Americas

Brazil

  • Americas
    Rethinking U.S. Foreign Policy Toward Latin America
    The most recent edition of Foreign Affairs has a great piece by Chris Sabatini, editor-in-chief of Americas Quarterly and Senior Director of Policy at the Council of the Americas. In "Rethinking Latin America" he points out that the most distinguishing aspect of U.S.-Latin America relations is the U.S. focus on internal dynamics -- building democratic institutions, promoting social and economic inclusion and the like -- as opposed to more hard-headed traditional international relations issues. This occurs not only in the Washington policy world, but also in academia. Reflecting back on my own graduate work, I distinctly remember the time spent reading the “classics” on U.S.-Latin America relations. These were relatively easy weeks, precisely because there has been so little written. This approach, Sabatini believes, “has distorted Washington’s calculations of regional politics and hampered its ability to counter outside influences and deal sensibly with rising regional powers.” To be fair, the United States does focus on domestic issues in other places and regions around the world. Discussions of democracy filled much of the Bush administration’s Middle East docket, and issues of economic development, voting, and civil society also occupy Africa and Southeast Asia policymakers. And the United States does, at times, address big international relations issues in Latin America, including the role of transnational security threats, economic ties, and regional organizations. But the dominance of domestic issues — over which the United States has little or no control --  in Latin America-oriented foreign policy is distinctive. Sabatini also rightly points out that many policymakers and thinkers continue to see Latin America through a Cold War lens, and use the region as a pawn in domestic partisan battles, all to the detriment of U.S.-Latin America relations. I’d like to think this is shifting. At least parts of the U.S. foreign policy establishment and political process recognize the need to engage Brazil, Mexico, and other nations in multilateral forums and on global issues. Many are prioritizing energy, trade, and security, and beginning to analyze the nuance of regional interactions, from Brazil’s often uneasy relationship with its neighbors to Mexico’s relations with Central America.  But these shifts need to be broader and more encompassing. Otherwise the fears of many Latin America watchers will come true, and the United States will lose ground in the hemisphere.  
    Blog Post by Shannon K. O'Neil March 1, 2012 Latin America’s Moment
  • Economics
    The Future of Brazilian Ethanol
    I am in Brazil this week, and met today with people from the Brazilian Sugarcane Industry Association (UNICA). In Brazil this means they are active energy players, as over half of the crop in Brazil is used for ethanol. In recent years they have become an effective lobbying force not just in Brazil, but also in Washington (and in Brussels). They presented an ambitious future, with production and productivity increasing to meet both rising internal demand for biofuels and big jumps in projected exports. Brazil’s sugar-based ethanol is far more energy efficient than U.S. corn-based ethanol, and getting more so through biological innovations. Today Brazil is the world’s second largest supplier and consumer of ethanol (bested only by the United States). Now the majority of its cars run on ethanol, consuming almost a third of the world supply. Brazil also has huge tracts of agricultural land that could support the projected growth in biofuels demand. But a couple of challenges remain. One is transportation.  Getting ethanol from the interior to the main industrial and urban markets (or to ports for export) remains a major issue. For the moment most is transported by truck (some also by train), but the state of roads makes this increasingly expensive as producers move away from Sao Paulo state. A group of sugarcane growers and mill owners are planning to build an ethanol pipeline, which would provide an innovative solution in the medium term (if they can come up with the financing). A second is cheap gas. Where Brazilian biofuels were once competitive or nearly competitive with conventional fuels, the discovery of huge amounts of shale gas around the world is beginning to question the role of biofuels in filling global energy gaps. From the United States to Argentina to Europe, energy calculations and expectations are shifting, shaking up renewable enery markets in the process. Some 35 countries have mandates to increase the percentage  of renewable energy in fuel, which will provide some support for biofuels markets. But companies and countries are less likely to make the infrastructure and distribution investments needed for broader usage in a cheap gas world. Brazil is a world leader today in biofuels through its dominance in sugar-based ethanol. It is working to expand that role internally and abroad. But it remains to be seen what role biofuels will play in the global energy matrix, and whether they will be surpassed by second generation cellulosic biofuels, or by other types of fuel more generally.
