ordered the exhumation to verify that the body buried in Bolívar's grave is in fact Bolívar, to run tests to determine the great man's true cause of death, and to rebury him among people of whom Chávez has a higher opinion.
Some say Chávez is simply manufacturing a murder mystery to divert public attention from Venezuela's deteriorating economy. True, things are bad. In the first quarter of 2010, Venezuela's economy contracted by 5.8 percent. Earthquake-ravaged Haiti is the only other country in the Western hemisphere to see its economy shrink so far this year. National oil company Petróleos de Venezuela (PDVSA) produces virtually all of the country's export revenue. The country's cash cow helped Venezuela produce 3.3 million barrels of oil per day (bpd) in 2001. But a massive strike in 2002, the firings of thousands of PDVSA employees that followed, and the president's habit of milking the company for extra revenue have taken a toll. The government claims that it still produces 3 million bpd. Some experts claim the number is closer to 2.6 million. OPEC says Venezuela is now producing closer to 2.3 million.
In June, inflation hit 31.2 percent year on year. Venezuela imports nearly three quarters of its food, but shortages of basic foodstuffs in state-run grocery stores have eroded Chávez's popularity. A scandal erupted this spring when officials discovered tens of thousands of tons of imported food that had been abandoned to rot in state-run warehouses.
In other words, Chávez has plenty of reasons to create a diversion.
It's also true that no one does political theatre like Venezuela's president. The honor guard in blue gloves and white biohazard suits opening Bolívar's coffin made for unforgettable (official state) television. Anyone who missed the moment (and speaks Spanish) can relive the magic by reading President Chávez's live tweets from the event.
But history suggests it would be a mistake to overestimate Chávez's sanity when it comes to Simón Bolívar. He has renamed the country the Bolivarian Republic of Venezuela and refers to his political agenda as the Bolivarian Revolution. He has been known to punctuate public speeches with his hero's jewel-encrusted solid gold saber. Some have accused Chávez of believing he is the reincarnation of his hero.
That's not fair. In their biography of Chávez, authors Cristina Marcano and Alberto Barrera Tyszka recount an interesting story of how this mistake was corrected in the past. During the two years that Chávez spent in prison following a failed coup attempt in 1992, a former cellmate recounted a particularly memorable night of smuggled rum, kahlua and tobacco. Chávez "began to tremble and speak like an old man," the witness remembered. Addressed as the ghost of General Bolívar, Chávez replied, "No, I'm not General Bolívar. Don't flatter me." When another inmate guessed that Chávez might be inhabited by the spirit of his great grandfather General Pedro Perez Delgado, Chávez replied "That's right my son, here I am."
Maybe it never happened. Most of the witnesses who served as sources for this story are former allies who are no longer on Chávez's Christmas list -- though a key source mentioned by name in the account is now deputy foreign minister. It does seem to fit the profile that has emerged over the years of a megalomaniacal leader who believes he must fight American colonialism just as Bolívar fought Spanish imperialists -- a man who sometimes leaps across the boundary separating fantasy from reality.
In other words, to forecast what one individual might do, we have to account for every possibility -- including that, on some subjects, the man we're studying might be just a little nutty.
Willis Sparks is an analyst in Eurasia Group's Global Macro practice.
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By Erasto Almeida and Willis Sparks
As a constant gush of crude oil into the Gulf of Mexico illustrates the dangers of deepwater production, policymakers around the world must make tough choices on how and when to open other deepwater projects. You'd expect that America's ongoing nightmare might generate serious debate in Brazil, where policymakers and petroleum engineers are moving forward with plans to develop one of the world's largest oil discoveries in a generation. Political factors ensure that that's not so.
Brazil's plans are plenty ambitious. British Petroleum's Deepwater Horizon project drilled at ocean depths of 4,920 feet. Brazil's reserves, discovered in 2006, are located beneath a layer of salt more than 7,200 feet down. Petrobras, Brazil's national oil company, will assume ultimate responsibility for bringing the oil safely to the surface if current legislation makes its way through the country's congress.
The technical challenges are considerable. Petrobras will have to reinforce pipes to withstand enormous deep-water pressure. Special alloys must be used to limit the corrosive effects of high levels of carbon dioxide. The unstable ocean floor above the salt will make rigs difficult to anchor. No oil company in the world has ever faced such complex challenges. Yet, Brazil is advancing full speed ahead, and its plans have broad public and political support. Why?
First, there's an element of national pride involved. Brazilian officials remind doubters that Petrobras is the world's leading producer of deep-sea oil reserves. The state-owned company produces more than two million barrels per day, more than three quarters of which is drawn from deepwater wells. Nearly one fifth of the total comes from depths equal to BP's Deepwater Horizon rig. Officials add that, as with the financial crisis, America's current problem flows from a catastrophic failure to regulate. Brazil will adopt tougher safety standards. The country's National Petroleum Agency, responsible for oversight of rig and well safety, is already preparing a detailed study of the state of equipment -- and of contingency plans should disaster strike. Whether the subject is big banks or big oil, Brazilian officials insist there is little risk in their country of American-style regulatory complacency. That said, they're also likely to limit the cost of new regulatory burdens to ensure that plans move forward without unnecessary delays.
