Industrialization’s Monster: Yes We Can

Considered the founding work of science fiction, Mary Shelley’s classic Frankenstein has served as explanation and warning across many subjects and issues since it first captured the imaginations of readers. The context within which she wrote, exactly two centuries ago as the Industrial Revolution was gaining speed, was the tumult of Humanity’s first failures against a rising tide. Today, as the casualties of the first years of this new Cyber Revolution fall and the sharp changes already emergent shake our reality, the moment is nigh to revisit Shelley’s warnings, to consider the ramifications of the past upon life and the planet, and to ponder the future.

Published in 1818, Frankenstein is the perfect foil to interrogate the cost of past choices as new ones arise. Shelley wrote the book when the perils of that great socio-economic change were already manifesting even as its promise beckoned. The Luddites of her day, the movement of the first workers displaced by industrial manufacture, were only the first of many casualties across the human and natural landscape. Today, however, as the complex costs and consequences of that advance in human experience are manifest, the work easily stands as a rebuke of Man’s unchecked rush to apply his knowledge and ability to change thereby creating a monster. Although Man rectified many of the Industrial Revolution’s early and simpler abuses of men and nature, its long term effect, and the looming complex climate and human crises it brought, threaten much of the existence we take for granted. Looking at the results of the Industrial Revolution writ large, we must examine the positive, beneficial effects for society against the negatives, most significantly in climate change, pollution, geographic-topographic degradation, and the unsettled terrain of human satisfaction with their daily lot.

Cyber-Industrialization

Looking back on the Frankenstein’s monster of unchecked industrialization, it is worth asking which of the advances might have been challenged in their own time had we known the true costs. Some? Many? None? Surely reason would have promoted a demand for moderation and acted as a brake upon the unchecked application of industrialization to the majority of humanity’s endeavors. At the very least, one might expect governing authorities to impose the costs of the advances upon those who would profit most from them. Such a hypothetical is no mere wistful navel gazing: to reflect on what to rework in the contested present is more than relevant as Mankind stands at the next great socio-economic revolution. As we face a similarly grand reconfiguration of humanity, changes being wrought under the Cyber Revolution offer a means to reconsider the choices for our future and reckon the errors of our past. We would do well to address these storms now rather than later. Looking only at a snapshot of issues arising from artificial intelligence, algorithms, the increasingly networked world, and their further implications on the quotidian purpose of life, the terms of our necessary humility emerge.

artificial intelligence
Science fiction cliches often portray AI as resembling human form, but the reality is that AI will not have the same human limitations. Photo credit: https://expo.co.jp/english/2017/06/06/766.html.

If sentience is mankind’s defining characteristic, then artificial intelligence and the role of algorithms are profound efforts to reproduce our very essence. Controlling significant swathes of life, these human creations hold to capacity usurp sovereignty over human existence. Already the machines taught to converse are learning to do so in self-created languagesit will not be long before they can do so to their human creators’ utter incomprehension. Perhaps worse than the science fiction horror of a world controlled by machines is the banal disaster of a world remade by distrust and unreality. The social media that more and more of the population rely upon are subjected to ever more sophisticated manipulation by algorithms. Created to shape content tailored to an individual’s tastes, the dark side of this phenomenon is algorithms designed to influence the fundamental core of representative governance. And while propaganda and false news are nothing new, the targeting and volume is creating an unprecedented environment of uncertainty about the very terms of reality.

Where humanity organized itself for good and ill in the creation of communities, this urge to connect as applied to the new cyber world cedes even more control to the unknown. The networked world increasingly places critical functions at finger-tap reach of individual and non-state actors whose motives and ends benefit few and harm many. Looking only at recent events, the systems and institutions under siege to the “Internet of Things” are those most critical to society; a window to the perils of this newest ungoverned space. The Equifax hack reported last month, affecting at least 143 million Americans, is only the latest largest data breach in history, and may threaten the financial security of too many. Ransomware attacks are increasingly used to take control of information systems, putting health at risk as hospitals have become targets to virtual hostage taking for money. But the worst may be the peril of the electronic means to our democratic system. The investigation into the possible hacking of the 2016 election illuminates a chillingly effective attempt to interfere with American sovereignty. While the extent of this campaign is as yet unknown, evidence of theft of voter information in Illinois by likely Russian actors has been verified and is under Congressional investigation.

Humanity’s Monster

At a deeper level, the Cyber Revolution attacks the fundamental meaning and experience of what it is to be human. Looking to the single issue of work, so many advances threaten to continue the degradation of this human value begun during the Industrial Revolution. It is an ominous trend. Not merely a Protestant ethic, there is something fundamentally important about work to human existence that links fulfilling a sense of productivity to meaning. Yet as the Cyber Revolution gathers momentum, robots and computers may perilously curtail productive human activity from agriculture to automotive, architecture to artisan cheese. The wisdom of prioritizing more goods at cheaper prices over simple human satisfaction demands a rethink as more radicalism arises from nihilism born of meaninglessness.

These are just the first rounds; this era’s first artisans displaced by factory machines, rivers despoiled, air befouled. Without succumbing to full-fledged Ludditism and the rejection of all advances, there is a need to rethink this headlong rush into the next era of change. The genius of our Frankenstein impulse, the creative imagination to dream and explore, should not be destroyed – but neither should the monsters of this impulse be allowed to rampage unfettered.


Jill RussellDr. Jill S. Russell is a Professor of National Security and Strategy at the U.S. Army War College. She has worked extensively in professional military education in the U.S. and the U.K., as well as in defense consulting. Her areas of expertise and research interest are logistics, urban conflict and public order, and strategy and policy. She writes and comments regularly on military affairs and national security for blogs, news outlets, and practitioner publications.

