A billion-dollar road, the Ruta del Sol, connecting Bogata to the Caribbean has generated millions of dollars in bribes. The auditor that discovered the bribery (and his son) both died suspiciously. The companies that were involved in the bribery also have deep connections to the Columbian government.
From the article: “The death of the Pizanos is the most dramatic twist yet in Colombia’s biggest corruption scandal. The case involves Odebrecht, a Brazilian construction firm that has bribed officials in a dozen Latin American countries, and Grupo Aval, Colombia’s biggest financial group. The two firms were partners in a $1.6bn contract to build Ruta del Sol, a motorway linking the capital region and the Caribbean coast. Documents and recordings made public show that Mr Pizano, an auditor for Grupo Aval, detected more than $30m in payments by the consortium for non-existent consultancies. Some of the money may have been bribes to politicians.
Grupo Aval is owned by Luis Carlos Sarmiento, Colombia’s richest man. Its legal adviser for many years was Néstor Humberto Martínez. Since 2016 he has been Colombia’s attorney-general. Odebrecht has admitted in a plea bargain with the United States’ Department of Justice that it paid $11m in bribes to Colombian politicians in order to obtain the Ruta del Sol contract. Both Grupo Aval and Mr Martínez denied prior knowledge of these payments, and of any subsequent ones. Whatever the truth of Mr Pizano’s allegations, Mr Martínez, who has powerful political backers, is clearly in no position to conduct an impartial investigation into them, as he may have a case to answer himself. Yet he cannot be sacked as attorney-general. He has recused himself from two of many related cases, placing a subordinate in charge. "
The 2018 Latinobarometro poll shows faith in democracy declining across Latin America, driven by the perception that almost all politician are corrupt. Lack of faith in their political institutions makes Latin American countries vulnerable to populist, illiberal candidates.
The Latinobarometro results: in 2009, 51% of those surveyed reported feeling dissatisfied with democracy in their country. By 2018, that number has increased to 71%. Note that more than half still rate democracy as superior to any other form of government.
What is driving this negativity? First, Latin American economies have slowed down, with GDP per person declining overall since 2009. Crime is a big worry (even amongst countries like Chile where crime is not really a problem). And there is the widespread belief that income is unjustly distributed (even though the Gini coefficient for Latin America has been decreasing). The biggest influence on the growing distrust in democracy is probably the widespread belief that most politicians and judges are corrupt. Lack of faith in democratic institutions translated to a distrust of democracy itself.
The danger is that widespread lack of faith in democracy can lead to the election of extremist leaders outside the mainstream - populists who may fall prey to illiberal tendencies. In Latin America, two recent examples would be AMLO in Mexico and Bolsonaro in Brazil.
Former Army captain Jair Bolsonaro wins the Presidency of Brazil. Will he be a reformer or a radical? Will he move Brazil towards the illiberal democracies?
Jair Bolsonaro of the Social Liberal Party wins Brazil's Presidential election with 55% of the vote (but also record low turnout). Bolsonaro won by promising to get tough on crime, reduce corruption and reverse the current economic slump. He is a Trump-style populist who combines social conservatism with a liberal desire to intervene in the economy. The investor class would like to see Brazil's government cut pubic pension spending; simplify the tax system; privatize state-owned firms and reduce regulation.
Bolsonaro's actions so far are a mixed bag. He has refused to use targeted public spending (pork) to persuade members of Congress to support his policies. That will make it harder for him to succeed. He is predictably conservative (wants to reduce "gay influences" in schools) and nativist (concerned that China is "buying Brazil instead of buying from Brazil"). He is subject to military influence as one-half of his transition team have military backgrounds. And he is anti-media. He ays he will withdraw government contracts for advertising with media outlets that behave "irresponsibly". These actions concern his opponents who worry Bolsonaro will move Brazil towards a more authoritarian, illiberal system.
