My dissertation, entitled ‘Why has Indonesia supported and Brazil Opposed Market Funding Mechanisms for REDD?’, can be found via the link below:

MYoukee Dissertation 2009

I also undertook a joint research project on the role of international regimes and private governance mechanisms in forestry:

Multi-level Forest Governance

‘Mercosur is an ineffective regional association with little capacity to contribute to regional and global integration, and limited capacity to promote other goals.’ Discuss

The knives are out for Mercosur as the regional agreement approaches its twentieth birthday. After an initial boom in intra-regional trade in the 1990s, the rate of growth in this area has tailed off and trade disputes between members remain common. The entry of Venezuela into the bloc has led to accusations that it has become a political ‘talking shop’ and there are many who believe that Brazil has ‘outgrown’ the group. Michael Reid has suggested that Mercosur risks ‘drifting into irrelevance’ (Mecham, 2003:386). But has the bloc been as unsuccessful as our title suggests? For the purpose of clarity we will take Cammack’s rather generalised statement to have three prongs. Firstly that Mercosur was ineffective in promoting intra-regional trade; secondly that it failed to provide economic benefits for members with regards to trade with external markets and lastly that it did not meet the economic and political goals of its founders. This clarification leads to another important question, however, concerning the real, as opposed to stated, ‘other goals’ of Mercosur. Whether the Treaty of Asuncion was the result of Brazilian efforts to exert economic and political dominance in the hemisphere is a matter of debate. So too the extent to which the stated goal of ‘economic development with social justice’ was a genuine aim or mere sugar-coated rhetoric. This essay will take a realist approach to the subject, focusing on Brazilian strategy towards Latin American integration. It will argue that Mercosur proved very successful in achieving Brazil’s short term political and economic goals and that the bloc still exists with the permission of Brazil and as a convenient vehicle to its political ends.

Is it realistic to view Mercosur as a uniquely Brazilian project and, if so, why would other countries join? Brazil dwarfs all other members in terms of market size, GDP and investment and the attraction of Brazil to other members’ markets is greater than vice versa (Phillips, 2003:226). In a ‘domino effect’ however, the smaller nations (which do a greater proportion of intra-regional trade) simply cannot to be cut out of a deal. Brazil’s insistence that Mercosur be an inter-governmental organisation rather than a supra-national one has assured that it can use its political and diplomatic weight to make unilateral decisions, although it often does so with prior consultation with members (Cason, 2000:38). So what were Brazil’s motivations for signing the Treaty of Asuncion in 1991? I propose that the principle goals, in order of priority were as follows: a) The consolidation of good relations with Argentina and democracy at home; b) the desire to counter US influence in the region and c) the creation of an integrated market more conducive to future export orientated industry and investment attraction. That is not to deny that Brazil may have had a policy preference for development and social justice, but these goals were a distant second to political and macroeconomic goals.

The Brazilian-Argentine rapprochement and the consolidation of democratic regimes in each country are sufficiently interrelated to be taken as a single motive. With both countries emerging from long periods of military dictatorship in the mid 1980s the new democratic governments of Brazil and Argentina saw an improvement of bilateral relations as a way to both minimise the chance of conflict and keep the generals out of politics by ‘locking-in’ democratic reform in the region. If Mercosur was at heart a political project, as Mecham suggests (Mecham, 2003:370), has its legacy been a successful one? Firstly, the return of military dictatorship, considered a real threat in the late 1980s, did not occur. Democracies in both countries have remained strong and, furthermore, Mercosur used the threat of exclusion to bring about significant democratic reform in Paraguay, contributing to greater regional stability. Secondly, as anyone who has attended a Brazil versus Argentina football match will attest, while there remains a health rivalry between Brazil and Argentina, bilateral relations between the two countries have gone from strength to strength. Geopolitical stability on the Argentine border has allowed Brazil to redeploy its military forces to the Amazon region where they can be more effectively used to tackle cross-border terrorist activities and narcotics trafficking. There has been further success in the field of nuclear policy cooperation (Pion-Berlin, 2000:43). There were hiccups, it is true, when the devaluation of the Real in 1998 and later the Argentine peso crash caused significant currency related trade disputes but it would be unfair to lay the blame for either event at the feet of Mercosur. Instead Mercosur and other regional agreements such as the Andean Community have played an important part in the creation in March 2009 of the South American Defence Council (SADC). The SADC is an initiative of President Lula who resisted Chavez’s calls for a ‘Latin American NATO’ to ensure that it the body is limited to a consultative mandate. It demonstrates both the renewed regional military cooperation and the increasing importance of Brazilian leadership.

Brazil’s push to take a greater leadership role in the region has been long expected but only recently undertaken. Rivalry between Brazil and US for dominance in the region can be seen as a wider geopolitical factor in the creation of Mercosur. The fall of the Berlin Wall in 1989 and the end of the cold war roughly coincided with the end of Marxist guerrilla conflict and military repression in Latin America. From the bipolar world of communism and capitalism emerged a multi-polar world. As a result regional disputes, such as the Brazilian-Argentine rivalry, moved up the agenda and the role of the US as both an enforcer of hemispheric security and a global economic hegemon began to subside. As the US became disenchanted with free-riders in the world international financial institutions and began a number of bilateral and regional initiatives (such as NAFTA) it unleashed ‘centrifugal forces’ that gave impetus to the creation of other regional agreements such as Mercosur (Walter, 1994:93).  While both Menem and Collor both focused on improving political and economic ties with the US (Hurrell, 1994:263), the creation of Mercosur can also be seen as an attempt to create a powerful economic and political block that could form a counter-balance to US hegemony in the region and resist the push for a Free Trade Agreement of the Americas (FTAA) which many members believed would be unfavourable to their interests. Indeed, one of the criticisms of Mercosur, that it has become a platform for political posturing, is evidence of its success in this regard. Venezuela’s withdrawal from the Andean Community and entry into Mercosur, in spite of the much closer trade ties it has with Colombia, is testament to the fact that Chavez’s sees the block as an effective instrument from which to attack US policy in the region. There is little doubt that US influence in the region, especially after the Bush administration’s focus on the Middle East, is at a new low. In March 2009 a well regarded think tank, Inter-American Dialogue (IAD) called for a new, more cooperative US policy in Latin America saying that the superpower would not be able to recover its traditional role in the region (IPS news 13.03.09). If we take Brazilian engagement with regional integration as being motivated by ‘the construction of subregional leadership as a means of mediating the hegemony of the USA’ (Phillips, 2003:221) it is hard to argue that it has been ‘ineffective’.

So far we have addressed the ‘other goals’ (or perhaps, put better, ‘hidden goals’) of Cammack’s statement. More questionable is the extent to which Mercosur achieved its economic goals. Most obviously the agreement has faced obstacles in lowering tariffs and agreeing on a customs union. Although attempts to reduce barriers began in 1991, numerous loopholes and exceptions prevented a steady and organised reduction.  As of 2005 there were an estimated 800 exceptions to the common external tariff (CET) (Hulse, 2005). In addition the impact of the 2007-09 financial crisis has exposed protectionist tendencies within member countries. As Brazilian exports to Argentina fell 45% year on year in the first two months of 2009, Argentina imposed import restrictions on 800 products, leading Brazilian representative to talk of taking the case to the WTO (Latin news 12.3.09). This is just the latest case in a long stream of internal trade disagreements in Mercosur, Paraguay in particular has been critical of restrictions on its exports. These high-profile instances of disagreement disguise the broader trend, however. It is estimated that 85% of trade goods can pass between countries without tariffs (Hulse, 2005). Equally intra-regional and extra-regional trade has grown significantly under Mercosur, the former growing from $4.1bn in 1990 to $12.2 in 2003 and the later from $42bn to $93.3bn. The growth in intra-regional trade should again be considered a positive legacy of Mercosur, even if trade disputes have not been eliminated.

The growth in trade with third parties is also an indicator of wider economic achievements. The boom in commodity prices that took place in the early 2000s can only have played a part in this trend during the later years. After the ‘lost decade’ of the 1980s and the failure of ISI systems of economic development, the ‘new-regionalism’ of the 1990s was an attempt to locate Latin America ‘within’ rather than outside the world economy. In this respect it was truly a new departure for the region (Devlin & Estevadeoral, 2001:18). Mercosur provided a neat ‘stepping stone’ to the wider pull of globalisation, giving firms and industries access to larger markets and international competition in a controlled environment (Phillips 2003:227). It also allowed member nations to promote themselves as members of the world’s fourth biggest common market to attract foreign direct investment (FDI). Between 1980 and 1991 FDI in Mercosur nations was an annual average of just $2.2bn. Between 1996 and 2000 that annual figure was $35.4bn. Clearly other factors, most notably the era of neoliberal reforms in the region, played a key part in this growth of trade and investment. Consequently, Mercosur’s precise role in such growth is hard to establish but it can hardly be sustained that it harmed this process in any way. Indeed, Nicola Phillips argues that Mercosur and other regional agreements have a key role to play in the future integration of the region into the globalised economy. Drawing a distinction between traditional regionalism and an increasingly important trend of ‘regionalisation’ she argues that the growing trend for multinational business to establish regional operations on a ‘hub-and-spoke’ model is assisted and promoted by the cooperation encouraged by Mercosur and the institutions it has built (Phillips 2003).