A Tale of Two Cities: Development in Latin America

Looking out upon the city from the top of a modern high-rise, one cannot help but note the contradiction. The urban sprawl of luxury apartments, malls, and cafés gives way to the eclectic but destitute clusters of favelas; the multi-colored and corrugated steel-roofed slums that dominate the periphery. The city is Rio de Janeiro, but it could easily be Lima, Peru, Buenos Aires, Argentina, or Bogotá, Colombia. This caricature of rich-meets-poor ambiguously describes nearly every major city in Latin America, a region in which a growing number of countries occupy the margin between developed and developing status.

The global trend of urban migration is particularly strong in Latin America, compounding development shortfalls for safe and adequate housing in capital cities. In Rio, for instance, 1.5 million people live in the favelas—about 24% of the population. There are over 1000 of these neighborhoods in the city, the majority of which are illegally constructed. Brazil is the region’s largest country, economy, and the presumptive regional hegemon, but like others in the region they struggle to spread the benefits of growth to all socioeconomic classes. Nearing the milestone of developed status, Latin America is starting to question exactly what developed truly means.

Development by the Numbers

The World Bank sorts countries of the world into four income categories: low income, lower middle-income, upper middle-income, and high-income countries. Half of the world’s countries fall into the two middle-income categories, which contain 70% of the world’s population and 72% of the world’s poor. All low-income and middle-income nations are eligible for Official Development Assistance (ODA)—the collective non-military aid, grants, and financial instruments intended to promote economic development and welfare—which totaled $142.6 billion dollars in 2016.

Once middle-income nations reach and maintain a per capita Gross National Income (GNI) of $12,745 USD or greater for three consecutive years (2013 numbers), they “graduate” from upper middle-income status to high income status, rendering them ineligible for ODA. Latin American ODA totaled nearly $5 billion dollars in 2016, but sable growth within the region over the last 25 years places countries such as Brazil, Argentina, and Mexico—those with large populations and high inequality—on a path to graduation from ODA eligibility.

development
The projected GNI growth (2015) will cause the majority of Latin American middle-income countries to graduate and lose ODA by the year 2030, based on OECD projections. Photo credit: https://www.oecd.org/dac/financing-sustainable-development/ODA-graduation.pdf.

The body that determines these categories is the Development Assistance Committee (DAC) of the Organization for Economic Cooperation and Development (OECD). The DAC, in conjunction with the International Monetary Fund and the World Bank, meets every two to three years to refine the list of eligible aid recipients. Middle-income countries constitute 90% of Latin America, and by the year 2030, 80% of the region will no longer be eligible for ODA.

The first wave of this phenomenon hit the region in August when Chile, Uruguay, and Costa Rica graduated to high-income country status. The graduations come after a period of GDP growth  in the region averaging 3% between 2000 and 2015. In countries like Brazil and Argentina, next on the list of prospective graduates, poverty has decreased drastically since the turn of the century. According to the World Bank data, poverty in Brazil decreased from 12.3% in 2002 to 3.7% in 2014. Argentina’s poverty level fell from 14% to 1.7% over the same period.

But these indicators only reveal part of the story. The World Bank international poverty line is drawn at $1.90 dollars of income per day, or about $685 dollars per year. Inequality figures in the region are the highest in the world. The 2016 Gini Index—the measure of statistical indicators that assign a value to inequality—show Latin America occupying 13 of the top 25 spots for highest inequality in the world. The top 20% of the population still holds 57% of the wealth and it has the fastest growing number of billionaires in the world, numbering 151 in 2015, a 38% increase over the previous year. Given that context, reaching the $685 dollars per year milestone seems to leave much room for improvement.

Graduate to Cooperate

The steady loss of ODA will be Latin America’s next development challenge, and the millionaires and billionaires will not be the ones feeling the impact. Chilean government officials have already been vocal in their objection to the graduation process, arguing that the loss of ODA comes at the most critical point for developing nations. They contend that the process is one-dimensional and does not reflect the complex set of issues that countries in this category face in sustaining development. This is true, but many of the challenges come from within Latin American governments and cannot be solved with ODA. Tax systems are archaic and welfare programs, especially in a non-welfare state like Chile, are limited or not sufficient to bridge the gap of inequality.

development cooperation
ODA is used on a wide range of development themes. Chile relies on development funds for programs related to climate change, the effects of which are more pronounced in the Patagonia region of the south. Photo credit: https://visualizingclimatechange.wordpress.com.

The real implications for ODA graduation are unknown. The OECD lacks the requisite data to be able to predict how ODA graduation affects future development. Additionally, development assistance varies from year to year, is given at the complete discretion of the donor countries, and is subject to global foreign policy trends. A retraction in globalism, increases in terrorism and security concerns, and global migration and refugee flow will continue to influence the distribution of aid. As countries in the global south continue their efforts in development, relying on ODA cannot be the only strategy to sustain development.

One opportunity lies in increasing South-South Cooperation, characterized as a framework of collaboration across multiple domains between countries of the global south. South-South Cooperation focuses on the transfer of knowledge, technical expertise, and human capital—all critical components of development. This collaboration already exists in the region, but the programs are few, the level of institutionalization is low, and domestic and regional politics often hamper cooperation efforts. Unlike the regional bodies (like MERCOSUR and UNASUR) that have high levels of institutionalization with low output, South-South Cooperation is accomplished through existing, state-level institutions like a country’s Ministry of Foreign Affairs. This allows them to engage in programs on a limited or enduring timeline, bilaterally or multilaterally, at both the national and sub-national levels.

Latin America—and the global south in general—must seek internal solutions for development. They will also need to find a way to better incorporate NGOs and the private sector, who have an increasingly important role to play in the global system. Regional economic leaders, such as Brazil, Chile, and Mexico, can accelerate the pace of regional cooperation initiatives and counter the loss of ODA over the next decade. Bureaucratic inefficiency and corruption make reforms difficult, but South-South Cooperation provides an existing framework and  support from the United Nations Office of South-South Cooperation (UNOSSC). A failure to reform and generate intra-regional development programs may not slow economic  growth, but it will threaten future social and political stability and undermine long-term regional security.