Haiti is a mess. Still recovering after a 2010 earthquake that killed 200,000 people, the President of Haiti is Jovenel Moise, head of the "Shaved Head" Party, who came to power with big promises of massive infrastructure projects and uninterrupted electricity. These promises cost money and Haiti has an incredibly narrow tax base - just 70,000 income tax returns were filed last year in a country of 11 million people. The $300 million a year Haiti was receiving in aid from Venezuela has also stopped due to the ongoing economic crisis there. Aid donations from abroad usually go to NGO's, not the Haitian government because of corruption concerns. All this means Haiti can only spend about 5% of its already low GDP on health, education and social safety net programs (compared to 15% for nearly-as-poor Honduras).
Moise sought to free up money by ending the fuel subsidies (about $350 million a year) his government pays out to keep gasoline cheap. As only the wealthiest Haitians can afford a car, these subsidies benefit the wealthy. 85% of the fuel subsidies benefit the wealthiest ten percent of Haitians. Yet, when they were cut (raising gas prices by about 40%) - riots erupted. And they were hard to stop. Haiti abolished its army in 1995 and UN peacekeepers left Haiti for good in October of 2017. The inability of the Haitian police to stop the fuel riots raises serious doubts about its ability to handle any future unrest.
Mexico's economy is surprisingly sluggish. Real GDP per person grew at an annual rate of 1.2% a year between 1995 and 2015 - one of the slowest rates in Latin America. Economist Santiago Levy (new book is Under-rewarded Efforts - The Elusive Quest for Prosperity in Mexico) believes the slow economic growth has to do with tax policies that create perverse incentives.
From the article: "Mexico has a huge and disproportionate number of small businesses, and unusually wide variation in the productivity of its companies. The census under-counts small firms because it excludes those that lack fixed premises (such as taco stands) and those in villages of fewer than 2,500 people. Even so, more than 90% of the 4.1m firms in the 2013 census had at most five workers. And 90% of the total were “informal”, absorbing almost 33% of the capital stock and 40% of workers. Rather than “informality”, the key distinction Mr Levy makes is between firms that have salaried employees and those that do not. Four-fifths of the “informal” firms are in the second category: their staff are either self-employed or paid piece-rates or profit shares. These firms’ only legal obligation is to pay corporate tax, of just 2% of revenues if these are under 2m pesos ($105,000) a year. Firms with salaried workers, by contrast, must pay social insurance, deduct income tax and grapple with employment law (which doesn’t allow them to fire people if business drops). The census shows that firms with salaried workers are much more productive. So it is worrying that from 1998 to 2013 the weight of non-salaried firms in the economy grew. Mr Levy argues that public policies are to blame. In the name of social inclusion, in the period under study, Mexico introduced non-contributory pension and health benefits worth 1.3% of GDP, thereby helping non-salaried workers, while raising income taxes on salaried ones to the tune of 1.9% of GDP.
The solution? Levy thinks that Mexico needs to replace restrictions on firing with unemployment insurance and shift the tax burden away from payrolls, abolish tax perks for small firms and take contract enforcement more seriously. The prize would be faster growth, better social provision and better-paid jobs.
In Venezuela, where the inflation rate is in the tens of thousands of percent, people find hedges againt the worthlessness of the bolivare. As usual, the wealthy have access to the best hedges against inflation.
From the article: "That is why you can see scaffolding and other signs of a building boom dotted around Caracas, the capital of a country that has endured an economic collapse. Businesses need to park their earnings where they will not be wiped out by inflation. A smaller-scale response to galloping prices is the emerging “egg economy”. Eggs hold their value better than cash, for a while at least. They make for a convenient currency, too. It is easier to carry around a half-dozen eggs than a trunkful of banknotes. And many tradespeople would be happier to receive the eggs."
"Episodes of hyperinflation are quite rare. Steve Hanke of Johns Hopkins University lists 57 cases, starting with France in the 1790s. It takes something extraordinary—war, revolution or epic incompetence—to mess things up on such a scale. The root cause is usually a chronic weakness in public finances. This might be because of looting by officials, lavish welfare spending or reliance on a single source of tax revenue. The government resorts to printing money to pay its bills. That feeds inflation. A vicious cycle ensures that it rises quickly. Because taxes are paid some time after the activity they relate to, rapid inflation erodes the value of tax receipts. More money is created to fill the gap in revenue. Inflation accelerates. The cycle turns."