    Blog Post by Shannon K. O'Neil February 28, 2012 Latin America’s Moment
  • United States
    U.S. Fuel Exports: Barrels Away
    Some readers of my last post noted that the decline in oil consumption in the United States since 2007 caused the boom in fuel exports that the country has experienced. Is the export boom due solely to a decline in U.S. demand? Before getting into that, let’s take a step back and acknowledge that no one’s disputing the reality of the phenomenon itself: U.S. refined product exports have shot upwards in a remarkable way since 2005 or so. In hindsight, I think I might have undersold the economic magnitude of the trend. Fuel exports brought in an estimated $88 billion to the United States last year, which amounted to four percent of total U.S. exports by value. As a December AP article noted, “Measured in dollars, the nation is on pace this year to ship more gasoline, diesel, and jet fuel than any other single export, according to U.S. Census data going back to 1990.” It continued: “Just how big of a shift is this? A decade ago, fuel wasn’t even among the top 25 exports. And for the last five years, America’s top export was aircraft.” So soaring fuel exports weren’t even on the radar just ten years ago; now, they’re in the limelight. We can quibble about relative weight of the underlying drivers, but there’s little room to debate their outcome, which is economically notable in its own right. I’d still argue that the demand-side of the fuel export story is about relative demand growth (or shrinkage, in the case of the United States) in the United States and other neighboring countries, which is how I framed it in my last post. A drop in U.S. demand alone wouldn’t have caused the boom. I would agree with other analysts that, yes, the significant decline in U.S. refined product demand has been of paramount importance in moving the country toward net product exporter status—but without stronger demand growth elsewhere, the boom would not have occurred. Figure 1 leaves little doubt that U.S. product supplied (the EIA’s approximation of petroleum product consumption) has waned since the onset of the Great Recession in 2007. After climbing to 19.2 million barrels per day (mb/d) in the summer of 2005, it declined steeply into 2010, where it’s more or less plateaued around 17 mb/d (3-month average). Figure 1. U.S. Product Supplied of Finished Petroleum Products (Rolling 3-Month Average, January 1990–November 2011, EIA) A quick look at U.S. motor gasoline and distillate demand over the last five years shows the extent of the damage—and that demand is still severely impaired. As of the most recent EIA monthly data (November 2011), U.S. gasoline consumption is still shy of last year’s levels for this time of year, let alone those of 2007, which it trails by about 8 percent (Figure 2). High prices at the pump and a sluggish consumer economy have weighed on domestic gasoline demand. Figure 2. U.S. Finished Motor Gasoline Supplied (2007–2011, EIA) Domestic distillate demand (a type of oil product that includes diesel and heating oil) is in better shape, fluctuating around last year’s seasonal demand, but it’s only barely begun to touch 2007 levels (Figure 3). Figure 3. U.S. Distillate Supplied (2007–2011, EIA) But look what’s been happening at oil demand growth in two of the countries I mentioned in my last post, Mexico and Brazil, with ports proximate to the U.S. Gulf. In Mexico, demand rebounded to 2006 levels in no time after a taking a beating in late 2008 (Figure 4). Look at oil demand in Brazil (Figure 5), which is continuing to show robust growth. Demand there is a full 17 percent higher in the fourth quarter of 2011 than over the same period four years earlier. Figure 4. Oil Consumption in Mexico (2000-2011, IEA) Figure 5. Oil Consumption in Brazil (2000-2011, IEA) Consumption growth in these export markets is pulling volumes south from the U.S. Gulf Coast (and to a much lesser extent, East Coast), providing demand for U.S. refineries that are confronting stalled consumption at home. That substitute demand has buoyed profit margins for refiners in the southern United States enough for the boom in fuel exports to occur. The fact that refineries in the Gulf are adept at processing low-quality oil (heavy and high in sulfur) makes them a natural source for Venezuelan and Mexican crude, among others, which they’re now sending back south and elsewhere as processed fuel. So will the U.S. fuel export boom hold up in the future? Answering that question requires thinking through several ways in which oil supply and demand trends might shift in the coming years. The outlook depends in large measure on how you think the economies of the United States and Latin America will fare going forward and when you think American drivers will get back to their old ways. In the United States, gasoline prices, unemployment rates, and consumer spending growth will all factor into that calculation. Western Hemisphere refinery capacity additions and oil production growth will also likely matter. The United States remains the world’s biggest gasoline consumer, guzzling about nine times more than the next biggest, Japan. And it’s still a long way from being a net oil exporter. It may send fuel away, but it still imports a whopping net 9 mb/d of crude oil—more than twenty times the net amount of fuel it exports. But net U.S. crude imports, too, are on the decline for the first time since the 1980s—perhaps the topic for another post.