This subjugation to the market and attraction of international business leads to the same question posed of neoliberal reforms: At what cost was it achieved? Jacob Viner has distinguished between regional agreements that are trade-creating and those that result in trade diversion. There can be little doubt that Mercosur is in the latter camp. By giving preference to regional producers who would be undercut by global competition, it is ultimately the consumers that lose out. Additionally the national treasuries lose out on potential tariff incomes from regional members. There has been little done to encourage the ‘economic development with social justice’ contained within the text of the Treaty of Asuncion. Perhaps this can be viewed as a true failing of Mercosur – Brazil and Paraguay remain vastly unequal societies – but it could also be argued that judgements of success or failure depend on these goals being genuine rather than merely rhetorical. And even if Mercosur did nothing to tackle poverty and inequality, the economic benefits that the country have derived from regional integration, trade and investment could equally be seen as success of sorts. In the end analysis, virtually none of the ‘new regionalist’ blocs to emerge across the globe in the 1990s were truly ‘trade creating’.  The EU is the one exception and to judge Mercosur in comparison to European integration would be to neglect the vastly different circumstances separating the two blocs.

In conclusion, it is reasonable to suggest that Mercosur played an important role in the three central aims of Brazilian policy of the 1990s: to ensure peace with Argentina and the preservation of democracy, to promote Brazilian leadership in the region and to help reshape the Southern Cone economies into one more open to the globalising economy. It may still ‘drift into irrelevance’. Recent negotiations between the EU and Brazil, representing Mercosur, have suggested that Europe prefers an FTA with Brazil rather than the bloc on whole. Brazilian business associations are pushing for the country to renege on an agreement that a deal will only be negotiated on behalf of the bloc and Luiz Furlan, Lula’s former Minister of Development, has said that “Mercosur’s time is up, long overdue” (Estado Sao Paulo). The future of the bloc is far from certain then, but even if it does become an irrelevance, Mercosur will have served the goals of its Brazilian master through a crucial era in its post-dictatorship history.

BIBLIOGRAPHY

Cason, J (2000): ‘On the road to Southern Cone economic integration’ Journal of Interamerican Studies and World Affairs 42.

Devlin & Estevadeoral, (2001): ‘What’s new in the new regionalism in the Americas?’ in Regional Integration in Latin America and the Caribbean

Hulse, J (2005) ‘Mercosur Demystified’ in Global Vision  http://www.globalenvision.org/library/15/807

Hurrell, A (1994) ‘Regionalism in the Americas’ in Regionalism in World Politics Hurrel & Fawcett (eds) Oxford University Press

Mecham, M (2003): ‘Mercosur: A failing development project?’ International Affairs 79

Phillips, N (2003): ‘The rise and fall of open regionalism? Comparative reflections on regional governance in the Southern Cone of Latin America’ Third World Quarterly 24

Pion-Berlin, D (2000): ‘Will Soldiers Follow? Economic Integration and Regional Security in the Southern Cone’ in Journal of Interamerican Studies and World Affairs 42.

Walter, A (1994): ‘Regionalism and World Economic Order’ in Regionalism in World Politics Hurrel & Fawcett (eds) Oxford University Press

Internet Resources:

http://www.ipsnews.net/news.asp?idnews=46058

http://www.cebri.org.br/pdf/112_pdf.pdf

www.latinnews.com

The case of Brazil provides a curious and useful counterpoint to the study of Latin American relations with the International Monetary Fund (IMF). While the IMF has no legal power to impose policy on sovereign states, the nature of the tough conditions applied to IMF loans at times when other sources of credit have dried up has often been likened to that of a vendor selling exorbitantly priced water to a thirsting man in the desert (Panizza, 2008). The varying roles played by ‘hard’ diplomatic power and ‘soft’ economic power in the adoption of IMF-backed neoliberal reform in the 1980s and 1990s is the source of much scholarly debate. Direct diplomatic pressure from Washington, has been seen by some as the motive for turning presidents with heterodox economic policies, such as Fujimori and Menem, towards the free-market. In the Dominican Republic, IMF reforms were pushed despite widespread and violent popular opposition. Since the country’s return to democracy, however, Brazil has been given remarkable leeway by the IMF to experiment with its own economic programmes, yet has still received Fund support in times of crisis. Even during such periods, Brazilian representatives have seemingly far greater leverage when negotiating with the Fund than those of other nations. This essay will attempt to analyse the role of the Brazilian economy, domestic political institutions and the international financial situation in explaining this leverage. The most salient lesson is that, when it comes to negotiating with the IMF, size matters.

In March 2005, President Lula da Silva announced that Brazil would not renew its lending accord with the IMF and by the end of the year the country had repaid its outstanding debts to the fund, two years ahead of schedule (BBC 14.12.05). Thus ended a six-year IMF programme that had begun during the emerging market crises of 1998 and increased in size in the wake of the Argentine Peso crisis of 2001-2002. This crisis, which had led to the freezing of Argentine bank accounts and the default of $95bn in foreign debt, had been triggered by the IMF’s public announcement that it had ‘lost confidence’ in the government of Fernando de la Rua. By failing to meet the fiscal requirements of the IMF’s loan programme, Argentina was left to pay a heavy price. The contrast with Brazil is stark. An oft-quoted study by Morley, Machado and Pettinato ranks Brazilian general and structural reform  in the period up to 1995 as well behind that of Chile, Argentina and other Latin American nations (Morley, Machado & Pettinato, 1999). Yet, throughout the 1980s and 1990s, Brazil has been able to count on IMF funds in times of need whilst simultaneously showing uncommon policy ownership.

In his study of IMF loan packages to emerging markets in the 1980s and 1990s, Strom Thacker demonstrates how the Fund, despite formally prohibiting the inclusion of political considerations in its decision making practice, shows a strong tendency to reward US allies and punish its enemies (Thacker, 1999). In essence, his findings confirm John Maynard Keynes’ fears that the US would exert excessive influence on the policy choices of the post Bretton-Woods international financial institutions. However, political relations between Washington and Brasilia were a relatively insignificant factor in the leeway shown to Brazil by the IMF. Indeed, although relations between the two countries have been for the most part cordial, Brazil has often been considered the US’ main rival for political leadership in the region (Arceneaux & Pion-Berlin, 2005). The sheer size of the Brazilian economy gave the country strong negotiating power. In their comparative study of IMF relations with Chile, Brazil and Argentina, Arceneaux and Pion-Berlin highlight the importance of a critical mass of foreign business interests in Brazil as the central explanation of this trend (Arceneaux & Pion-Berlin, 2005). Accounting for 38 per cent of the GDP in mainland Latin America and 36 per cent of income paid to the rest of the world from the region (Arceneaux & Pion-Berlin, 2005:62), Brazil, in a sense, was ‘too big to fail’. The IMF was prepared to prop up the country with frequently loose conditionality restrictions, both to protect the interests of foreign investors and to prevent the knock on effects that a Brazilian crash would have had on the rest of the world.

It should be noted that this was not always the case. In the first of the IMF loans to Brazil covered in our period of study, a $4.9bn loan package during the Latin American debt crisis of the early 1980s, the Fund successfully implemented a programme of strict austerity measures on the country. The crucial factor, however, was that it was achieved in the last years of Brazilian military government. Studies by Skidmore and Kaufman have highlighted the effect of authoritarian regimes on the successful implementation of stabilisation programmes in Latin America. In essence, only those countries without competitive democracies – such as Brazil, Argentina and Mexico – were capable of introducing the fiscal discipline necessary to halt inflation (Remmer, 1986:5). In competitive democracies the electorate are normally far less likely to vote for candidates proposing the tough social spending cutbacks inherent to IMF conditionality. When Brazil became a democracy in 1985, therefore, the political motivation for driving a tough bargain with the IMF increased amongst ruling parties.

Even from the earliest days following the return to democracy, Brazilian governments showed a willingness to experiment with ‘heterodox’ economic policies, involving various price-freezing mechanisms, against the advice and support of the IMF. The Cruzado Plan, Bresser Plan and Summer Plan all put a temporary freeze on inflation and postponed the need to introduce social spending cuts. The latter plan in particular, introduced in the election year of 1989, has been viewed by many as a particularly populist measure. Following his unexpected rise to the presidency, Jose Sarney, in search of a political base, succumbed to pressure from trade unions to make a ‘heroic gesture’ against international financiers (Lehman, 1993:146). The introduction of the Brazilian constitution of 1988 transferred further fiscal power away from the Federal government and towards state governments. It is telling that the catalyst for capital flight in the 1998 crisis was the announcement by Minas Gerais governor Itmar Franco that his state would forego paying its debt obligations in order to boost spending on the poor and unemployed (Eichengreen, 2008:202). Brazil’s decentralised and exceedingly pluralistic form of democracy can be seen as a contributing factor to popular resistance to IMF austerity measures and, by extension, the hostility of Brazilian governments to bend to the Fund’s designs. However, its ability to resist the imposition of the Fund’s will rested in economic factors.