"A shrewd minority are using the stock market as a sort of inflation-linked bank, buying shares to deposit cash and selling them to withdraw it. A favoured stock is Banco Mercantil, which has businesses outside Venezuela."
Latin America represents 8% of the world's population but accounts for 38% of all murders. There were 140,000 deaths in the region from homicide in 2017 alone - that exceeds the number killed in combat for all wars this century.The Small Arms Survey has determined that if Latin American homicide rates could be lowered to US standards, 2.6 million lives could be saved by 2030. The financial costs are also high. In El Salvador, the costs of homicide amounts to about 1% of GDP per year. In Latin American nations with high homicide rates, the cost of police accounts for 5% of the federal budget, double that of less violent countries.
Note the low US homicide rate that has been falling since the early 90's. Why? Patrick Sharkey argues in his book Uneasy Peace that the US has created a "virtuous circle" made up of high incarceration rates and data-based approaches to policing, especially geographical data. Accurate rime reporting allows police to target their efforts in the most needed areas. Then the police can focus on lifestyle crimes (The "Broken Windows" approach) or even more aggressive tactics like stop-and-frisk.
In Latin America, there s a vicious circle. Reporting is bad, data isn't available and the police are often poorly trained and corrupt. Murders are concentrated in urban areas, where 80% of the killings occur on just 2% of the streets. Latin America underwent a massive shift to urban areas in the late 20th Century. Now 75% live in urban conditions, double the rate of Africa and Asia. This has led to overcrowding in slums and rampant unemployment which further increases the murder rate. Cali in Columbia shows the impact of better data. The mayor Rodrigo Guerrero set up "crime observatories" to collect and study crime data. They discovered that most of Cali's murders were not drug gang related as had been thought but alcohol and pay-day related. Restricting alcohol sales and gun permits lowered the homicide rate by 35% in just a few months.
From the article: "On March 22nd the central bank reported that GDP grew by 2.7% in 2017, bringing the country’s growth streak to 15 years, the longest expansion in its history. Its success shows the value of openness, strong institutions and investment in know-how. Uruguay was too economically dependent upon large neighbors Brazil and Argentina. The Broad Front (FA), a leftist coalition that has governed since 2005, began an effort to “decouple” Uruguay from its neighbours. Under two FA presidents—Tabaré Vázquez, an oncologist who governed from 2005 to 2010 and again since 2015, and José Mujica, a former guerrilla who held office between Mr Vázquez’s two terms—the government created special tax regimes and set up economic zones to attract investment. Uruguay entered new industries, such as software and audiovisual services, which exported to new markets. Between 2001 and 2016 the share of exports going to Brazil and Argentina fell from 37% to 21%.
Recently the government has invested in raising productivity. Public spending on science and technology increased by 73% in real terms between 2007 and 2015. Even cattle farmers adopted new technology. While Argentina slapped export tariffs on beef to hold down domestic prices, Uruguay became the first Latin American country to make all its beef exports electronically traceable, a way of reassuring buyers that problems like foot-and-mouth disease will be caught early. Between 2005 and 2012 Argentina’s beef exports fell by three-quarters; Uruguay now sells more than its larger neighbour. At the same time, FA governments stuck with the orthodox economic policies they inherited and with practices that make the country attractive to investors, such as keeping taxes low and the judiciary independent of political influence.
The formula has worked. Uruguay kept growing after Brazil and Argentina entered recession in 2014. The middle class, as defined by the World Bank, grew from 39% of the population in 2003 to 71 % in 2015. Uruguay’s income per person is the highest in Latin America."
Lithium is a coveted commodity. Lithium-ion batteries store energy that powers mobile phones, electric cars and electricity grids (when attached to wind turbines and photovoltaic cells). Joe Lowry, an expert on the lightest metal, expects demand to nearly triple by 2025. Supply is lagging, which has pushed up the price. Annual contract prices for lithium carbonate and lithium hydroxide doubled in 2017, according to Industrial Minerals, a journal. That is attracting investors to the “lithium triangle” that overlays Argentina, Bolivia and Chile (see map). The region holds 54% of the world’s “lithium resources”, an initial indication of potential supply before assessing proven reserves.