    Blog Post by Blake Clayton February 15, 2012 Energy, Security, and Climate
  • Economics
    Venezuela’s Capriles Radonski Wins Primary, Looks toward October Election
    Things are heating up in the two presidential races facing Latin America this year. On the heels of Josefina Vázquez Mota’s victory in the PAN party primary last week, on Sunday Venezuela hosted yet another historic vote. For the first time since Chávez won the presidency 1999, the opposition united, giving Venezuelans the chance to choose a single candidate to run in the general election this October against Chávez. And vote they did. Nearly 3 million ballots were cast in a massive turnout,  which is particularly impressive given that many (particularly those with public sector jobs) fear even being seen in line to vote, as it would paint them as opposition sympathizers, perhaps costing them their jobs. Longstanding front-runner Henrique Capriles Radonski won the contest by a convincing margin, taking 62 percent of the vote to Pablo Perez’s 29 percent. The 39-year-old Governor of Venezuela’s second largest state (Miranda) told a boisterous crowd of followers last night, “We came to build a distinct future, we came to build a future for all Venezuelans. Now is not the hour of left nor right; it is the hour of Venezuela, of all Venezuelans.” Capriles Radonski – and the opposition more generally – seem to have learned a few important lessons after 12 plus years out in the cold. Most importantly, they have come around to the need to come together in order to take on a dominating incumbent. In the past, divisions and infighting stymied the opposition at least as much as Chávez’s electoral machinations. They have also learned the payoff of appealing to the center, and competing with rather than condemning the social programs and public works projects that appeal to the poor – an estimated 30 percent of this oil rich country. Capriles Radonski in particular does this well, donning the “Lula” mantle and advocating policies to spur inclusive economic growth, benefitting Venezuelans rich and poor. The opposition looks to focus on issues of escalating crime, stagnant growth and rising inflation. But even with this momentum, Chávez will still be hard to beat. Polls show him with just over 50 percent popularity, and diehard support of a third of the population. He also dominates the radio and television airwaves, and has billions at his disposal to spend on campaigning – high world oil prices favor the government. Still, his health remains an issue, calling into question whether he can meet the rigors of the campaign trail, particularly vis-à-vis the energetic Capriles. But despite the uneven playing field, the opening start suggests a close (and closely watched) election season.
    Blog Post by Shannon K. O'Neil February 13, 2012 Latin America’s Moment
  • United States
    The Hidden U.S. Export Boom
    Before I launch into the post, I thought it might be good for me to introduce myself to you readers, since I’m going to be blogging pretty regularly in the coming months. I joined CFR last October as a fellow for energy and national security as part of a larger Sloan Foundation-funded initiative, the Program on Energy and National Security. I’m delighted to be a part of the CFR and am looking forward to working on this new energy program. Before coming to CFR, I spent some time in academia and in financial services. On the academic side, I studied economics and finance at the University of Chicago, Cambridge, and Oxford. I did a bit of teaching in those areas at Oxford, which was fun (hopefully my students would say the same). While at Oxford, I spent some time working with the late Matthew Simmons, of Simmons & Co. Intl. (and a terrific guy, I might add), on private equity and non-profit ventures he was putting together in 2009–2010. Just before joining CFR, I headed up oil research at Louis Capital Markets in New York. So that’s me. In terms of the blog, I’m planning on focusing mostly on the economic, political, and financial aspects of oil and natural gas. I’ll venture a little further afield from time to time into financial markets or the broader economy. I’m going to make charts and graphs a feature of my posts, since they’re a great way to capture trends and relationships and don’t take long to digest. Today’s topic: a hidden U.S. export boom. There’s starting to be more and more coverage in the mainstream media, but I still wonder whether it’s sunk in to most Americans just how historic the changes going on right now in oil production in the United States really are. Last year, for the first time since the U.S. Energy Information Administration (EIA) began comprehensive data (in 1993), annual U.S. crude exports of petroleum products exceeded imports in 2011 (see Figure 1). Figure 1. U.S. Net Imports of Petroleum Products (1993–2011) U.S. refineries sent away an average of 380 thousand barrels per day (kb/d), on a net basis, last year. That is a steep and remarkable drop from years past. In October 2005, net imports were just shy of 4.0 million barrels per day (mb/d). The trend is even more remarkable in individual product categories, for which U.S. Department of Energy data extend back to 1945 (Figure 2). Unlike total U.S. net import data, data for the two major refined products, motor gasoline and distillates (a category that includes diesel and heating oil), are available reaching back to the end of World War II. The last time the United States was a consistent net importer of finished gasoline was in 1959. Net distillate imports oscillated between positive and negative territory during the early 1990s, but the United States hasn’t consistently imported diesel and other distillates since the 1950s. Figure 2. U.S. Net Imports of Finished Motor Gasoline (left) and Distillates (right) (1945–2011)   Where has the oil been going? Mexico and Brazil have become two major customers, among others (Figure 3). As of November 2011, net exports of petroleum products to Mexico had risen to nearly 600 kb/d, a record level, while the net flow to Brazil was a volatile 137 kb/d.       