The views expressed in this article are those of the authors and do not reflect the views of any  government or private institution.

Major Patrick “TISL” Parrish is the Blogmaster and editor for the Affiliate Network. He is a US Air Force Officer and A-10C Weapons Instructor Pilot with combat tours in Afghanistan and Libya. He is currently serving as an Olmsted Scholar in Santiago, Chile.

Bolivarian Devolution: The Venezuelan Crisis

This morning nearly 25,000 Venezuelans will cross the Simon Bolivar bridge into Colombia in search of work and a hot meal. Most will return in the evening with extra food for their families if they are lucky. They make the trip hoping to earn money peddling goods on the street, seeking routine medical care, or standing in line for hours to receive one of the thousands of free meals served daily by churches and non-profit organizations. The bridge, a piece of shared infrastructure by which 80% of trade goods pass between the two countries, has become a humanitarian lifeline for those trying to escape the Venezuelan crisis. Recent surveys suggest 93% of Venezuelans cannot afford to purchase food and hospitals there lack 95% of medical supplies needed to provide basic care. The cost of Venezuela’s failed Bolivarian Revolution, a phrase coined by the late President Hugo Chavez, is being paid by the citizens it promised to protect, and the growing spillover into Colombia threatens to turn a Venezuelan problem into a regional one.

The Bolivarian Revolution began rather inauspiciously in 1992 when then-Lieutenant Colonel Hugo Chavez led an unsuccessful military coup to oust the democratically elected president. Released from prison two years later, Chavez went on to win the 1999 election as a populist fringe candidate under a socialist ideology he called “Chavismo”. In a case of extradinarily bad timing, his anointed successor, a former bus driver-turned-Finance Minister by the name Nicholas Maduro, assumed the presidency following Chavez’s death in 2013. Within a year, the global drop in oil prices triggered an economic crisis in Venezuela, catalyzing the failure of the socialist experiment and intensifying social unrest. President Maduro responded to the resultant popular criticism with a heavy hand, using the military to violently suppress protests and working internally to subvert Venezuela’s democratic institutions.

The situation in Venezuela represents a complete reversal of fortunes from two decades ago. Beginning in the 1970s, nearly four million Colombians fled to Venezuela to escape violence and terror wrought by the drug cartels and the FARC. In 1999, the flow of migrants began to steadily reverse, and 1.5 million people have since left Venezuela for Colombia. Two recent events illustrate the ironic role reversal. On the 15th of August, the FARC officially completed a peaceful disarmament process and was incorporated into the Colombian democratic system as a political party. Then, just three days later, the pro-Maduro Constituent Assembly in Venezuela seized control of the opposition-led Congress, removing yet another democratic impediment to his rule. The move sparked regional outrage, but engendered little surprise as the Venezuelan political apparatus moved one step closer to authoritarianism.

Venezuela Devolution
Thousands of Venezuelans line up every morning to cross the Simon Bolivar Bridge to obtain food and basic necessities on the Colombian side. Photo Credit: http://www.houstonchronicle.com/news/article/Thousands-cross-Venezuela-border-to-Colombia-for-8383342.php

Socialist Expropriation and Crime

Venezuela controls some of the world’s largest crude oil reserves, a critical piece in a calculated strategy to safeguard the Chavez regime by distributing wealth. The scheme has been remarkably successful over the last 18 years and is probably the only reason his successor is still in power, but corruption, subjugation of private industry, and ill-fated socialist policies have depleted the nation’s wealth. Upon his election in 1999, Chavez nationalized much of Venezuela’s industry. By 2011 Venezuela was receiving only a $5M share of Latin America’s total $150M in annual foreign investment and the number of private businesses had decreased from 14,000 to roughly 9,000. Oil accounted for 95% of Venezuela’s exports at the time, but the billions of dollars earned in the post-9/11 oil boom have vanished. Most of the money was funneled to political supporters and a large share was invested in strengthening the military.

Four years after Chavez’s death, the question remains whether the military will stay loyal to Maduro, to the Revolution, or abandon them both in favor of the opposition. Maduro’s ability to continue lining the pockets of his generals and politicians dwindles by the day. His support is already weakening in the lower ranks of the military where the effects of the economic crisis are most palpable. Worsening conditions increase the potential for a military uprising against Maduro in favor of a leader more capable of advancing the Chavismo ideology. Considering also the historical influence of Cuba’s Castro regime and ongoing support from Russia and Iran, it stands to reason Chavismo will endure even if Maduro’s political capital dries up.

Command of the lucrative illicit drug trade is also a factor. Throughout the Chavismo era, corrupt politicians profited from the trade by exploiting military and police fealty. The details of their corruption were published almost a decade ago when a seizure of data exposed integrated cocaine distribution networks between Venezuela and the United States. Notably, in 2016 two of Maduro’s nephews were convicted in the US for conspiracy to transport cocaine, suggesting possible ties to the President himself. If indeed Maduro is on the take, the growing scarcity of pay-off funds from other sources raises concern he may lose control over the illicit drug trade, leaving a vacuum that could lead to increased violence, volatility, and regional instability.

All-American Solutions

Despite President Trump’s recent refusal to rule out a “military option” in Venezuela, the United States lacks the domestic and international political capital to impose its will there. Furthermore, his intransigence on immigration and the proposed border wall with Mexico have not earned him additional support in a region where one-third of the population sees American power and influence as a major threat. During a recent Latin American tour, Vice President Mike Pence spent much of his time softening Trump’s message on Venezuela and assuring leaders Washington is open to a wide range of options including economic sanctions. Despite the assurances, Colombian President Juan Manuel Santos explicitly rejected the notion of a military response in a joint press conference with Pence, insisting Venezuela’s neighbors must use “other measures to bring about change in the country.” Clearly a more indirect and cooperative approach will be required if the United States wishes to influence the situation in Venezuela.