Second, Brazil's legislative debate over oil reform has centered in recent months on how the huge expected deepwater profits will be divided among federal, state, and local governments. That gives political powerbrokers at every level a substantial share of the spoils -- and a reason to support the project.
In addition, the current government sees state-owned Petrobras as a useful tool of economic policy. During the slowdown in Brazil that followed the U.S. financial crisis, Petrobras helped protect local jobs by expanding local investment and buying larger percentages of its equipment from Brazilian suppliers. Petrobras can be even more useful if it meets its public target of doubling production over ten years, and most of the added output will come from the deepwater pre-salt reserves. President Luiz Inacio Lula da Silva has called the deepwater discovery a "second independence for Brazil." In part, that's because it can reduce the country's dependence for growth on economic conditions elsewhere. That's a powerful political incentive for a fast-developing country.
Ironically, the spill in the Gulf could actually accelerate Brazil's plans. If oil-stained U.S. beaches lead to a longer-than-expected U.S. deepwater drilling moratorium, additional supplies of capital and equipment could become available. Some of those supplies will likely make their way south.
Only a major spill that finds its way onto Brazil's beaches could slow the momentum toward developing the pre-salt reserves. That's not impossible. The most promising deposits are located offshore between Rio de Janeiro and Sao Paulo, Brazil's most densely populated cities by far.
But even a large spill might not make a difference. The largest wells are 150 to 250 miles offshore. More to the point, Brazilian officials say that ocean currents would carry leaking oil further out to sea -- not onto Brazil's beaches.
Are they right? We won't know for sure unless and until it happens. But we do know that, for better or for worse, Brazil is about to drill deeper than ever before.
Erasto Almeida is a Latin America analyst at Eurasia Group. Willis Sparks is an analyst in the firm's Global Macro practice.
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Hugo Chavez will hold his congressional majority in September's legislative elections in Venezuela. His support base remains strong. His government still exerts plenty of influence in rural regions of the country that are disproportionately represented in congress. A new electoral law will maximize the value of every pro-government vote. Majority control of congress will allow Chavez to dominate the legislative agenda in the run-up to a presidential election in December 2012.
But beneath the surface, his popularity across the country is headed downhill as Venezuela's economy buckles beneath the weight of its internal contradictions and an overloaded electricity grid leaves much of the country in the dark.
Venezuela's GDP shrank by 3.3 percent in 2009 -- and by 5.8 percent in the last quarter of the year -- according to latest central bank estimates. The country remains mired in recession while its Latin American peers have begun to recover. The government is spending freely on the back of higher oil prices in a bid to stimulate the economy, but growth prospects are limited by supply-side bottlenecks and strong disincentives for private investment. Venezuela's mix of heavy government spending with strict price and foreign exchange controls continues to feed inflation, which hit 26.2 percent on an annual basis in March. To keep a lid on the problem, the government has taken over or threatened to nationalize retailers that pass higher import costs to consumers. This strategy will probably make scarce goods still scarcer and prove unsustainable.
But the single biggest challenge to Venezuela's economic health may well come from strains on the country's power grid. Power demand has risen 6 percent a year over the past decade, outstripping the rate of expansion in generation capacity. Officials began rationing power at the end of 2009 and implemented a plan in February to cut electricity for up to four hours every other day across the country (with the exception of Caracas). Nationwide outages will weigh heavily on the country's ability to recover from recession by slowing production for the manufacturing and service industries, which together account for more than 25 percent of GDP and more than 30 percent of jobs in the formal sector. A state takeover of the last three privately run power generation companies in 2007 has reduced incentives to add capacity.
Hard times are already taking a political toll on the president. According to respected local pollster Datanalisis, Chavez's popularity slipped from 61 percent following his February 2009 referendum victory to 43 percent in February 2010. More than 65 percent of respondents in the latest monthly poll think that Venezuela is in a "critical situation." Chavez's approval ratings remain well above the lows of 2003, when he survived a coup attempt and his support dipped to around 30 percent. But with Venezuela's economy running on fumes and the government unable to turn things around, Chavez's numbers will probably sink further.
Chavez still has formidable political advantages. He holds a virtual monopoly on Venezuela's resources and will take advantage of both higher oil prices and the fiscal boost provided by January's devaluation of the country's massively overvalued currency to increase government spending in ways that limit the economic pain for low-income voters. His government has a formidable patronage-based reach into Venezuela's sparsely populated rural areas, which are disproportionately represented in congress. The government approved an electoral law last year that favors Chavez by weakening the proportional representation system and allowing the largest single group to effectively sweep the elections. Meanwhile, the government-dominated national election council recently redrew electoral boundaries to maximize the impact of government supporters' votes and limit potential opposition gains.