Figure 3. U.S. Net Imports of Refined Products from Mexico (left) and Brazil (right) (2004–2011)   An equally dramatic story has been playing out in the flow of products to and from OPEC member countries (Figure 4). Just 5 years ago, OPEC sent 1.0 mb/d (net) to the United States. That quantity has fallen markedly. Net imports from OPEC are still positive, but not by much—a paltry 230 kb/d on average since 2010. Figure 4. U.S. Net Imports of Refined Products from OPEC Members (2004–2011) U.S. exports of petroleum products are booming (Figure 5). After remaining stagnant between 750 kb/d and 1.0 mb/d between 1990 and 2005, exports began to explode higher. The trend is still in its early stages. I don’t think it’s one that will live and die based on how fast the U.S. economy recovers—Figure 5 clearly shows that exports were moving higher before the Great Recession began in 2007, though the slowdown in the U.S. appears to have catalyzed the boom. Figure 5. U.S. Exports of Finished Petroleum Products (1981–2011) So what’s behind the trend? I’d point to four forces. First, North American oil production gains have reduced the country’s reliance on imported oil—not just products, but crude as well—as more oil came from Canadian and U.S. sources. Second, economic growth in Central and South America that outpaces that of the United States is leading to quicker fuel consumption growth in these markets, which is pulling additional volumes south of the border. Third, geographic proximity and highly efficient refining capacity in the Gulf of Mexico means that growing oil streams, from Canadian heavy to U.S. unconventional, are being sent to the Gulf, from which refined products are then sent outward. Fourth, U.S. law mandating the use of ethanol as a gasoline additive has reduced domestic demand for conventional gasoline and boosted supply. I wouldn’t bet against the export boom in the coming decades, either. I don’t think it’s a flash-in-the-pan phenomenon. I agree with forecasts that see Canadian heavy crude production, at 1.1 mb/d in 2005, coming close to tripling by 2015, while U.S. shale oil production could swell to 3.0 or so mb/d by 2020. The Gulf Coast remains the obvious refining outlet for these liquids. Although the pace of fuel demand growth in the United States may come close to returning to pre-recession levels if the European crisis passes, it will likely increase even more rapidly in Brazil and elsewhere in Latin America. Economic growth in Latin American and the Caribbean should on average be significantly faster than in the United States in the coming years. The IMF sees the growth differential narrowing from 3.1 percentage points in 2009 to 1.7 in 2013, but that’s still a wide margin. The implications of the trend for the economy and policy? More on that later. But for now, a remarkable boom that highlights just how quickly things are changing on the American energy scene—to the benefit of the United States.  
    Blog Post by Blake Clayton February 10, 2012 Energy, Security, and Climate
  • Brazil
    Brazil and Russia's Engagement in Global Health
    Event with Judyth L. Twigg, Katherine Bliss and Yanzhong Huang January 10, 2012 Global Health Program
  • Climate Change
    What to Watch in 2012: A Leading Multilateral Role
    2012 will be a year to watch Latin America’s rising role on the multilateral stage.  The hints of Latin America’s growing stature were already there in 2011. In November, International Monetary Fund (IMF) head Christine Lagarde toured the region, meeting with Brazil, Mexico and Peru to ask for help (and extra funds) to stabilize Europe and the eurozone. But 2012 will be the real stage, as both Mexico and Brazil – the region’s largest economies – take the reins. The first stage will showcase Mexico’s role at the helm of the G20. Its year of leadership will culminate in the annual summit to be held in Los Cabos in June 2012. Given the eurozone crisis, fights over currency valuations, and volatile financial markets, the path will be choppy at best.  Mexico ambitiously wants the issues of the structure of international financial regimes, food security and financial inclusion all on the table, with the goal of transforming, at least somewhat, the role and mandate of this vital multilateral institution for the future. The second major event will be the 2012 Earth Summit to be held in Rio De Janeiro (just one day after the Group of Twenty meet). It commemorates the first groundbreaking 1992 Earth Summit (also in Rio), where the United Nations Framework Convention on Climate Change (UNFCCC) was adopted, and which still forms the basis of the global climate change regime today. But the Brazilians hope for more -- to push forward with international negotiations, perhaps even setting the agenda for the next twenty years. There are real doubts as to what can actually be achieved (particularly given what little happened in Durban, South Africa, which hosted the last UNFCCC negotiation late last November). But, whatever the odds stacked against it, Brazil will be at the fore, burnishing both its environmental credentials as well as its aspirations for global leadership. Neither climate change nor world financial stability are easy sells today. But both depend on multilateral actions. And whether progress is made in 2012 will very much depend on the leadership of Latin America.
    Blog Post by Shannon K. O'Neil January 6, 2012 Latin America’s Moment
  • Immigration and Migration
    What to Watch in 2012: The End of Latino Immigration?