Venezuelan Crisis
Colombian President Juan Manuel Santos addresses the Colombian press during a joint conference with US VP Mike Pence. Despite the positive state of US-Colombia relations, President Santos emphatically rejected the US military option that President Trump mentioned the week prior to the visit. Photo credit: http://www.infobae.com/america/america-latina/2017/08/14/juan-manuel-santos-le-pidio-a-estados-unidos-descartar-una-posible-intervencion-militar-en-venezuela/

Despite President Santos’ strong stance, there is no reason to believe Latin America is capable of responding effectively on its own. Any admonishments of Maduro’s despotism by Venezuela’s neighbors are tempered by their own dogmatic respect for state sovereignty; a common paradox in a region composed of weak states with strong leaders. Additionally, domestic political concerns consume nearly every country in the region. Brazil is embroiled in its own government scandal and focused on economic and political instability. Argentina is still nursing an economic recovery after years of fiscal mismanagement under the Kirchners. Colombia is coming to terms with a difficult peace agreement with FARC revolutionaries and wants to keep growing economically. Chile, despite being an economic growth leader for a decade, has yet to truly find its voice in regional politics and continues to struggle with domestic political impediments. As is characteristic of Latin America, there is a lot of talk, but no coherent regional stance.

Throughout Latin America, citizens are bracing for the political and economic effects of an influx of Venezuelans seeking work, housing, and social assistance. Violent civil war is a concern, as is the resurgence of illicit transnational networks—a trend that had been on the decline in recent years thanks to progress in neighboring Colombia. A US military intervention would most certainly exacerbate existing regional security challenges. The only sustainable solution to this Bolivarian Devolution rests on the ability of Latin American states to look beyond their respective domestic challenges and respond with an uncharacteristic level of regional cohesion. To enable such a response, the United States should pursue collaborative regional solutions focused on mitigating the economic and social impacts of the growing humanitarian crisis.


The views expressed in this article are those of the authors and do not reflect the views of any  government or private institution.

Major Patrick “TISL” Parrish is the Blogmaster and editor for the Affiliate Network. He is a US Air Force Officer and A-10C Weapons Instructor Pilot with combat tours in Afghanistan and Libya. He is currently serving as an Olmsted Scholar in Santiago, Chile.

Major Kirby “Fuel” Sanford is a US Air Force Officer and F-16 Instructor Pilot with combat experience in Syria, Iraq, and Afghanistan. He is currently serving as an Olmsted Scholar in Buenos Aires, Argentina. 

Green is the New Black: Making a Gas Cartel

As the disastrous civil war in Syria stretches into its sixth year, the conflict is beginning to take shape as a struggle for influence between Russia and the United States and their respective proxies. The Russian interest in Syria, initially limited to protecting the naval base in Tartus and keeping Bashar al-Assad in power, is now widely believed to have a regional and global power dynamic. Russia controls 26% of proven global natural gas reserves and has long been frustrated by its inability to export to customers other than the European Union (EU) and NATO member states. Not only does this geographic reality leave Russia dependent upon a single block of customers that has access to other suppliers, but it limits Moscow’s ability to influence politics with its overwhelming market share. In late 2015 however, the Russian military mission in Syria began to present other opportunities to exploit the politics and the pipelines that crisscross that war-torn region, thus giving birth to the prospect of a new natural gas cartel.

The global energy market is changing. Traditional, fossil-based energy supplies like coal and oil are becoming increasingly expensive to find and extract. Political turmoil in the Middle East coupled with popular pressure to address climate change, make natural gas a more attractive option for future energy needs, particularly in Europe. With average global gas consumption likely to increase approximately 1.6% annually until 2040, Europe needs a strategy to secure supplies from beyond the Russian monopoly. This is not a minor concern in Brussels. Moscow’s 2014 closure of gas pipelines into Ukraine highlighted the linkage of Europe’s energy future to Russia’s political ambitions, yet EU sanctions against the Russian oil and gas industry are seen as a delayed and ineffective western response. Europe, like Russia, now has its eye on massive natural gas reserves in the Middle East.

A Layered Strategy

The war in Syria is a catalyst for strategic cooperation between Russia and Iran. By bringing together the combined weight of their massive natural gas reserves, Moscow and Tehran would be able to influence Europe in powerful ways. If they bring Qatar’s reserves into the deal they could create an OPEC-like gas cartel with control of 60% of the world’s reserves; a frightening degree of dominance over the increasingly strategic commodity. However, there are many geographic and political obstacles to this ambition, and it is in these spaces the Russian strategy is taking shape.

Russia Natural Gas
Together, Russia, Iran, and Qatar possess more natural gas reserves than the rest of the world combined. Photo credit: http://www.energybc.ca/naturalgas.html

Distribution of Iranian reserves to Europe depends on the outcome of conflicts in Syria and Iraq and on the political independence of Kurdistan. These countries contain much of the existing regional natural gas pipeline transmission capacity. Stabilization of those conflicts presents an opportunity for positive Russian engagement with Turkey and forms the basis for a recent trilateral accord signed in Kazakhstan between Russia, Turkey, and Iran aimed at ending the Syrian civil war; an agreement made possible by an expansion of the Russian military mission there. Turkey, with an intense interest in the political future of Kurdistan, plays a unique role by controlling access to many of the natural gas pipelines aimed at Europe. More importantly perhaps, Turkey is the southernmost outpost of NATO and hosts the important US military base at Incirlik.