The three countries have not been equally eager to seize the opportunity. Market-friendly Chile has a big head start. Argentina is hastening to make up lost ground, as the activity on the Olaroz salt flat suggests. Bolivia, whose resources are as large as Argentina’s, has barely begun to exploit them. Those differences suggest much about how the South American trio treat enterprise and investment more generally.
Chile dominated the world lithium markets for decades. The Atacama salt flat has the largest and highest-quality proven reserves. The desert’s blazing sun, scarce rainfall and mineral-rich brines make Chile’s production costs the world’s lowest. Allied to this is the region’s most benign investment climate. Chile is far ahead in rankings of ease of doing business, levels of corruption, and the quality of its bureaucracy and courts.
The 16th-century escutcheon of Potosí, a city on the high Andean plain in southern Bolivia, declared it the “treasure of the world, king of all mountains and envy of kings”. Its silver mines bankrolled Spain’s empire. Today’s prospectors are eager to exploit the area’s lithium deposits, but Bolivia’s democratic government is less welcoming than the imperial one.
The country’s investment regime suffers from “lack of legal security, weak rule of law, corruption and murky international arbitration measures”, according to the American State Department. Under the left-wing government led by President Evo Morales since 2006, Bolivia has pulled out of numerous bilateral investment treaties, denying investors access to international arbitration. His government has nationalised parts of the oil and gas industries, along with the biggest telecoms company and most of the electricity sector.
Quick recap on Haitian history. Current president is Jovenal Moise, who succeeded "Sweet Micky" Martelly in February of 2017 after a contested November 2016 election. Haiti has undergone 18 regime changes since Duvalier left in 1986.
From the article: "A small business elite has supported fragile governments in exchange for low taxes and oligopolistic control of key industries, keeping the economy uncompetitive and obliging the government to finance itself through regressive taxes on imports. Perennially short both of cash and professional civil servants, the state has failed to provide infrastructure, the rule of law and services such as health and education. The earthquake made the weak state even weaker, killing many civil servants and destroying their records. Most Haitians who have escaped poverty have done so by emigrating. Many of those who stay resort to crime. Violent protests are common, sometimes toppling presidents and starting the vicious cycle anew."
More Haiti facts: their GDP per person has declined 40% since 1981. The 2012 earthquake killed 200,000 people. Infrastructure is falling apart. Example: the Artibonite Valley, capable of growing enough rice to feed all Haitians, has lain fallow since 2015 when marsh grasses clogged the irrigation and drainage canals in the valley.
Moise is using a utilitarian approach to prioritize reforms. The Copenhagen Consensus Center (CCC) with a $2 million grant from the Canadian government, scored and ranked proposed reforms by their return-on-investment. Example: cholera epidemic kills 10,000 in 2010. By looking at ROI, it is determined that vaccinating just schoolchildren will have a better result than trying to vaccinate the entire population. It will be cheaper, easier to manage and once vaccinated, the schoolchildren will be sufficient in number to achieve herd immunity. This schoolchildren-only approach has a benefit-to-cost ratio of 6.
More from CCC: fortifying the flour in Haiti would save 150 infants a year and prevent 250,000 cases of anaemia at very little cost. It has an ROI of almost $25, meaning that for every $1 in cost, Haiti gets $25 in benefits. Also high up, training more first responders and improving access to contraception.
The Mexican government hopes to improve the lot of the south by creating special Economic Zones, which will have lower taxes or less regulation than the rest of a country.
Northern Mexico is where the manufacturing happens, thanks in part to maquila laws that allow duty-free importation of materials as long as the finished product is exported. Between 1980 and 2000 these laws boosted the share of international trade in Mexico’s GDP from 11% to 32%. Southern Mexico is poorer and rural, with an economy based on agriculture. The Mexican government hopes to improve the lot of the south by creating special Economic Zones, which will have lower taxes or less regulation than the rest of a country. The intention is to promote investment in deprived areas with incentives that might be unaffordable, unpopular or unnecessary if applied nationally. First used in Ireland in 1959, they now number over 4,300 globally. (Commenters think the real problem in Mexico is widespread corruption - the nation is referred to as a “Mafiacracy").