The first demonstration of democratic Brazil’s ability to sideline the Fund came after the failure of the Cruzado Plan led to a moratorium on interest payments on Brazilian debt obligations. Stating from the outset that Brazil would refuse to enter negotiations with the IMF, President Sarney successfully renegotiated the country’s debt repayments with the Paris Club of investors. As part of the deal, Brazil only agreed to consult with the IMF on policy issues rather than subscribing to an austerity programme (Lehman, 1993:149). Through hard bargaining, Brazil convinced the banks that the best method by which it could resume interest payments was through sidelining the IMF. Lehman, writing in 1993, believed that Brazil had set a precedent that would allow other Latin American countries to adjust their bargaining positions and gain greater concessions in the future (Lehman, 1993:155). The experiences of Venezuela, Dominican Republic and Argentina, however, suggest that this has not happened. Governments in Latin America are still pushed into strict austerity programmes against their will and the violent protests of their populace. It is the market allure of Brazil and the greater foreign financial interests in the country that allows it to drive hard bargains with the IMF.

In his account of the emerging market financial crises of the 1990s, The Washington Post journalist Paul Blustein uncovers another important element of Brazilian leverage: self-doubt and dissention within the IMF itself. When the wave of contagion emanating from the devaluation of the Thai Baht in 1997 crossed the pacific, Brazil, with a $65bn budget deficit and an overvalued currency, was viewed by many from both within and outside the IMF as ‘the last line of defence’ against possible global meltdown (Blustein, 2001:338). Again this critical status was related to Brazil’s economic size. The principle fear was that if Brazil collapsed, it would force Argentina, which exported a third of its goods to Brazil, to abandon its currency board system and in turn promote speculation on Hong Kong’s currency board (Blustein 2001:338). The IMF were keen to prevent this worst-case scenario from transpiring by offering financial aid to Brazil, but their eagerness strengthened  Brazil’s bargaining position and created a rift in the IMF. The $41.5bn loan package extended on 13 November 1998 did not oblige the Brazilian government to devalue the Real and provided no provisions to ‘bail in’ Brazilian banks, two conditions that European policy makers had proposed (Blustein 2001:347). Eisuke Sakakibara, the Japanese vice minister of finance, who had witnessed the IMF’s hard-line stance during the East Asian crisis, decried the apparent double standard that allowed Brazil to receive funding without major concessions.

In part, the reasons behind this double standard can be attributed to the timing of the loan. The IMF deals to East Asia had been rushed through, often in a matter of days, as the crises were already in motion. By comparison the Brazilian deal was a preventative measure and the economy, as Finance Minister Pedro Malan repeatedly pointed out, was in far better condition than that of Russia, the first victim of contagion outside of Southeast Asia.  With a potential crisis on the horizon but not imminent, Brazil could afford to take a tough negotiating line. Throughout the negotiations, Malan commanded a considerable level of respect from IMF negotiators. An ex-World Bank executive director himself, Malan had not embraced the Washington Consensus in the same way other Latin American technocrats had. The success of his Plano Real in reigning in inflation – introduced against the advice of the IMF [=1] – encouraged Fund representatives to give him the benefit of the doubt in negotiations (Blustein, 2001:345). While other Latin American finance ministers were populated by likeminded, western educated neoliberals (Chile’s ‘Chicago boys’ are the salient example but there are many more), in Brazil there was more ideological resistance to neoliberalism.

A cursory glance at modern day Brazil is enough to notice how far the economy has come since the days of ISI and military dictatorship. Throughout the 1980s, 1990s and 2000s the country has maintained a steady course towards the opening and liberalisation of the market. Today the country works hard to maintain its fiscal surpluses and has even earned the reputation as a steady, cautious emerging market. In March 2008, The Economist published an article containing a cartoon in which Brazil, depicted as a cowering tortoise, was being overtaken by a sweating hare wearing an Argentine football kit. While Argentina fudges its official inflation rates to prolong growth, Brazil is ‘plodding along’ with inflation targeting measures (The Economist 19/03/08). The contrast from the 1980s – when Brazil was a thorn in the side of the IMF and Argentina was the poster child of neoliberal reform – is startling but understandable. Whatever its role in the Argentine crisis of 2001-02, the IMF has become the scapegoat for the disaster by virtue of its perceived influence in government policy. In Brazil, the adoption of neoliberalism was achieved with far greater independence from IMF control. A competitive democracy provided the political motivation for governments to drive a hard bargain with the IMF. The eagerness of international lenders to enter the Brazilian market and the subsequent strategic importance of the Brazilian market gave the government the trump card it needed to make that possible.

BIBLIOGRAPHY

Arcenaux, Craig and Pion-Berlin, David (2005) (eds) Transforming Latin America. The International and Domestic Origins of Change, Pittsburgh: PUP.

Blustein, P, (2003) The Chastening: Inside the Crisis that Rocked the Global Financial System and Humbled the IMF, Public Affairs Press

Eichengreen, B. Globalizing Capital (2008).

Kahler, Miles (1992) ‘External Influence, Conditionality, and the Politics of Adjustment’ in Haggard, S. and Kaufman, R. (eds) The Politics of Economic Adjustment, Prindeton NJ: Princeton UP.

Lehman, H (1993) ‘Strategic Bargaining in Brazil’s Debt Negotiations’ Political Science Quarterly, Vol. 108, No. 1 (Spring, 1993), pp. 133-155

Panizza, Francisco ‘The Organic Intellectuals of the Washington Consensus. The Power of Financial International Institutions’ (Manuscript).

Pastor, Manuel (1989) ‘Latin America, the Debt Crisis and the International Monetary Fund’, Latin American Perspectives, vol. 16, no. 1 (Winter), pp. 79-110.

Morley, S, Machado, R, Pettinato, P (1999) ‘Indices of Structural Reform in Latin America’. Economic Commission on Latin America

Remmer, Karen (1986) ‘The Politics of Economic Stabilization: IMF Standby Programs in Latin America 1954-84′, Comparative Politics, vol. 19, no. 1 (October), pp.1-23.

Thacker, Strom C. (1999) ‘The High Politics of IMF Lending’, World Politics, vol. 52, no. 1, pp. 38-75.

http://news.bbc.co.uk/1/hi/business/4527438.stm

“Give me a balcony,” declared Jose Maria Velasco Ibarra, “and I will become President.” Five times in the twentieth century the Ecuadorian politician – a famously skilled orator – made good on this promise, consistently winning the support of the country’s poorest voters. Although a term that should apply equally from one continent to another, ‘populism’ has shown a particular affinity for Latin American politics. Over the last hundred years voters in the region have shown a strong predisposition to elect political outsiders blessed with the charismatic leadership identified by Max Weber as one of the ‘tripartite forms of authority’. Indeed, the phenomenon has been so widespread that the list of countries where populism has been ‘not at all successful’ is a short one. This essay will argue that the existence of three key preconditions – deep socio-economic change, the existence of a mass of unaffiliated voters and an identifiable domestic enemy – provide the base from which such charismatic leaders can flourish. That populism has proved itself to be more than a historical anomaly linked to import substitution industrialisation (ISI) is testament to its adaptive nature. While the preconditions remain the same, they have taken new forms over time. This essay will demonstrate how present day populism has come to focus increasingly on an indigenous support base with neoliberal economics, international business and the existing political elites identified as its primary targets.

Populism is a notoriously nebulous term in political science and the host of competing definitions often focus on either the structure of populist regimes or the discourse that they expound (Cammack, 2000:151). This essay will take a deliberately loose definition of populism in order to reflect the malleability and adaptive nature of the term. Populism is defined as the rule of a charismatic ‘outsider’ figure, bypassing political institutions and directly appealing to the masses against a perceived ‘other’. Economic definitions focussing on the unsustainable reallocation of resources will be taken into consideration as a particular attribute of populism, but not its defining characteristic. In addition, this essay will define ‘success’ as victory at the ballot box rather than the real or perceived success of policies implemented under populist governments.

For the sake of simplicity three major waves of populism are identified in this essay. The first, which has its historical setting in the 1940s and 1950s is referred to as ‘classical populism’ and includes the governments of Peron, Vargas and Cardenas. The second wave is termed ‘neopopulism’ and refers to those leaders such as Menem, Fujimori and Collor who introduced neoliberal reforms in the early 1990s. The third group, which I have termed ‘third wave populists’ all rose to prominence in the early 21^st century and include Chavez, Morales and Correa. As previously stated, the list of Latin American countries where populism has been ‘not at all successful’ is a very short one, even more so since the election of Hugo Chavez in 1999. Chile, Uruguay and Costa Rica fall into this category, but every other major Latin American country has elected at some time a leader conforming to the definition above. It is pertinent to look at why nations have moved towards, or away from populist systems at various stages of their history and to contrast and compare the three identified waves of populism. For this reason, rather than focussing on a select number of ‘case studies’ of populist and populist-resistant states, this essay will take a broader thematic approach. In addition to outlining the root causes of the phenomenon, it will pay particular attention to those factors which have led to the rise of ‘third wave’ populism in contemporary Latin America.