    Central American immigrants await a train departure to the north of Mexico, on top of a freight train in Arriaga, Chiapas (Jorge Lopez/Courtesy Reuters). Looking ahead to the new year ahead of us, these next two weeks I want to look at important developments affecting Latin America that are worth keeping a close eye on in 2012. The first is the changing nature of immigration. The flow of immigrants from Latin America to the United States, a constant and often accelerating trend of the last three decades, slowed in 2011. The most prominent was the change from Mexico. New arrivals fell off a cliff, with apprehensions at the border hitting their lowest levels in seventeen years. The drop is so great that Doug Massey, head of the Mexican Migration Project (a long term survey of Mexican emigration at Princeton University), claims that for the first time in sixty years, Mexican migration to the United States has hit a net zero. Though Mexico is the single largest source of migrants to the United States, providing roughly a third of all newcomers, they weren’t the only change.  Anecdotal evidence at least suggests that many Brazilian migrants – which once numbered around one million – started heading home as well. Unemployment fell to all time lows, and numerous articles pointed out the labor scarcities both for high and low skilled workers. There are many reasons behind these trends, some general, some country specific. Many point to the Obama administration’s rather tough immigration policy as one reason for the decline. A record-breaking 400,000 immigrants were deported last year, and immigration prosecutions increased almost eighty percent along the U.S-Mexico border in the last four years. For Mexico, others speculate that the rise of organized crime and violence along the border may deter some from contemplating the journey (though studies, such as that done by Jezmin Fuentes et al., suggest this may be less of a deterrent than many claim). An important factor is the weak U.S. economy. With unemployment rates hovering at just over eight percent, there are fewer jobs for natives and migrants alike. This has occurred at a time when many of their home countries are growing steadily – at a decent 4 percent regional average clip, and much more in particular countries and economic strongholds. Better job opportunities in the region broadly -- but particularly in Brazil -- encouraged many to return home, and kept others from leaving at all. Looking ahead, a U.S. economic recovery would recreate the pull north for Latin Americans seeking to improve their lot. If the Chinese economy stumbles this too could slow returns, or push more migrants north (especially from Brazil, which counts China as its largest trading partner). Meanwhile, flows from Central America are likely to continue as long as economic opportunities there remain scarce. The real question is Mexico. There, demographics have already shifted, with fewer Mexicans coming of age and entering the work force each year. As a result, the Mexican immigration boom of the 1990s and early 2000s is unlikely to be repeated ever again.
    Blog Post by Shannon K. O'Neil January 3, 2012 Latin America’s Moment
  • Brazil
    2011 Trends in Latin America: Shifting Violence
    A stuffed bear hangs from a cross of a child's grave at the children section of the San Rafael cemetery in Ciudad Juarez (Courtesy Reuters). Latin America has the ignominious distinction of being one of most violent regions in world. Though not known for its wars or even (at least violent) border disputes, homicide rates average nearly 20 per 100,000 people. Central and South America are among the most murderous regions worldwide, behind only  Southern Africa. Six of the ten most violent nations in the world are in Latin America, with Honduras and El Salvador claiming the number one and two spots. The biggest headline-grabber this last year has been Mexico, which counted some 12,000 deaths in 2011 and over 40,000 drug related homicides since the start of President Calderón’s term (non-official estimates put these numbers even higher). Though Mexico is not the most violent in per capita terms, this escalation has deeply impacted the country. But the region’s security outlook is not all gloom and doom. Ciudad Juárez, still Mexico’s most violent city, saw its homicides drop by almost half since 2010, to just under 1,700 this year. Given the well-documented inertial effect of violence (i.e. violence tends to breed more violence, ratcheting up the effect over time), this is a doubly encouraging trend. Further south, the Brazilian government rolled out its “Favela Pacification Program” beyond the original pilot (launched in 2008), sending Police Pacification Units (UPPs) to 19 favelas in Rio de Janeiro. Since last year, the city’s homicide rate dropped 13 percent and armed confrontations with police were down by a quarter. Meanwhile, Guatemala enjoyed a relatively peaceful year, with a slight (2.5 percent) decline in murders, bringing its homicide rate under 40 for the first time since 2004.
    Blog Post by Shannon K. O'Neil December 30, 2011 Latin America’s Moment
  • Economics
    2011 Trends in Latin America: The Middle Class
    Customers look at laptops at a Wal-Mart store in Mexico City (Henry Romero/Courtesy Reuters). Another 2011 trend is the rise of the middle class. While in the United States article after article – as well as the country-wide “Occupy Wall Street” protests -- denounced the decline of the middle class, in Latin America the middle continued its gains.  Despite the tougher international climate, economic growth averaged over 4 percent, and unemployment rates fell to 6.8 percent (from 7.3 percent in 2010). Perhaps more important, GINI coefficients --  which measure inequality -- lowered slightly to just over 50 (from roughly 53 in 2000). This means that the growth that happened actually spread to the bottom and middle of the pyramid. There is an ongoing debate about how to measure the global middle class. Some of these issues I addressed in this past post. But whatever the starting point, the 2011 regional trend was positive. In Brazil, the middle topped 100 million, in Mexico it reached 67 million, and in Argentina more than 21 million. This doesn’t mean Latin American nations don’t continue to struggle with poverty. According to the latest World Bank data, just under 30 percent of the population -- 160 million people -- lives on less than $4 a day (in PPP terms), and 14 percent -- some 80 million -- live in abject poverty (on less than $2.50 a day). The growing middle though does show the path forward, and reinforces the goal for those concerned with the less fortunate, helping them too rise the economic ranks into a more comfortable middle.