The notable absence of the EU, the US, and the United Nations from the Kazakhstan talks reflects an important aspect of Russia’s strategy: limiting western—particularly US—influence in the region. Though Iran is an enthusiastic and powerful ally in this endeavor, strategy alone is not enough as the US has some very real ties to the region. American bases in Turkey, Iraq, Kuwait, Bahrain, and Qatar form a defensive network that bolsters the political stability of many of Iran’s rivals; not the least of which are Israel and Saudi Arabia. As mentioned, Turkey’s own security is still based largely on NATO, and most of the Gulf Emirates are completely dependent on American hard power for their defense. Given robust and longstanding support for this political-military structure in Washington, it is not surprising that Russia and Iran are exacerbating tensions between all of America’s allies in the region, particularly Qatar and Saudi Arabia.

Russia and Iran are the unseen beneficiaries of fractured relations between the two important US allies. Saudi Arabia’s main regional rival, Iran, is hardly an ally of Qatar, though enduring cultural links exist between the two states that can form a basis for renewed affinity. There is evidence Russia is encouraging an economic tie as well through business deals between Rosneft, the integrated oil company controlled by Moscow, and the Qatar Investment Authority (QIA). It is here, where Russian, Iranian, and Qatari interests converge, that the possibility of a joint pipeline project begins to make sense.

Russia Gas Cartel
The eventual route from the Persian Gulf South Pars/North Dome gas field (red region, bottom right) to Turkey is of strategic importance in the Middle East. Photo credit: https://www.loc.gov/resource/g7421h.ct002142/ (pipeline routes added by Chris Golightly)

Overland transport of gas reserves from Qatar’s North Dome gas field will converge at the existing terminal in Ceyhan, Turkey, but could take several different paths. While Russia prefers a pipeline (IGAT-IX, above in black) along the Iran-Iraq border, the US backs a route that transits Saudi Arabia, Jordan, and possibly Israel and Syria. Whatever the eventual route, stability in Syria is vital for security of the entire coastal strip. Achievement of the Russian design depends upon three key elements: politically isolating the United States, fracturing its allies, and stabilizing the Syrian conflict on terms that are favorable to the Kremlin.

Though Russia clearly hopes to position itself as the lynchpin in the arrangement, neither Moscow nor Tehran possess the technology required to construct IGAT-IX or the high-end LNG export facilities required at its terminus. For that they require easing of western sanctions that currently prohibit US or European oil companies such as Exxon-Mobil from sharing technology. The framework for this collaboration already exists. In August 2011, Russian President Putin, and the Executive Chairman of Rosneft, Igor Sechin, met Rex Tillerson in Sochi when he was still CEO of Exxon-Mobil. There, the three signed co-operation agreements for ten joint ventures, including drilling projects in the Russian Arctic, exploration in the Black Sea, a joint Arctic research center, and substantial options for Rosneft to invest in projects in the Gulf of Mexico and Texas. Consequently between 2011 and 2013, Exxon-Mobil became the partner of choice for Rosneft and now puts Russia and Iran high on the priority list for exploration. The reciprocal cooperation and the elevation of Tillerson to Secretary of State increases the expectation that sanctions will eventually be lifted, or at least not increased. Already, the bill for increased sanctions against Russia, which includes prohibitions against certain dealings with its oil and gas industry, is hung up in the House of Representatives due in no small part to efforts by the US oil lobby.

The Cost of Inaction

The prospect of Russia and Iran controlling 60% of the world’s proven natural gas reserves aims right at the heart of European security. Addressing it will require energy-specific strategies that not only reduce demand through the use of renewable sources, but also political solutions that guarantee supply by stabilizing the Middle East. With European unity hamstrung by homegrown nationalist movements, and the United States distracted by an endless series of domestic political dramas, it is difficult for either to formulate such strategies for the long-term. While the West limits its efforts in the Middle East to defeating the Islamic State of Iraq and the Levant (ISIL), Russia and Iran are playing a much broader game that will ultimately be more effective.

The potential for a tightening of gas supply options is a sober call for Europe to overcome domestic distractions and concentrate on a comprehensive energy security strategy; one that incorporates development and commercialization of a suite of renewable energy technologies. This should include solar and offshore wind, advances in nuclear fusion, offshore methane gas exploration, and clean, dry fracking. Until Europe reduces its reliance on Russian gas and takes measures to ensure political stability in the Middle East, there will be a risk of unwanted influence from Moscow and continued uncertainty.


Chris Golightly is an Independent Consulting Engineer specializing in offshore renewable energy, based in Brussels. Prior to 2010 he worked in the Oil & Gas industry.

Future Vision: Europe’s Image Problem

Since the end of the Second World War, Europe has put its security in the hands of supranational organizations. These institutions, whether economic, military, or political, have deterred the wars between states that plagued European security since the Peace of Westphalia in 1648. In that period, the march of uniformed armies decided conflicts and knowing where those armies were and how they were deployed was paramount to victory. For this there is no more powerful tool than an eye in the sky; satellite imagery in the hands of western governments. But today’s security challenges seem to invalidate collective intelligence systems.

Threats today are insidious. The massed armies of old have given way to environmental degradation, terrorism, and “hybrid” military threats designed to operate in the seams within Allied decision-making. Big states like France, Great Britain, and particularly the United States, hold a monopoly on imagery intelligence (IMINT) and distribute it through Allied intelligence structures at NATO and the European Union. With NATO’s Afghanistan mission winding down and a Euroskeptic administration in the White House, the old model of sharing IMINT is no longer flexible, responsive, or reliable enough to address the modern security needs of most European states.