It was telling that the first wave of populism occurred in tandem with the emergence of cinema and radio, a medium by which leaders could communicate directly with the people. Eva Peron had been an actress on radio soaps and Getúlio Vargas made regular radio broadcasts in a style not dissimilar to that of F.D. Roosevelt (Reid 2008). In March 2008, in response to Colombian air strikes in Ecuador, Chavez used his television show ‘Alo Presidente’ to apparently instruct the Defence Minister to move ten troop battalions to the Colombian border. Television provides the perfect platform to make such grand gestures and increase the sense of participatory democracy. The relatively early penetration of such media and technology may be seen as one key factor why Mexico, Argentina and Brazil were the first countries to adopt classical populism. Today, however, almost all Latin Americans have access to television and radio and while the emergence of an inspirational leader at a prescient time is important, it can hardly be argued that the presence or absence of such leaders accounts for the success of populism in different countries. If they are to be elected, certain key preconditions must be in place.

In essence, populism as a phenomenon is most common when existing political institutions prove unable to cope with the onset of deep socio-economic structural changes (Cammack, 2000:155) (Roberts, 1995:82). The first of these changes took place in the wake of the Great Depression and led to the adoption of ISI by several major Latin American nations under populist leaders. For those commentators who saw populism as a historical anomaly particular to this stage of development the resurgence of ‘neo-populist’ regimes in the late 1980s and early 1990s proved a sharp surprise. The economic push for this wave was the rejection of ISI and the hyperinflation it had brought and the subsequent implementation of tough neoliberal economic policy. During this period the popularity of charismatic leaders such as Fujimori and Menem increased during hard times (Weyland, 1999:174). In a sense, such trusted figures were the only ones who could muster the necessary public backing for tough reforms. Since the turn of the millennium a ‘third-wave’ of populist leaders have risen to power. Although the shift in economic paradigm is not as apparent as in the previous two cases, the rejection of the Washington Consensus, perceived US economic imperialism and a deep suspicion of free market economics as the best route for national development could well be considered the basis of such a shift.

One of the most obvious similarities between ‘third wave’ neopopulist regimes is that they have occurred in those countries with the greatest hydrocarbon reserves, namely Venezuela, Bolivia and Ecuador. The liberalisation of the economy and the continued presence of multinational corporations (MNCs), especially foreign oil and gas companies, have become a target for populist leaders to rally support. This is in stark contrast to the previous consensus that oil reserves had a stabilising effect on democracy. Before Chavez’s rise to power, the ‘exceptionalism thesis’ supposed that abundant oil revenues were central to the success of the puntofijo system, the showcase example of Latin American democracy (Parker, 2005:38). In the 1970’s Perez’s primary task was seen as one of ‘administering abundance’ (Reid 2008).As the Washington Consensus fell from grace in the late 1990s, however, the sovereign rights of nations over their natural resources has become a rallying cry for populists. Venezuela, Bolivia and Ecuador have all successfully renegotiated contracts with MNCs to give a greater share of profits to the state and Correa has spoken out against the exploitation of the labour force by MNCs (Reuters, 1/5/07). In Mexico there was significant opposition to a second term of neoliberal reform in the build up to the 2006 elections with 75% of voters opposed to further privatisations (Bejar, 2006:22), Ultimately populist Andres Lopez Obrador narrowly failed to win the presidency with opposition to the proposed privatisation of PeMex, the state-run oil firm, as one of his main policy goals. Ownership of other natural sources of energy is increasingly disputed on the continent. In April 2008 former Catholic Bishop Fernando Lugo, a political outsider, was elected President of Paraguay due in part to his promise to renegotiate the Itaipu energy treaty with Brazil (USA Today 17/9/08).

With oil prices surpassing the $100 mark in the early twenty first century, the redistribution of natural resource windfalls became a popular policy. Once in power, hydrocarbon bonanzas allow populist leaders to introduce the public spending plans promised to the masses, often at the expense of long-term fiscal discipline. Between 1998 and 2001 Chavez increased Venezuelan social spending from 8.4% of GDP to 11.3% of GDP (Parker, 2005:47). By way of contrast, Chile undertook its greatest economic dislocation, the neoliberal reforms of the ‘Chicago boys’, during a time of military dictatorship when political repression prevented the emergence of an opposition populist. Tellingly, the state copper company, CODELCO, escaped privatisation and has proved a valuable source of income to the state. Thus, disproportionate ownership of national resources by foreign companies is central to the growing opposition to free market economics that forms the background to the current populist upswing.

A second precondition for successful populist movements is a large, unaffiliated electorate who feel unrepresented by the existing political environment. Urbanisation has played a major role in this process, from classical populism to the present day. The rapid international migration to cities such as Buenos Aires, Sao Paulo and Mexico City on the back of industrialisation beginning in the 1930s was the basis of support for classical populists. Peron, Vargas and Cárdenas proved capable of exploiting the dislocations caused by rapid migration and building nationalist, corporatist regimes allying the state to the trade unions, political parties and industrialist class. By implementing an economic policy of ISI these leaders were able to offer hitherto unprecedented worker rights, including pensions, paid holidays and health provisions. Unsurprisingly, such concessions proved wildly popular with the growing politically aware proletariat and seemed to satisfy – at the expense of economic frugality – what Carlos Castaneda terms ‘the unfulfilled Latin American dream of painless modernity’ (Reid 2008).

In the 1990s neopopulists identified a new supporter base in the city. The modernisation of agriculture and the development of transport infrastructure under the military dictatorships had led to increased rural-to-urban migration and the growth of shanty towns and informal workers. In Brazil and Peru the vote was also extended to illiterates during this period, providing the marginalised electorate that Collor and Fujimori could garner (Weyland, 1999:178). Neoliberal economist such as Hernando de Soto argued strongly that the legalisation of shanty towns and the informal sector, primarily through property rights and simplified bureaucracy could engage these members into society and give a boost to the economy. Even in the toughest years of neoliberal shock therapy, Fujimori, Collor and Menem scored popular support figures in excess of 60% (although Collor’s support dropped rapidly in subsequent years) (Weyland, 1999:187).

In promising a government of chinito’ and cholitas against the blanquitos during his 1990 election campaign, Fujimori was also tapping into a source of popular support that would grow more powerful with time: indigenous identity politics. Evo Morales, the champion of Bolivian cocaleros became the salient example of this trend when he became the first indigenous president of Bolivia in 2005. In 2006 Ollanta Humala, who led an armed insurgency against Fujimori in 2000, won 47% of the vote in a presidential run-off against Alan Garcia. While Humala has tried to distance himself from the Movimiento Etnocacerista founded by his father, indigenous politics play an important part in his political ideology. Both he and Morales are close political allies of Hugo Chavez, another who, although mixed race, chooses to emphasise his indigenous lineage in his speeches and has enshrined a host of indigenous rights – including the provision of land titles and the protection of indigenous languages -  in Chapter VIII of the Venezuelan constitution of 1999 (Gott, 2005:204). In 2007 he demanded that Pope Benedict XVI issue an apology to the indigenous people of Latin America for remarks he made defending the evangelisation of native Americans (Venezuela Analysis 21/5/08). Chavez seeks to portray himself as both defender and spokesman of indigenous rights and this is reflected in his strong support from non-white voters.

The current trend has led Peruvian novelist and former presidential candidate Mario Vargas Llosa to bemoan the emergence of a ‘new racism’ in Latin American politics, one which ‘irresponsible demagogues’ can exploit for electoral success (LaNacion 2006). Vargas Llosa’s fears seem exaggerated. After all Morales has undercut support for Felipe Quispe’s far more ethno-centric Pachakuti Indigenous Movement. Nevertheless, the existence of large numbers of unaffiliated and dissatisfied voters is an obvious boon for those who profess to speak for them. Although class based discourse is still important, racial identification is becoming an increasingly common defining line in the politics of many Latin American nations.

The third condition for populism is the existence of an identifiable ‘other’ against which a charismatic leader can mobilise mass support and frame political discourse as a battle between ‘us’ and ‘them’. More often than not, this ‘other’ is the existing political elite but it can also take other forms, such as terrorist organisations or foreign nations. The classical populists rose in opposition to the landed gentry that had dominated traditional party politics since independence and generally opposed industrialisation. Peron targeted the conservative landowners of the Concordancia during the notorious corruption of the decada infame. Vargas stood against the Paulista coffee oligarchs and Cardenas united support against the traditional haciendas to bring about agrarian reform. Similarly the neopopulist wave took place at a nadir in popularity for political parties. In Brazil, the dramatic rejection of traditional parties in the municipal elections of 1988 and a general strike the following year paved the way for Collor, a critic of corruption and inefficiency, to come to power. In March 1992 only 12% of Peruvians claimed confidence in the existing parties (Roberts, 1995:98). Fujimori proved a popular leader throughout two terms not just for his personification of the fight against urbane blanquitos such as Vargas Llosa, but also for his strong and successful policies towards the Sendero Luminoso guerrilla movement, the second ‘other’ he rallied against.