    Blog Post by Shannon K. O'Neil December 29, 2011 Latin America’s Moment
  • Brazil
    2011 Trends in Latin America: The Region’s Presidents Battle Cancer
    Presidents Chavez of Venezuela, Fernandez of Argentina and Rousseff of Brazil chat while posing for a family photo during the CELAC summit in Caracas (Carlos Garcia Rawlins/Courtesy Reuters). As 2011 comes to an end, I want to reflect on just a few trends affecting the region over the course of the past year. While these developments certainly have long histories, they have all become more noticeable – and noteworthy – in 2011. To keep it interesting, I will be posting one trend a day for the rest of this week, so check back -- and let me know what you’d add to the list in the comments or via my twitter account (@latintelligence). This hasn’t been a good year health-wise for Latin American leaders. Cristina Kirchner’s recent diagnosis of thyroid cancer is just the latest. The most mysterious, and politically game-changing health challenge is that of Hugo Chávez. Officially, Cuban doctors removed a reportedly “aggressive” pelvic tumor in June, and since then he has undergone chemotherapy and steroid treatment. Though he claims to have conquered the disease, others (including his former doctor) say he may not live more than two years. Last year, Paraguayan President Fernando Lugo was diagnosed with non-Hodgkin’s lymphoma, and spent four months in chemotherapy and in and out of hospitals. According to the most recent tests, his cancer is in remission. In Brazil, President Dilma Rousseff  continues some treatment for lymphatic cancer (discovered during her 2010 presidential campaign) and former President and still political heavyweight Luiz Inácio Lula da Silva has just begun his final round of chemo for throat cancer (diagnosed in October). Pictures of the famously bearded leader now show him hairless, though still beaming. There were also rumors circulating that Evo Morales had a cancerous tumor in his nose, though this was never proven. This type of illness has idiosyncratic, but nevertheless real effects on politics. It can weaken a politician due to their physical absence from the public limelight as well as political backroom negotiations. Lula’s Worker’s Party (PT) will sorely miss his active leadership, especially in the run up to local elections in 2012. Kirchner is expected to make a quick recovery after surgery, though she will turn power over to her Vice President Amado Boudou (a close political confidant) for three weeks in January. It remains to be seen whether these absences will make a significant mark on either country’s internal politics. Javier Corrales, a political scientist at Amherst, has written about a different role for illness, and its potential to strengthen rather than diminish the political patient. Calling it “participatory cancer” he chronicles Chávez’s attempts to turn his illness from a disadvantage to an electoral strength. By brandishing cancer and his fight as an electoral gimmick, the Venezuelan leader distracts voters from more serious problems (such as a floundering economy and rising crime). While continuing to watch the political fallout, let’s hope the new year brings health to all.
    Blog Post by Shannon K. O'Neil December 28, 2011 Latin America’s Moment
  • China
    Emerging Economies, Private Companies, and Global Economic Power
    Source: UNCTAD World Investment Report 2011 In the wake of the 2008 economic crisis, economists, investors, and even politicians have pinned their hopes on the major emerging markets as the new engines of global growth. International Monetary Fund Managing Director Christine Lagarde’s recent visit to Latin America (she has also made the rounds in China, Russia, and Japan) demonstrates this increasingly prominent macroeconomic role. Perhaps a first, the multilateral head came to ask for funds, not lay down rules. But for emerging economies to truly drive global growth, the real engine will be the private sector. While less measured than central bank reserves or monetary flows, anecdotal evidence suggests that this too is happening – with foreign direct investment now flowing from emerging to more mature economies.  And it isn’t just China searching for bargains. A recent example of this worldwide trend includes Mexican-based Grupo Bimbo’s purchase of Sara Lee’s U.S. and European operations for close to $1 billion. The acquisition caps a two decade-long global expansion, buying up brands such as Entenmanns and Thomas’ and establishing plants in places as far flung as Fort Worth, Texas and Beijing, China. Begun by Spanish immigrants, Grupo Bimbo began with a family cake shop on the outskirts of Mexico City. In the post World War II economic boom the Servitje family expanded into breads, cookies, and candies, delivering their wares first in Mexico City, then throughout Mexico, and now throughout the world. Today Bimbo owns plants in 19 countries,  and is the largest baker in the United States. Other recent acquisitions – such as Lenovo’s purchase of German electronics supplier Medion and Tata Group’s buyout of Jaguar and Land Rover – show a similar shift. To be sure, U.S. and European capital still pour into emerging economies – even in the midst of the global recession. FDI from developed to emerging economies nearly doubled from 2007 to 2010. It is not just diplomats but also Wall Street and the City of London that are adapting to a multipolar world. Developing countries are investing abroad more than ever, eating into advanced economies share of overall FDI outflows (down from 84 percent in 2007 to 71 percent in 2010). Most of the investment outflows (almost two thirds) go to their emerging market peers. This, perhaps more than other factors, will lead to the touted “rise of the rest.”