A Transitioning Reality

The end of 2014 marked the transition from NATO’s United Nations-mandated International Security Assistance Force (ISAF) in Afghanistan to Operation Resolute Support. The new mission focuses on building the capability of Afghan structures through training and financial instruments. These efforts are funded via the Afghan National Army (ANA) Trust Fund, the United States Afghanistan Security Forces Fund (ASFF), and the Law and Order Trust Fund for Afghanistan (LOTFA). The reduction of western troop levels and the primacy of Afghan institutions that cannot meet strict and expensive requirements for access to Allied intelligence, has reduced the urgency that previously drove the sharing of IMINT within NATO.

Satellite Imagery
When current and in high-resolution, photos like this one can provide salient intelligence; like the fact that the second Russian bomber (from the bottom) has recently run its engines. Photo Credit: DigitalGlobe – https://twitter.com/DigitalGlobe/status/829404552092905473

The election of Donald Trump may further restrict cooperation within NATO. During his first one hundred days as President of the United States, the Trump Administration made it clear it expects its NATO allies to increase their contributions to the organization. Though this is poorly defined and President Trump appears to be softening his position, intelligence sharing is not likely to increase during his administration leaving European allies to consider available options. Fortunately, advances in technology and the genius of the free market have generated alternatives in what was previously locked in the rarified world of classified military technology.

20/20 Hindsight

Commercial satellite solutions have come a long way since 1962 when the first privately sponsored mission sent the Telstar communication satellite into orbit. Today, high-resolution commercial earth observation and advanced geospatial solutions are useful across the many sectors of defense and intelligence, public safety, map making and analysis, environmental monitoring, oil and gas exploration, infrastructure management, and navigation. These options are inexpensive and rival legacy military capabilities in terms of resolution and coverage. When coupled with geographic information systems and internet technologies such as cloud computing and database management, commercial satellite imagery is a powerful tool in the hands of a growing community of potential clients.

Satellite Imagery
Satellites like this one, DigitalGlobe´s WorldView 4, are among several of the options that may provide European nations with the imagery that they need for the future. Photo Credit: DigitalGlobe – http://worldview4.digitalglobe.com/#/main

Outlook for the Future

The Brexit referendum in the United Kingdom as well as the strong showing of nationalist parties in France, the Netherlands, Hungary, Poland, Greece, Turkey, and the United States are making it harder to implement complex supranational intelligence sharing arrangements. Terrorist attacks and the continuing influx of economic migrants and refugees continues to fuel growing discomfort with the risks inherent in “open door” policies. In this time of crisis, intelligence services, militaries, and police forces are under increased pressure to provide security and have already begun exploring unilateral solutions to the problem. Their task will be impossible however without the right tools for the job.

For now, European imagery comes from the combined abilities of the European Space Agency (ESA), the EU Satellite Centre (EU SATCEN), and the contributions of individual states. European leaders depend upon the abilities of the Copernicus Earth Observation program and the Sentinels to provide them with many of their imagery needs but these are legacy systems. The Copernicus constellation lacks the technological capability of newer commercial satellites like Worldview 4, and the nations are acutely aware of Copernicus’ shortcomings. For those countries lacking a space program or a military IMINT capability of their own, private sector solutions will be an increasingly important component in the defense and security of their nations.


 

Johnathon RickerJohnathon Ricker is an account manager with Navisio Global LLC, CEO of Prospective International, and a student of international security, intelligence, and strategic studies.

Paraguay: Voting Away Freedom

Dictatorship and socio-economic bias have left Latin America home to some of the most corrupt nations in the world. Despite the continent’s recent relative success in economic development and securing regional trade agreements, 20th century political scourges still haunt many Latin American nations and Paraguay is no exception. For 35 years the nation endured a period in which popular peaceful dissent was met with the strong-arm of the military. Extralegal arrests and humans rights abuses were commonplace, and the housing of Nazi war criminals was an accepted practice. Paraguayan President Horatio Cartes’ renewed bid last week for re-election risks forfeiting the strides made towards real democracy over the past decade and may force the government back into political crisis.

While Paraguay’s political future remains in doubt, the facts surrounding the events of the 31 March are not in dispute. A majority group from the Senate and a hand-full of opposition senators met secretly to cast a majority vote to put into motion the first steps necessary to amend the Paraguayan constitution. The amendment would enable President Cartes to seek a second term in contravention of the single-term limit originally imposed to bolster Paraguay’s democratic processes. The proposition could further entrench Cartes’ Colorado Party that has enjoyed a majority in the legislature for 66 of the last 70 years.  After 35 years of despotic rule by dictator Alfredo Stroessner, the people of Paraguay were outraged by this legislative “coup d’etat” which sparked a protest at the Congressional building in Asunción.

In the melee that followed, a large portion of the building was gutted by fire and Rodrigo Quintana, the leader of the Liberal Party’s youth branch, had been shot dead. The details surrounding the incident are dubious, if not damning. Quintana was shot and killed in a violent police raid on the Liberal Party’s Youth Branch political headquarters. Security footage shows Quintana running away from the police.  After absorbing the deadly shot, an officer now identified as agent Gustavo Florentin approached and stepped on his body. Florentin has since been fired, along with the interior minister and Paraguay’s police commander, Crispulo Sotelo. While these dismissals direct blame towards the police for an inability to protect Congress and the public, the truth is this action by President Cartes was more preventative than altruistic. The calculated move precludes the possible violent reaction from an already agitated opposition but the risk of repeated violence endures until negotiations surrounding the amendment begin and until transparent government investigation of the police raid lifts the perception of impunity.

paraguay protest
Protestors peaceful after a previous night’s clashes left Congress in flames. Photo credit: http://www.aljazeera.com/news/2017/04/paraguay-delays-election-vote-fresh-protests-170404053715500.html

A Vote Against Confidence

The Colorado party will likely argue that the vote was an inadvertent procedural violation of legislative etiquette. The opposition, along with the neighbors and trade partners, will view the covert legislative action as a power grab and a sure indicator that a corrupt polity is leading the small land-locked country backward in already uncertain economic times. A procedural violation can be dealt with within the democratic process, but a substantive and willful disregard for democratic governance spells a disastrous outcome.