Current Colombian President Alvaro Uribe has risen to power by garnering popular support for his hard-line stance towards a domestic guerrilla threat. With Colombian public increasingly weary of their country’s long-running civil war, Uribe possessed strong anti-FARC credentials that allowed him to win mass support after he had broken with the Liberal party prior to the 2002 election. Uribe, whose father was killed by FARC guerrillas, was a key supporter of the controversial CONVIVIR civilian defence organisations. In power he has bolstered the armed forces, offered lenient sentences to right wing paramilitaries and rejected negotiations with the FARC (Dugas, 2003:1128). The successful release of Ingrid Betancourt from FARC captivity and the killing of key FARC leaders saw Uribe’s approval ratings pass 80% in 2008 and have prompted attempts to amend the constitution in order to permit him to run for a third term. In an earlier surge of Colombian populism Jorge Gaitan campaigned against the Conservative government’s role in the 1928 banana worker massacre but narrowly failed to win the presidency before he was assassinated in 1948 (Dugas, 2003:1120). We can conclude that in violent societies – those enduring civil wars or serious guerrilla-terrorist threats – populist leaders (often of the rarer right-wing variety) can rise to the fore if they offer the kind of solutions of which the existing political parties have proved incapable.

The Uribe example aside, the rise of third wave populism has been achieved through attacking the existing political institutions on the perennial grounds of corruption, clientelism and inefficiency. When MAS won the 2005 Bolivian election with 54% of the popular vote Morales became the first candidate in decades to avoid a run off. His victory followed a series of gas wars, coups and counter-coups that had seen the presidency of the country change hands with a frequency that had served to undermine the politial system. In Venezuela, it was the failure of the political elites to modify and reform the Puntofijo system of 1958 that allowed Chavez to justifiably portray AD and COPEI as outdated parties serving the interests of a rich minority and subsequently redraw the political battlefield along class lines (Buxton 2007:345). In Mexico, the excesses of presidentialism under Fox and the perceived corruption and partiality of the Supreme Court magistrates has opened the way for Obrador and future populists to attack the political status quo (Bejar 2006:20). To a lesser extent Chavez and Morales have criticised US anti-drug policies such as Plan Dignidad and Plan Colombia and identified US ‘imperialism’ as another common enemy. Nevertheless, venal governments, clientalistic and apparatchik political parties and weak institutions remain the most popular targets for populists. When estranged voters feel that the political system is rotten they are immediately disposed to vote for an outsider.

Indeed the existence of strong political parties and institutions, which have earned the trust and respect of the populace would appear to be the single most powerful obstacle to populist politics. Both Chile and Uruguay have a long democratic tradition and effective institutions linking the presidency, congress and parties (Philip, 2003, 32). Chile is renowned for its efficient and well regarded civil service and in Uruguay levels of political patronage through high level appointments are markedly low compared to the rest of the region (Panizza, 2001). Political parties in both countries occupy a wide spectrum and the existence of well organised leftist parties catering to the working class and rural populations deprives populists of potential supporters. Despite 17 years of persecution under the Pinochet regime the Chilean Communist and Socialist parties remain in existence. In the early twenty first century, at a time when ‘third wave’ populists have been elected in other nations, Chile has elected centre-left coalitions. Similarly, in 2004, having experienced a bank run in the wake of the Argentine financial crisis of 2001, the Uruguayan electorate chose to show their dissatisfaction with neoliberal economics and the dominant Colorado and National parties, not by electing a political outsider but by voting for the Broad Front, a well run coalition of left-wing parties.

The resurgence of populist politics in Latin America in the twenty first century has effectively disproved those who believed the phenomenon could not endure. This essay has sought to outline how certain preconditions for populism have evolved over time and to highlight the important role played by new economic dislocations, indigenous politics and potential common enemies in contemporary populism. The electoral success of populists can be largely attributed to the presence or absence of these preconditions in any given country. Fundamentally however, the root source of these problems has remained the same. Poverty and inequality of wealth are the main reason that populist leaders continue to find strong supporter bases, be they industrial workers in the 1940s or indigenous coca growers in the 2000s. In those countries (the majority) with fragile democracies and discredited parties, a lack of popular political education leaves the electorate particularly susceptible to charismatic leaders and simplifying ideologies. If the process is painfully repeated it is only because – in the words of political scientist Luis Rubio – ‘people remember the years of economic growth not the years of paying the bill’ (Reid 2008). With the onset of a major global financial downturn and with little sign of increased income equality in Latin America the likelihood of further populist figures taking power on the continent seems high. The nature of the economic shift, and the identity of the supporter base and the ‘other’ may change, but all three basic preconditions will most likely be in place.

BIBLIOGRAPHY

Bejar, A (2006) ‘Mexicos’s 2006 Elections: The Rise of Populism and the End of Neoliberalism?’ Latin American Perspectives Vol. 147 Issue 33 No. 2, pp.17-32.

Buxton, J (2005) ‘Venezuela’s Contemporary Political Crisis in Historical Context’ Bulletin of Latin American Studies Vol. 24 No. 3, pp.328-247

Dugas, J (2003) ‘The Emergence of Neopopulism in Colombia? The case of Alvaro Uribe’ Third World Quarterly Vol. 24 No. 6, pp. 1117-1136

Cammack, P (2000) ‘The Resurgence of Neopopulism in Latin America’ Bulletin of Latin American Research Vol. 19 No. 2, pp.149-162.

Gott, R (2005) Hugo Chavez Verso Press: New York and London

Panizza, F (2000) ‘Neopopulism and Its Limits in Collor’s Brazil’ Bulletin of Latin American Research Vol. 19 No. 2, pp.177-192.

Parker, D (2005) ‘Chavez and the Search for an Alternative to Neoliberalism’ Latin American Perspectives Vol. 32 No. 2 (March), pp.39-50

Philip, G (2003) Democracy in Latin America Polity Press: Cambridge.

Reid, M (2008) Forgotten Continent: The Battle for Latin America’s Soul Yale University Press: New York

Roberts, K (1995) ‘Neoliberalism and the Transformation of Populism in Latin America’ World Politics Vol. 48 No. 1, pp.82-116.

Weyland, K (1999) ‘Populism in the Age of Neoliberalism’ in Conniff, ML (ed.) Populism in Latin America The University of Alabama Press: Tuscaloosa and London

NEWS ARTICLES

http://www.lanacion.com.ar/nota.asp?nota_id=773706

http://www.reuters.com/article/bondsNews/idUSN0126781520070502

http://www.usatoday.com/news/topstories/2008-09-17-569181578_x.htm

http://www.venezuelanalysis.com/news/2392

The simplified catagorization of early twentieth century Latin American governments into the ‘good’ left and bad left by Castaneda does a disservice to the complexity and variety of parties and leadership structures in the region. The lumping together of Correa, Morales and Ortega into a group supposedly headed by Chavez has led to the groups vilification in much of the western press and has prevented the due recognition of their successes. In recent years these leaders have, to an extent, offered an alternative path to that of the neoliberal consensus and in doing so scored considerable successes both economically and socially. However, these have often been achieved at a great cost to liberal democratic values in the countries they govern. This essay will argue, with some caveats, that the social democratic governments of Lula, Bachelet and Velasquez offer the most promising model for Latin American development.

Firstly it is necessary to establish the bounds of our essay. Roberts and Livitsky provide a very useful break down of left wing Latin American governments depending on two variables, the extent of centralisation of political power and the extent of institutionalisation of political parties.  Although the length of this essay prevents a full analysis of this classification, it will be referred to when relevant throughout the text. The bad left will be taken to refer to Morales, Chavez and Correa. The good left examples will be Lula, Velasquez and Bachelet.

In their rush to label the bad left as ‘populist’ the international media and commentators such as Castaneda frequently overlook some of the significant successes each leader has had. Every time the oil price has dropped sceptics have predicted the ruin of Venezuela and speculated that oil production has been overestimated and government revenues will fall to dangerous levels. Independent reports have shown that production remains high and the government’s decision to budget for $40 a barrel oil in the boom years when oil was over four times that price means that expectations of fiscal ruin have never come true. The privatisation of natural resources in Bolivia did not lead to the drop in FDI that was predicted, Bolivia has grown at 6% in 2008. In addition it has used its increased revenues to bolster its reserves from $1bn in 2004 to $8bn in 2009. Correa, following the example of Nestor Kirchner, has declared national debt illegal and has offered investors only 35cents in the dollar. This has not bankrupted the country; in 2008 Ecuador saw a 44% growth in its FDI. This is not to say that many elements of the WC do not remain. There seems little chance of Latin American countries reverting to fixed exchange rates or introduce capital controls. They have shown that states are not as constrained by the structural ‘embedded liberalism’ of the international system.