After the September elections, Chavez and his United Socialist Party of Venezuela will no longer have the full control of congress they've enjoyed for the last five years. In 2005, the opposition boycotted legislative elections. With Chavez weakened, his rivals won't make that mistake again, and if they can present a (more or less) unified front this time, they will probably make some limited headway at the ballot box. But they're unlikely to win more than 35 percent of seats. Even a weakened majority in congress will allow Chavez to run the government with few checks or balances, but his political standing will become steadily more precarious as the recession drags on.
The country's oil wealth won't help as much as it used to. Production, now between 2.2 million and 2.3 million barrels per day, will likely stagnate or continue to decline in the next several years as state-owned oil company Petróleos de Venezuela, S.A. (PDVSA) sinks under the burdens of its spending obligations and poor management. In addition to transferring a growing share of its revenues to the government in royalties, transfers, and direct social payments, PDVSA is being tasked with buying and distributing food to combat shortages, on top of financing recent power infrastructure upgrades.
Given Chavez's tendency toward confrontation with foreign oil companies, multinationals are unlikely to make major investment commitments, despite the Venezuelan government's latest efforts to court these firms to develop new projects in the Orinoco region. With the country's oil production in decline, price hikes will yield diminishing returns. In 2006, the government needed to spend about $2.5 billion to generate a single percentage point increase in GDP growth. By 2008, it needed to spend more than $13 billion to generate the same increase.
With less revenue to dull the economic pain, a rising cost of living, and shortages of vital goods, apathetic voters who support neither the government nor the opposition -- and who make up half the electorate -- could step off the sidelines and return to the polls for the first time in years. Chavez will resort to authoritarianism as his popularity sinks, setting the stage for a volatile 2012 election campaign.
It will be harder than ever for Chavez to control what happens next.
Patrick Esteruelas is an analyst in Eurasia Group's Latin America practice.
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On February 23, representatives of 32 nations in the Western hemisphere gathered in Playa del Carmen on Mexico's Yucatan Peninsula to discuss formation of a new political forum. The new organization doesn't yet have a name, but for simplicity, let's call it the Council of Latin American and Caribbean states (CLAC?). Some covering the event seized on the fact that the new forum will exclude the United States and Canada. Is this bad news for North Americans hoping for regional stability and a market-friendly Latin America? Not really.
We've learned some important things about Latin America in recent weeks. We learned that one of the most market-friendly countries in the region, Chile, is a resilient place. Despite an earthquake 500 times stronger than the one that devastated Haiti on January 12, there will be a peaceful transfer of executive power on March 11 from a president of one party to the president-elect of another. And despite the kind of breakdown in public order you'll find in any country following a catastrophe of this scale, Chile has the economic and political resources it will need to rebuild.
Profits from copper sales, which are unlikely to be affected much by the quake, provide Chile with about $16 billion in savings. Its government can also tap financial markets to finance an increase in state spending on disaster relief. The country is also blessed with some of the most efficiently run governing institutions in Latin America.
This is the definition of stability: the capacity to withstand a serious shock to the system with its institutional integrity intact. New president Sebastian Pinera faces a tremendous challenge in months to come, but he'll have the advantages that political legitimacy can provide.
We've also seen a show of institutional strength in Colombia, where a constitutional court has finally rejected a bid by President Alvaro Uribe to alter the constitution and do away with presidential term limits. The vote was seven to two. Uribe can claim much credit for seven years of growth fueled by a surge in foreign direct investment and a dramatically improved security environment within the country. But his exit will help restore faith in Colombia's democracy and rule of law, and it opens the way for a talented field of candidates who agree on the need to encourage foreign investment.
There are hopeful signs for foreign investment even in Venezuela, where President Hugo Chavez recently wooed multinational oil companies with a bid round, the first real test of foreign investor interest in Venezuela's oil industry since Chavez became president in 1999. His government's willingness to lower the tax burden on foreign oil companies (and the obvious attraction of the Orinoco Belt's huge reserves) drew offers from both multinationals and state-owned oil companies.
In fact, separating words from deeds helps explain why Americans and Canadians shouldn't worry too much about the work of that new regional forum. It can't replace the Washington-based Organization of American States, whatever Chavez says to the contrary, because while Brazil and Mexico can use the new club to bring their regional political clout into line with the market power of their emerging economies, the region will depend for growth on access to North American consumers for years to come.
Latin American governments are growing stronger, and that's good news for North America.
Ian Bremmer is president of Eurasia Group and author of The End of the Free Market: Who Wins the War Between States and Corporations? (Portfolio, May 2010)
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The Call, from Ian Bremmer, uses cutting-edge political science to predict the political future -- and how it will shape the global economy.