    Blog Post by Shannon K. O'Neil December 13, 2011 Latin America’s Moment
  • Budget, Debt, and Deficits
    Quarterly Update: BRIC Financial Holdings
    Since our August update, the eurozone crisis and poor global growth have fueled investor flight to dollars, despite the recent downgrading of the U.S. credit rating. As fund managers have moved money into dollars, withdrawing from emerging markets, dollar appreciation has meant that BRIC central banks need to intervene less in currency markets in order to keep their exchange rates competitive. While BRIC governments continue to accumulate U.S. assets, the pace has slowed. Four points stand out: - Both the level and growth of China's reserves dwarf those of the other BRIC countries. Chinese reserve accumulation over the past twelve months exceeds Brazil's, Russia's, and India's stocks of reserves. - Reserve growth slowed during the crisis of 2008 for all of the BRICs. In the past few months, a similar slowdown has taken place. - Risky U.S. assets remain out of favor. During and after the financial crisis, the BRICs sought refuge in low-risk U.S. treasuries; they are sticking to this pattern now. - Reserve growth is a byproduct of currency intervention, but its implications vary across countries. In China's case, reserve growth helps maintain an undervalued currency and hence a large current account surplus, fueling the imbalances that destabilize the global economy (see the Geo-Graphics blog post "China's Imbalances Are Bigger than Reckoned"). In Brazil's case, reserve growth helps contain its current account deficit in the face of strong investment inflows that threaten an overvaluation of the Brazilian real; thus Brazil's reserve accumulation arguably serves to reduce imbalances. For a broader picture of foreign capital flows into the United States, please see our companion Chart Book here. There is much talk about the BRIC countries as a group, but when it comes to financing the United States, China stands apart. Chinese concern about the weakness of the U.S. dollar stems from the fact that the majority of the government's foreign assets are composed of dollar assets. However, the dollar share is falling. It stood at over 71 percent of the total in January 2005 but is only 60 percent now. China's foreign assets grew at a slower rate during the crisis, but growth was still rapid. The bulk of the U.S. assets purchased by China are treasuries, unlike before the crisis, when Chinese official purchasers bought agencies, equities, and corporate debt. Brazil continues to keep most of its reserves in U.S. treasuries. Its holdings of U.S. corporate debt and U.S. equities are so small as to be virtually invisible in the picture. Before the crisis, Brazil's reserves were almost exclusively in U.S. financial assets. In the last two months, Brazil stopped accumulating reserves as the dollar rapidly appreciated against the real. In the midst of the crisis, when reserve growth was flat, Brazil diversified its reserves away from the dollar by selling dollar assets. As reserve growth resumed, so did the accumulation of dollar assets. But recent reserve growth has been much stronger than dollar asset accumulation, despite an increase in Treasury buying. Russia's reserves fell sharply in 2008 and early 2009. By 2010, both total reserves and dollar holdings resumed their upward march. Reflecting its economic proximity to the eurozone, Russia began to diversify its reserves out of dollars in the mid-2000s; in 2007, the dollar share of reserves averaged 45 percent, down from 70 percent in 2005. Even as its reserves fell in the crisis, Russia began to purchase U.S. treasuries, raising the money by selling all of its agencies (see the pink and green areas of the chart above). These purchases of U.S. treasuries have now leveled off. Indeed, Russia's total holdings of treasuries have recently decreased (green bars, below), likely driven by a decrease in holdings of short-term U.S. government debt. Although Russia's total reserves have been increasing since late 2009 (red line, chart above), recent change has been driven mainly by currency valuation, not purchases of reserves. Because Russia holds approximately 55 percent of reserves in non-dollar assets, its reserves measured in dollars rise as the dollar falls. The yellow line in the chart shows that Russia did not add U.S. assets as much as its total reserves accumulated. India's reserves are held mostly as bank deposits. A large share is likely held at the Bank for International Settlements. As a result, the U.S. data do not provide much insight into the currency composition of India's assets. The white space in the chart below, showing the large gap between reported dollar assets and total reserves, reflects this lack of information rather than large Indian nondollar holdings. However, the small portion that is observable in the U.S. TIC data suggests an increased appetite for U.S. treasuries after the crisis, following the pattern in China, Russia, and elsewhere. Total central bank (not just BRIC) demand for agency bonds fell sharply in late 2009 while demand for treasuries rose. Looking at all central bank purchases (not just the BRICs'), the dollar dominance has diminished. Starting in about 2005, the dollar represented a lower share of fresh accumulation than in the past, although dollar purchases remained elevated. During the crisis, reserve accumulation plummeted while dollar purchases did not, reflecting the dollar's continuing role as a perceived safe haven. Note: Reserves data come from the IMF's COFER data series. The quarterly data have been adjusted to a monthly series. These data include all central bank purchases, not just those by the BRIC countries. *A note on methodology: These charts are derived from reserve data produced by the BRIC central banks, from capital flows data produced by the U.S. Treasury in its International Capital System series (TIC), from the International Monetary Fund's (IMF) Currency Composition of Official Foreign Exchange Reserves (COFER), and from Greenberg Center for Geoeconomic Studies estimates. China's reserves data have been adjusted to include China's hidden reserves, which include an amount listed on the balance sheet of the People's Bank of China under the heading "other foreign assets," and an estimate of foreign assets held at the China Investment Corporation (China's sovereign wealth fund). The U.S. TIC data have been adjusted to include purchases made through London and Hong Kong. These adjustments anticipate revisions that are likely to be made when the Treasury's annual survey is published; by looking at the pattern of past revisions, it is possible to estimate future ones. Unless otherwise noted, foreign asset growth or reserve growth has not been adjusted for valuation changes due to currency moves.