To understand the level of risk being taken and the importance of the upcoming events, one needs only to look at who responds and what is said. Immediately after the violence, President Cartes downplayed the events in a letter to the people of Paraguay. In the third paragraph he writes: “Democracy is not conquered or defended with violence and you can be sure this government will continue to put its best effort into maintaining order in the republic…we must not allow a few barbarians to destroy the peace, tranquility and general well-being of the Paraguayan people.” His cavalier statement was met with disdain by the United Nations Office of the High Commissioner for Human Rights (OHCHR), which quickly issued a pointed cautionary statement calling on political leaders “to avoid inciting violence and seek dialogue.” Although innocuous at first glance, the OHCHR statement avoids addressing the protestors or their actions and instead directly engages political leaders for “inciting violence”.

Paraguay protest
President Horacio Cartes tweeted this photo of a letter drafted in response to the protests of 31 March.

The Paraguayan Congress remains shut down while fire inspectors assess the damage. With a populace fighting widespread corruption of government officials, broken promises for rebuilt infrastructure, and frustration over lack of progress, even Asuncion’s own mayoral race was lost to the opposition party. Pope Francis of neighboring Argentina has called for immediate dialogue between opposing parties and President Cartes has heeded the advice, recommending to the lower house (presumably pro-amendment) to delay until the factions could discuss a way forward for the initiative. Opposition leader Efrain Alegre objected, pending a comprehensive investigation into the events surrounding Quintana’s death. The bipartisan call to delay the vote, originally scheduled for April 4th, further obscures the path forward and and tensions continue to rise. Further delay could unravel an uneasy peace maintained since Cartes assumed the Presidency in 2013.

Despite all evidence pointing to the impossibility of withdrawing the proposal and annulling the clandestine senate vote, there is still a chance that diplomacy and influence from neighboring countries could prevail. Since President Cartes’ election, Paraguay has experienced a surge in economic growth, making it one of South America’s fastest growing economies. This glimmer of hope would lead one to believe that the Colorado party should abandon the measure and seek a strong replacement for Cartes in 2018, restoring peace and trust in a nation still racked with fear of a return to despotism. The unfortunate truth is that the prospect of political gain and notoriety is alluring, and the risk to the political certainty of the country is high. The most promising course of action towards maintaining peace would be for Cartes to go against the majority, adhere to the current constitution, and eliminate himself as a candidate in the next election. This also appears the most unlikely scenario, as it would put an end to the right-wing preeminence that the Coloradan majority has enjoyed for decades.

Point of Inflection

In the absence of immediate and powerful diplomatic intervention or reversal by Congress, Paraguay faces a crossroads in which violence and freedom could become interdependent. The lower house will, if allowed to vote, pass the measure and send the constitutional amendment to the President for approval. If the recent violence following the initial vote is any clue to how the opposition will react, the ensuing fear and anger will undoubtedly thrust this tiny nation into a state of complete chaos. The ingredients exist for a violent implosion: a new police commander, a new interior minister, complete right-wing control without term limits, and a populace that has tasted freedom and democracy even if only for a brief period of time.

The upcoming weeks are crucial for determining the future prospect of peace and economic growth, both for Paraguay and for greater Latin America. Absent any legislative reversal on the initiative, the nation is on a collision course. The tragic and too-familiar possibility of a counter-revolutionary dictator rising from the ashes is greater now than at any point since Stroessner’s final days in 1989.


Major Kirby “Fuel” Sanford is a U.S. Air Force F-16 Instructor Pilot with combat experience in Syria, Iraq, and Afghanistan. He is currently a master’s student in Buenos Aires, Argentina as part of the George and Carol Olmsted Scholar Program. The views expressed in this article are those of the author and do not reflect the official policy or position of the U.S. Air Force, the Department of Defense, the U.S. Government, or the Olmsted Foundation.

Some More Equal than Others

Argentine President Nestor Kirchner, left, transfering power to his wife Cristina on her inauguration day in 2007
Argentine President Nestor Kirchner, left, transfering power to his wife Cristina on her inauguration day in 2007 (Infolatam)

In the midst of presidential election season, life in Argentina today is a bizarre mixture of cries for equality and human rights, contrasted with insidious government propaganda, limits on personal freedom and frustrating consumer choice.

By Jared Wilhelm

In October 2015, the citizens of Argentina will elect a new president. For the past twelve years, the large and resource-rich South American nation was headed by a member of the Kirchner family: first Nestor in 2003 and then his wife, Cristina since 2007. Much in the vein of famous Argentine first lady Eva “Evita” Peron, Cristina is a charismatic, populist figure within in the nation, exerting tight control over monetary policy, the media, and those who oppose her controversial policies.

The election will prove to be important not only for the nation, but also for the world. While Cristina can’t run due to term limits, a victory for one of her Kirchnerismo Party candidates might signal a continuation of some of her edicts, like allowing China to build it’s first overseas military base in Argentine Patagonia, cozying up to Vladimir Putin’s Russia and his houseguest Edward Snowden, and alleged suspicious dealings with Venezuela and Iran.

Uncertain future aside, it is interesting to look past the sensational headlines of corruption and international intrigue to consider the day-to-day life of the average Argentine who lives with the oddities of Kirchnerite rule. Would Argentina’s Founding Fathers- who modeled Argentina’s Constitution almost exactly after the United States of America’s in 1853– recognize the life that Cristina has imposed on the average citizen?

Free Fútbol for Everyone: A Captive Audience

While Argentina is famous for its grass-fed beef, wine and Tango, the key to the average Argentine’s heart is soccer, or fútbol. The Argentine league is the third oldest in the world, and no Sunday afternoon family meal is complete without watching one of the local or national clubs on television.