Going against the grain has allowed these countries to increase their social spending. It has also allowed Morales to introduce greater social spending such as the renta dignidad and even in his short term in power conditions for the poorest members of society has improved markedly, infant malnutrition has dropped and literacy has increased. In Venezuela World Bank supported statistics show a dramatic drop in poverty levels. Additionally through the support of mass social movements, in the cases of Bolivia and Venezuela, have fostered an alternative vision of participatory democracy and helped the inclusion of the long marginalised indigenous vote. It is telling that Bolivia and Venezuela show the highest support for democracy in the region.

But these successes need careful qualification. Should the Venezuelan model, with its benefits to the poorer levels of society, be used as an example to other nations, Haiti perhaps? How could it be? Venezuela achieves its growth not through increases in productivity or a diverse export orientated business sector, it rests almost entirely on the windfall oil revenues exaggerated since the 2002 commodity boom. It should be remembered that Chavez initially entered the political arena as a third-way leftist in the mould of Clinton and Blair. The bonanza afforded to him soon allowed him to shift his policy away from wealth creation to one of wealth distribution. To a lesser extent the same model can be seen in action for Bolivia’s natural gas income, where Morales is trying to redistribute proceeds away from the gas-rich east of the country and in Ecuador, where Correa sits on top of considerable hydrocarbons reserves. Countries not blessed with such resources, especially smaller countries with limited markets, are far more constrained by the embedded liberalism of the international regime. If they were to start a wave of privatisation, implement wide distributive policies and throw out MNCs it is likely that their credit ratings would fall and FDI would dry up. A far better model for resource allocation comes from Chile, where Cadelco has remained in public hands and the proceeds rather than spent on one-off populist spending plans are instead saved for counter-cyclical spending or siphoned towards diversifying the domestic economy.

Not only are the populists an unwise example to follow economically. They are a bad example politically too. Chavez, Morales and Correa may enjoy popular support levels of over 60% but this does not tell the whole story. The minorities are often bitterly opposed. Rightly or wrongly, the half moon states of the Bolivian East believe that redistributive measures have overstepped the line. In Venezuela the elites that have been displaced by Chavismo refuse to go quietly. Chavez makes it a point to base almost all policies around confrontation be it with the local elites, foreign business or the United States. It is no coincidence that in both countries alleged assassination plots on the president were recently foiled. Political polarisation is dangerous for democracy and the economy. It can lead to the tyranny of the majority, destabilising actions and in the economic field, the violent vacillation of policies between opposed groups has huge costs in terms of implementation and acts as a major repellent to both local and foreign investors. Contrast this with, Brazil for example and the weaknesses of the populist mould are evident. Lula came to power promising continuity, explicitly so in an open letter that pledged to follow IMF reforms. Since then he has maintained tight fiscal budget and introduced modest targeted social programmes. He remains phenomenally popular as a president and the fragmentation of the party system means that broad consensus politics prevent polarisation. Brazil may be at risk of becoming a ‘boring country’ in Panizza’s words, but this should be cause for celebration.  And anyone who has been to Ipanema beach knows Brazil could never be truly boring.

Most importantly however, SD governments are working hard to fortify the liberal side of the democratic system, the formal and institutions that act as checks and balances on government power. It may very well be argued that the Ecuadoran, Bolivian and Venezuelan constitutions were all in more fire need of a reworking in order to reflect the rights of citizens but when constitutions are seen as ‘fair game’ to any president coming into power to rig the system in his favour then it does huge damage to the country’s most important institutions. True, removing term limits on presidents can reduce ‘moral hazard’ issues of lame duck presidents and give voters more choice, but the centralisation of power in one man for so long weakens democratic institutions. Chavez, Morales and Uribe have all removed such limits but it is telling that Bachelet and Lula, who also both have soaring popularity ratings and would most likely win the next election have neglected to follow such a path. SD governments are also less likely to bypass or emasculate the judiciary and act in concert with political parties. A democratic space is left for the opposition where in Venezuela opponents are black listed and Chavez uses state funds to run his own referendum campaigns.  In Bolivia, Morales undermines institutions by initiating a hunger strike. Chavez has become, in the words of Carlos Fuentes, ‘A tropical Mussolini’, removing opponents and hollowing out democracy. Perhaps Buxton is right to argue that he is restrained by his own popular movements, that this constitutes a form of checks and balances, but this is a weak alternative for strong formal institutions.

This paper has not sought to argue that the perceived injustices that the populist left see in society are not real or that theirs is not the ‘just fight’. But the short term benefits that they have reaped for the poor and marginalised sectors of society, while real, are outweighed by the long term damage they do to the economic and political future of the country. They should not be seen as an example to other Latin American countries, indeed few have the resources to implement them. Democratic institutions and a society where winners and losers from reform do not become polarised are important for the economic and political stability of Latin America.

On the toolbars above you will find links to my CV and information on my current projects as well as contact details.

On the right hand toolbar under the ‘Categories’ heading you can find links to examples of my written work as a business and economy analyst for emerging markets.

IN ASSOCIATION WITH

Iranian President Mahmoud Ahmadinejad’s recent visit to Turkey marked an important step for relations between the two countries, as Iran’s role as a key energy supplier and growing trade partner make a deepening of diplomatic ties a necessity for Ankara. On August 14-15, Ahmadinejad and his Turkish counterpart, Abdullah Gul, signed a number of agreements on issues ranging from anti-terrorism and drug cooperation to cultural exchanges. However, the two countries failed to reach an agreement on a priority issue – a deal that would guarantee Turkey’s winter supply of Iranian gas. The recent conflict in Georgia has intensified Turkey’s search for alternative energy supplies, as Russia supplies around 65% of the country’s natural gas demand. As winter approaches and Russian policy is causing many uncertainties, the need to secure supplies and diversify sources of natural gas has become a pressing one. By the end of 2007, Turkey was importing approximately 17% of its gas needs from Iran, according to figures from the Turkish Petroleum Pipeline Corporation (BOTAS). However, in the past this supply has been shaky, as for the past three winters, Iran has not hesitated to reduce supplies to Turkey in order to meet its own domestic demand. Iran even turned off the pipeline completely on January 7 of this year when its own supplies from Turkmenistan were cut off. Turkish companies were hoping that Ahmadinejad’s visit would conclude a $3.5bn investment deal in the Iranian energy sector that has been under negotiation since 2007, when the two countries signed a Memorandum of Understanding (MoU) to build a new pipeline through Turkey capable of transporting 40bn cubic metres of gas to the EU annually. The agreement stipulated that Turkish companies would produce and export 20bn cubic metres of gas from the South Pars gas field, one of the world’s largest. However, Ahmadinejad left Turkey without a deal being struck, and the stalling of the talks is believed to be mainly due to disagreements over the Iranian policy of buyback contracts. Under these contracts, Turkish firms investing in Iranian gas fields bear sole risk for the development of the site in exchange for remuneration from the National Iranian Oil Company (NIOC) in the form of an allocated production share. After meeting an agreed-upon profit, the NIOC takes ownership of the site and assumes windfall profits. But Turkish companies believe the buyback contracts do not offer sufficient incentives, and would rather buy gas from the fields directly. There were also disagreements over technical issues relating to infrastructure, as Turkish representatives believe that the production and transmission hitches that have caused the winter cuts in supply have not been adequately addressed. While the final details on the new pipeline are expected to be hammered out in the coming months, it is likely that the state-owned Turkish Petroleum Corporation (TPAO) will undertake the project alone. Foreign backers have so far stayed away from the deal. The project is also problematic in regards to relations with Washington, which is firmly opposed to any energy deals with Iran. While an agreement over gas could not be reached, trade between the two countries shows more promising signs. Bilateral trade, which stood at just $1.5bn in 2000, exceeded $7bn in 2007 and has grown to $6.1bn in the first seven months of 2008. It is expected to top $10bn by the end of the year. Although the value of Iranian gas exports dominates these figures, Iran is becoming an increasingly important export destination for Turkey’s booming automotive industry. Iran imported $145m worth of cars in the first seven months of 2008, a 167% increase on the previous year’s figure, according to data from the Uludag Exporters’ Union. Iran is also the sixth largest source of tourism arrivals and the largest outside the EU and Russia. Over 640,000 Iranians visited Turkey in the first seven months of 2008, accounting for over 4% of Turkey’s foreign arrivals, according to data from the Ministry of Tourism. The deepening of trade ties with Iran could also bring enormous benefits to parts of Eastern Anatolia, according to Kaan Korkmaz, finance coordinator of Eren Holding, a Turkish group with operations in cement, energy and paper. “Eastern Turkey has limited history as an industrial region and 70% of the country’s economy is centred on Istanbul and surrounding regions. The deepening of trade with Iran, Iraq and other countries in the region has the potential to develop export facilities in cities such as Erzurum and Kars. In the long term, only by developing major cities can greater prosperity be brought to the region,” he told OBG. During Ahmadinejad’s visit, the two presidents announced that the Tehran-Ankara Joint Economic and Commercial Commission will soon convene in Tehran to discuss ways to raise the volume of trade to $20bn over the next four years. A final deal on gas is also expected by the end of the year. Ankara’s warming to Tehran has been met with raised eyebrows in Washington and Brussels. Though their new rapprochement may make the West nervous, Turkey’s pressing need for energy diversification and search for new business opportunities are now driving relations with Iran.