    Report by Neil Bouhan and Paul Swartz November 16, 2011 Greenberg Center for Geoeconomic Studies
  • Europe and Eurasia
    It’s Time to Euthanize Sovereign CDSs
    Imagine life insurance contracts that wouldn’t pay off if officials declared heart attacks to be “voluntary.” Welcome to the world of sovereign credit default swaps, or CDSs.  When the Greek debt deal was announced on October 27, the eurozone leadership insisted that the banks were taking a 50% write-down “voluntarily,” meaning that Greek CDS contracts would not be triggered.  This was done to protect official creditors like the ECB and IMF, to avoid rewarding speculators, and to prevent possible financial contagion.  In response, Greek CDS prices plunged 20 percentage points.  Policymakers didn’t seem to care, but they should.  Those who bought CDSs believing that they were prudently insuring their bond holdings now face unexpected losses.  Sovereign CDSs have lost so much credibility that the troubled investment bank Jefferies felt it necessary to state publicly that it was not using them.  This credibility loss has spread to other sovereign CDSs, as shown in the bottom part of the figure above: the correlation between PIIGS debt spreads and CDS prices has plunged, indicating that CDSs are no longer viewed as reliable sovereign credit risk insurance.  Using CDS prices as a measure of default risk is now like setting your watch to a defective clock.  Yet the market is unlikely to die owing to Basel III bank capital regulations, which still treat CDSs as meaningful offsets against certain types of sovereign credit exposures.  This gives banks a perverse incentive to hold them just to reduce their capital requirements.  Given the permanent political distortion that Europe has introduced into the sovereign CDS market, it would be best now if the market could simply be shuttered. Steil: ECB Limitations in Addressing Eurozone Crisis Conference Call: Can the Eurozone Be Rescued? Analysis Brief: Resolving the Eurozone Crisis Backgrounder: The Eurozone in Crisis
    Blog Post by Greenberg Center for Geoeconomic Studies November 14, 2011 Geo-Graphics
  • Climate Change
    Argentina’s Natural Gas Discoveries
    A view of the San Alberto gas plant (David Mercado/Courtesy Reuters). Last December, Argentina’s major oil and gas company YPF discovered some 4.5 trillion cubic feet of unconventional gas in the southwest province of Neuquén. The find has the potential to totally transform the country’s (and the region’s) energy future. It pushes Argentina’s shale gas reserves to 774 trillion cubic feet -- making it the third largest provider of natural gas in the world, after the United States and China. If exploited it would easily cover domestic demand for gas for the foreseeable future and end the recurring and unpopular gas crises that force factories to shut down at times during the winter months.  Argentina would become energy self-sufficient for the first time in nearly a decade. But there are challenges to get the gas out of the ground. First, Argentina’s shortage of water may stand in the way of accessing natural gas reserves. The process of drilling to extract shale gas uses up to 6 million gallons of water for every well drilled, and experts say it will take 38 billion gallons of water to capture natural gas trapped underneath the Vaca Muerta, or “Dead Cow” basin. Another challenge is the government’s oil and gas pricing regime, which has been a major disincentive to investment in recent years. Heavy regulations hold prices down to $2.00-$2.50 per cubic foot of regulated gas -- nowhere near the breakeven price needed to make development worthwhile. Argentina has set up a two-tier system under its “Gas Plus” program -- allowing gas produced by new investment to be sold at much higher prices – in some cases more than double the rate in the domestic market. This has brought in more than a billion dollars from the likes of Exxon, AES and Apache. But these differential prices show how transitory Argentine rules can be. To attract the huge amounts of capital needed to truly develop these gas finds in the coming years, the Argentine government will have to convince investors that the rules won’t change with the political winds. If this happens, it will transform regional gas markets. Bolivia will be the biggest loser. As the region’s current top energy provider, its economy today depends on fueling neighboring Argentina and Brazil. By developing its own gas reserves, Argentina takes away not just a vital customer but also potential foreign direct investment - leaving Bolivia’s economic development model in jeopardy. Another -- much more indirect -- loser is Mexico. The fact that investors are more interested in Argentina -- known for playing fast and loose with property rights and contracts -- than in Mexico, which is ranked Latin America’s most business friendly economy, shows how hamstrung Mexico’s energy sector remains. Without further changes to the system to open up outside funding for exploration and production projects, Mexico risks becoming a spectator on the energy sidelines, with huge ramifications for its overall economy as a result.
    Blog Post by Shannon K. O'Neil October 18, 2011 Latin America’s Moment