RECENT BRIEFINGS Lebanon: Industrial Optimism 12.09.2008 The prospect of greater political stability in Lebanon is having a direct effect on the country’s economy, with investments increasing, tourism numbers on the rise and a programme of economic reforms that will, if implemented, help to ease the state’s massive debt burden. (…more) Senegal: Transferts de fonds 11.09.2008 Dans le cadre du débat sur l’aide publique au développement, les pays donateurs, et en particulier la France, ont publiquement reconnu que la diaspora jouait un rôle de premier plan dans le développement économique du Sénégal. (…more) Jordan: Twist of Phosphate 11.09.2008 The record profits earned by Jordan Phosphate Mines Company (JPMC) is indicative of the strength of the global fertiliser market. (…more) LATEST PUBLICATIONS The Report: Sarawak 2008 Sarawak is celebrating its 45 th year of independence from colonial rule in 2008. Despite political shifts elsewhere in Malaysia, Sarawak’s government proved stable after a sweeping victory by the ruling coalition in the March 2008 elections. With sound financials, a plethora of natural and human resources, government support and a business-friendly state, the economic outlook for Sarawak is positive. Sarawak’s industrial base is expected to undergo considerable expansion and attract major investments. Click for more info

Sofia Airport has reported strong passenger growth for the first half of 2008, as international and particularly domestic flights grew in frequency and popularity. While the other two main Black Sea airports, in Bourgas and Varna, reported less stellar performances, demand is strong enough for budget carriers to plan and open new routes and increase the frequency of existing ones.

The airport announced on August 8 that about 1.54 million passengers passed through Sofia Airport in the first half of this year, an increase of 19 per cent on the same period in 2007. Meanwhile, aircraft movements increased by 3000 to 23 370 and cargo volumes grew by two per cent to 9077 tons.

At the end of 2006, Sofia Airport opened a second terminal with a capacity of 2.6 million passengers a year, which took the airport’s overall capacity to between 4.2 and 4.4 million.

The first half results show that more passengers – 198 500 – flew to and from London than any other city, an increase of 45 per cent on the first half of 2007. The figure has been considerably boosted by UK-based budget carrier easyJet, which launched flights from Sofia to London’s Gatwick Airport in November, carrying 59 000 passengers on the route by the end of June. The high volume of traffic reflects both the significant number of Bulgarians who have settled in the UK since their country joined the European Union in January 2007 as well as Bulgaria’s appeal as a holiday and investment destination for Britons.

The second busiest route is to and from Vienna, with about 158 800 passengers in the first half, and the third to and from Frankfurt am Main, Germany’s financial capital, with 96 000 passengers. This reflected passenger volume growth of 41 per cent and 17 per cent respectively. Vienna is the hub for Austrian Airlines, which is aiming to position itself as the leading airline in Eastern Europe by offering a wider range of destinations than any of its competitors or partners. Frankfurt, for its part, is the base for fellow Star Alliance member Lufthansa, Germany’s flag carrier.

While these airlines pride themselves on offering good connectivity between Sofia and the rest of Europe (and the world) through their hubs, domestic carrier Bulgaria Air is still the leading airline in terms of passenger volumes – it carried 398 290 people to and from Sofia Airport in the first six months of the year. According to the airline, this represents a 30 per cent growth on 2007.

Bulgaria Air has been experiencing particularly strong demand on its flights to the coastal cities of Varna (the de facto second city in economic terms) and Bourgas (the fourth city). Both municipalities include major ports, and lie at the centre of a collection of coastal resorts. The Bulgarian flagship carrier transported 48 660 passengers between Sofia and Bourgas and Varna in the first half of 2008 – compared to 16 563 in the same period last year.

German firm Fraport, which runs the airport, announced on August 7 that Bourgas Airport serviced about 485 530 passengers in the first six months of this year, while 444 070 passed through Varna. This represented significantly lower passenger growth rates than that of Sofia. Bourgas’ figure was up only 0.6 per cent on the year, and Varna’s 2.7 per cent. The modest performance is probably due to both an overhaul of the two airports curtailing a rapid expansion in the number of flights, and a slowing in the growth of tourism arrivals on the coast due to tighter economic circumstances in some of Bulgaria’s major tourist markets, including the UK and Germany.

Nonetheless, the rise in passenger numbers to Sofia, and the flourishing of internal flights seem to indicate that Bulgaria’s main airports can ride through the rough patch and continue to grow in the medium term, despite rising fuel costs.

While there are reports in the local press that conventional airlines are scaling back plans to increase flight frequency to the coast, or even contemplating cutting flights, low-cost carriers show confidence in the market. This is particularly welcome because for several years they mostly avoided Bulgaria, preferring to wait for its accession to the EU. In July, easyJet announced that it would be starting flights between Sofia and Madrid in November and between the Bulgarian capital and Manchester, in the north of England, in December. Both routes will run three times a week.

Perhaps more significantly, on July 25, Budapest-based low cost airline Wizz Air, which already serves eight European cities from Sofia, commenced the first internal budget flight in Bulgaria’s history, between Sofia and Varna. With tickets starting at 19.99 leva ($15.10) one way, all charges included (cheaper than most bus tickets), Wizz will be offering sharp competition on the increasingly popular route. While it is too early to tell what the effects on the market will be, and whether other low-cost carriers will follow suit, an intriguing precedent has been set.

IN ASSOCIATION WITH

The race to attract customers in eastern Turkey is gathering pace amongst the country’s major retail banks. With a large unbanked population and renewed government commitment to the development of agriculture and business in the region, the long-term opportunities for banks are potentially huge. While banking penetration in Turkey’s major cities is near European levels, issues of accessibility and trust mean that a large proportion of the rural population remains unbanked. “A significant portion of the population has no access to the services of formal banks,” Burcu Arasli, the head of the microfinance division at the United Nations Development Programme’s Turkey office, told OBG. “More than 50% of the population keep their money under their pillow instead of in a bank. After the crisis of 2000-01 a lot of people lost faith in banks,” he said. The country’s banks are speeding up efforts to expand branch networks in the region. According to Tolga Egemen, the executive vice-president of Garanti Bank, the fastest-growing bank in the country with 100 new branches opened already in 2008, there is plenty of room for expansion. “While in a country like Switzerland banks such as UBS are forced to go international in order to maintain profits and growth, in Turkey there is still a huge untapped potential, especially in the east,” he said. Although branches in rural areas are not as profitable in the short-term as those in major cities, it is important to establish a client base according to Egemen. “The profitability of these banks varies from region to region. A bank can become profitable in Levent in Istanbul in three months. In some parts of Anatolia, where it is the second or third branch, it takes two years. Where it is the first branch in an area it is more effective,” he said. One of the Turkish government’s key priorities is to increase business and agricultural opportunities in the country’s Anatolian heartland. A broad incentives package, including tax breaks, is available to businesses operating in the region and the government’s renewed commitment to the South-east Anatolia Project (GAP) could potentially increase available agricultural land in the region three-fold via the construction of 2000 km of irrigation channels designed to carry water from the Euphrates and Tigris rivers. Turkey’s prime minister, Recep Tayyip Erdogan, has said that GAP will provide 4m jobs and help reduce support in the region for the separatist Kurdistan Workers Party (PKK), against whom the Turkish military has been fighting a long and costly campaign. Zeki Onder, the executive vice president of Sekerbank, told OBG that the exploitation of Turkey’s huge reserves of uncultivated land is central to the country’s long-term economic growth and the reduction of its sizeable current account deficit (CAD). “In the long term the CAD can only be reduced by increasing industry and production. In the past textiles, automobiles and white goods have emerged as Turkey’s major competencies. Now agribusiness has emerged as the next area of potential,” he said. Large-scale projects are already under development in the region. Koc Holding, the country’s biggest company, is investing $84m to build what will be the world’s fifth-largest tomato-paste-processing plant outside the city of Sanliurfa. “We expect to see movement from the government and the private sector to stimulate large business and land consolidation in the region. Inheritance laws have been reformed to prevent the fractionalisation of land and some companies are investing up to 10m-15m euros for a single high-tech greenhouse. This demonstrates the size of businesses involved,” Onder told OBG. In addition to the country’s major companies, small and medium-sized enterprises (SMEs) are taking root in the region. Metin Karabiber, the assistant general manger of Fortis Bank, told local press that the country’s “economic growth basically relies on SMEs in Anatolia”. According to Karabiber, the bank’s loans to SMEs grew from $170m (7% of total loans) in 2004 to $2.5bn (35% of loans) so far in 2008. According to Onder, the grey economy in the region is also starting to shrink as local small-scale agricultural producers turn to banks for financing. “Farmers are happy to be identified as a customer base and moreover they are not put off by the current high interest rates as it makes little difference on small-scale loans,” he said. Sekerbank takes a direct approach to building its microbusiness customer base and provides tailor-made products, such as credit cards that are paid off after harvest. The potential of the sector has also caught the eye of international financial investors. KfW Bankengruppe, a German public bank, has established a joint venture with Sekerbank, Is Bank, AK Bank and Garanti Bank to provide 90m euros in loans to 49 Turkish provinces. The size of this fund will grow in the future, according to Onder. However, certain obstacles have yet to be overcome. Human resources can be a major challenge for banks in rural areas according to Remy de Cazalet, the managing director of Michael Page Turkey, an executive search company. “It is hard to find qualified staff in the east and even harder to send them there. The banks have resorted to sending staff who may have studied and worked in major cities but who have their origins in the region,” he told OBG. Representatives of Anatolian businessmen claim that banks undervalue property used as collateral for loans and that greater effort needs to be made by the government to stimulate business in the east of the country. The Van Chamber of Commerce and Industry, for example, has said that further investment incentives – including additional tax breaks, improved transport infrastructure and reduced-price energy – are necessary to achieve further growth.

RECENT BRIEFINGS Syria: Maybe This Time for DSE 15.08.2008 The long delayed opening of the Damascus Stock Exchange (DSE) is again back on the table, though Syrian market watchers may be taking the news that trading will start within a few months with a pinch of salt. (…more) Malaysia: Trading Winds 15.08.2008 Malaysia‘s first half trade figures show impressive growth in exports and an increasing surplus. Nonetheless, the second half may prove tougher going, though the government is confident that targets can still be reached. (…more) Kuwait: Tensions Escalate in Hormuz 15.08.2008 Escalating tensions between the US and Iran are leading Kuwait to prepare for the worst, according to local media reports. (…more) LATEST PUBLICATIONS The Report: Bahrain 2008 Bahrain was the first oil producer in the Gulf and also the first state in the region to become aware of the need for diversification, meaning that this policy is now paying dividends. Banking is highly developed in the Kingdom and it boasts the world’s largest aluminium smelter. Bahrain’s IT sector is considered a pioneer in the Gulf while tourism is being heavily promoted by the government with major hotel chains such as Kempinski and Marriott setting out their stalls in the country. Meanwhile, the economy is being opened up to foreign players and a major infrastructure overhaul is part of this effort, cementing Bahrain’s place as a major transport centre and taking advantage of its position at the gateway to the northern Gulf. Click for more info

IN ASSOCIATION WITH

The Constitutional Court’s decision not to close Turkey’s ruling Justice and Development Party (AKP) has drawn the country back from the brink of a crisis that could have called into question the country’s democratic credentials and almost certainly have resulted in fresh elections. The decision puts an end to the political uncertainties that have deterred investors and stunted economic growth in recent months. On July 30, six of the 11 members of the constitutional court voted to shut down the AKP on grounds of unconstitutional and anti-secular activities, one short of the seven votes needed to enact the closure. Had the case been successful, 70 members of the party, including Prime Minister Recip Tayyip Erdogan and President Abdullah Gul, could have been banned from politics for five years. Instead the court opted to cut the AKP’s $40m state funding by half, a firm slap on the wrists and a clear warning that further incursions into sensitive areas of secular politics will not be tolerated by the court. In February, the AKP forced a law through parliament loosening restrictions on the wearing of headscarves in universities. The law was later overturned by the constitutional court but its original enactment was a key element in the prosecutions case. Investors are optimistic in the wake of the decision. “This was a market-friendly decision,” Veyis Fertekligil, chief economist of Turkland Bank, told OBG, “If the ruling party had been closed, there would have been a strong knock-on effect for the stock market, government bonds and the exchange rate.” Instead, the Istanbul Stock Exchange (ISE), which had slumped after the announcement of the closure case in March, rebounded strongly. On the day of the decision, the ISE-100 index rose 5.6%, its biggest leap in six months, capping off a 27% rise since the index hit a two-year nadir on July 1. The Lira also made strong gains, rising to 1.162 against the dollar. Gökçe Kabatepe, managing director of Raymond James Securities Turkey, told OBG that political uncertainty was the main reason for the ISE’s recent underperformance against other emerging markets. “In the days following the announcement of the court’s decision, the ISE has already made up most of the ground it had lost compared to other bourses at the beginning of the year,” he said. Kabatepe explained that the decision not to close the party would boost investor confidence and open the door for a new surge in Foreign Direct Investment (FDI). “There has been a slowdown in FDI in recent months. The government has been cautious about potentially low valuations of privitisation tenders, and foreign investors have delayed their entrance in the private sector to see how the political situation plays out. We expect to see greater merger and acquisition activity before the end of the year, and 2009 could be an excellent year for IPOs.” International ratings agency Standard & Poor’s also revised their investment outlook for Turkey from negative to stable, reasoning that “diminished near-term political uncertainties” would act to “bolster investor confidence, widening the sources for the financing of Turkey’s current account deficit.” Addressing this deficit will be a key challenge for the government in the near future according to Fertekligil, “This year we expect the deficit to exceed $50bn. In recent years, with FDI exceeding $20bn, this was not a major issue. With the recent slowdown in foreign investment however, corporate borrowing from abroad is increasing, exposing the economy to greater risk.” Despite the positive outlook, S&P’s credit rating remains at BB-. Brazil, on the other hand, whose Bovespa bourse has often been described by analysts as the ISE’s “twin” due to the similarity of its behaviour, achieved the coveted BBB investment grade in April. To some in the Turkish financial sector, this disparity seems unwarranted. Tolga Egemen, executive vice president of Garanti bank, told OBG, “Turkey is one of very few emerging markets from Brazil to South Korea which has never defaulted on debt, but its good track record is neglected in evaluations.” The ratings agencies, however, point to a different record: that of political uncertainty. The close call of the decision demonstrated deep divisions between the AKP and the secular elements of the judiciary and military. Last year, the constitution was changed to ensure that seven votes rather than six were required to pass a law in the constitutional court. In the final AKP ruling, 10 of the 11 judges agreed that the party had become a “focal point for anti-secular activities,” but the case was not serious enough to warrant closure. On August 4, Turkey’s Supreme Military Council replaced General Yasar Buyukanit with General Ilker Basbug to the position of general chief of staff. While less confrontational than his predecessor, Basbug is a strong supporter of Turkey’s secular system and his appointment indicates that the country’s military will continue to take a tough stance towards any activities they deem a threat to the system. Nevertheless, there is reason to suspect that the resolution of the closure case may be the high tide mark of recent political tensions. By stepping back from the “nuclear option” of banning the party and its members, the constitutional court has opened the way for compromise. Many AKP members, reportedly convinced the party would not survive the ruling, may begin to take heed of criticisms that they could do more to assuage the fears of the country’s secular population. If an effective compromise can be reached, the social and economic reform process – which was initiated during the AKP’s first term but has stalled in recent years as a succession of political confrontations between the AKP, the secular opposition and the apparent French opposition to Turkish membership have distracted government attention and coincided with a drop in public enthusiasm for accession – could be revived. The Turkish government and EU representatives were keen to emphasise that with the significant hurdle of the court case overcome, political attention could once again be focused on accession. On the evening following the verdict, Prime Minister Erdogan restated his commitment to pushing towards EU membership while the EU Commissioner for Enlargement, Olli Rehn, told the international press it was time for Turkey to “resume its reforms to modernise the country with full energy.”

RECENT BRIEFINGS Bahrain: Best Yet To Come 08.08.2008 Two years down the track, Bahrain’s free trade agreement (FTA) with the US has garnered mixed reviews, with some hailing it as an overwhelming success while others say it has yet to reach its full potential. (…more) Dubai: Visa Changes 07.08.2008 A change in visa regulations has come into force. (…more) Saudi Arabia: Tadawul Tumbles on Regulatory Outlook 07.08.2008 The Tadawul All-Share Index (TASI) took a tumble this week as investors attempted to offload shares in anticipation of new market regulations. (…more) LATEST PUBLICATIONS The Report: Bahrain 2008 Bahrain was the first oil producer in the Gulf and also the first state in the region to become aware of the need for diversification, meaning that this policy is now paying dividends. Banking is highly developed in the Kingdom and it boasts the world’s largest aluminium smelter. Bahrain’s IT sector is considered a pioneer in the Gulf while tourism is being heavily promoted by the government with major hotel chains such as Kempinski and Marriott setting out their stalls in the country. Meanwhile, the economy is being opened up to foreign players and a major infrastructure overhaul is part of this effort, cementing Bahrain’s place as a major transport centre and taking advantage of its position at the gateway to the northern Gulf. Click for more info