Since 2009, Argentines don’t need a satellite dish or a cable subscription to see their favorite local team, international tournaments or even the World Cup.  Instead of tuning in to one of the major local networks, fans turn to the government-run TV Publica. Outbidding traditional media conglomerates with a contract nearly double the size of what private companies previously paid, Cristina uses taxpayer dollars to ensure there will be Football for Everyone broadcast on her own personal station.

Since there are sometimes weekends with no national soccer games, in addition to Fútbol para Todos, there are Boxing for Everyone and Racing for Everyone as well. Anyone used to paying $99.99 for a blockbuster boxing match will be shocked to see the broadcast free for all.

Under the guise of providing equal access across the class spectrum and in an effort to compete with opposition media tycoons, Cristina and her propaganda machine waste no time taking advantage of their captive audience. In place of selling advertising time to the highest bidder, the government uses these precious opportunities to reach the people using spots that tout the government’s achievements, or to advertise for the state-owned airline, Aerolineas Argentinas, or the state-owned oil company, YPF. Both of these companies were expropriated from private businesses after takeovers by Spaniards in the 1990s turned sour.

In an almost eerie dichotomy with everyday life, the government’s slickly produced propaganda spots show a country where everything works beautifully and everyone is happy. No matter if the commercials are one-sided campaign ads, showcases of nuclear energy projects, satellite launches or simple advertisements for upcoming free sports broadcasts, one clear message is always sent during the final few seconds of each spot: Brought to you by the President.

While taxpayers are paying for the production and airtime for the Ministries of Education, Tourism, Health or Science and Technology, each commercial includes a not-so-subtle reminder of who is behind it all.
While taxpayers are paying for the production and airtime for the Ministries of Education, Tourism, Health or Science and Technology, each commercial includes a not-so-subtle reminder of who is behind it all.  See an example here.

Journalists estimated in January 2015 that during its six-year existence, the Argentine people  bankrolled a staggering $793 million US dollars worth of government propaganda through the program. Compared to a world where the market demand determines availability and private advertising dollars or subscriptions pay for broadcasts, taxpayer-paid government control of the majority of soccer broadcasting is a small price to pay for the Presidenta to spread her message on a daily basis to households across the nation.

Price Controls

Ever since Cristina expropriated the national petroleum company from Spain in 2012, the government controls the price of gas at the pump. Citizens no longer have to worry about the whims of supply and demand, world events or the decisions of the OPEC nations; instead, Cristina’s government ministers decide the price of a liter and then negotiate with the rest of the privately-owned companies to cap prices for six months at a time.

Price controls don’t stop at the gas pump. In 2014, Cristina launched a nationwide campaign to control prices and combat double-digit inflation on some 470 items in grocery stores, restaurants, airports, and even motorcycle dealerships. Cristina’s economic team decided that instead of letting market forces drive the price of certain items in stores, the government would set the price. What does the Price Guarding program mean to the consumer?

When a shopper visits any grocery chain or Wal-Mart Argentina, a large list of every Price-Guarded item is posted at the front of the store. The store shelves look the same, except there are special Price Guard logos on certain brands of the milk, hotdogs, cereals… even beer. A pack of cookies that should cost $2 is only $1.50- a good savings for the generic, tasteless cookies. Unfortunately, these price controls have unintended consequences. If you don’t like generic, tasteless cookies and instead prefer made-in-Argentina Oreos- well the Oreos that should cost $2.50 now can cost $4.50 or $5.

While businesses are not forced to comply with this scheme, more than 100 nation-wide chains have agreed to participate to maintain competitive market share. But Cristina and her team do not trust big business, so they encourage every day citizens to verify Price Guard prices are followed. During soccer broadcasts, government propaganda spots encourage shoppers to print out the Price Guard list and check to make sure the prices are set at the government’s rate. If not, Cristina has set up a 1-800 number and smartphone-app that allows everyone to report businesses for charging extra. When someone calls to make a citizen’s report, the odds are they probably won’t be using an iPhone.

A Nation without iPhones

Since 2011, Argentina has not permitted the legal import and sale of Apple iPhones. Thanks to Cristina, only cell phones that are locally made can be sold on the legal market. Cristina and her economic team have decided that in order to spark national growth, imports of all kinds will be limited and the local industries will be protected. The idea is to create jobs: now instead of being assembled in Asia, Samsung phone parts are shipped across the Pacific so that they can be assembled in country by Argentines and then considered a legal product. The same goes for televisions, refrigerators, even cars.

If someone really, really wants an iPhone, there are options.  Besides the healthy trade on the black market, one could order the phone (or any other prohibited foreign item) through a site like the US’s Amazon. If the phone costs $300, the buyer is responsible for paying the $300 cost of the phone and shipping to Amazon, and then an additional 50% tax to the Argentine government. A $300 phone will cost around $500 and require a trip to a local customs office for pickup, because Cristina doesn’t allow foreign deliveries to be sent directly to your home. Home delivery makes 50% tax collection complicated.

So if the average citizen of the Argentina has decided to save $300 of his or her hard-earned salary to buy an iPhone, unfortunately that citizen can’t buy one in a local store. Instead, he or she must save $200 extra to order from overseas, or cross the border to Chile or Uruguay to buy one there. Many weekends, especially holidays, there are six to eight hour lines at international border crossings, allowing citizens to purchase Apple Products, Kitchen-Aid Mixers, X-Boxes or Lego toys for their children. On the way back into Argentina, they of course need to hide these products from customs so they don’t have to pay the 50% tax.

While the import substitution policy protects local workers and the economy in theory, in practice it creates a class-based unfairness that even eclipses the most pure free-market capitalist society.  The wealthy, mobile political class can and do afford travel overseas to buy superior products. The average worker has no choice but to buy inferior or obsolete products, based on the rules imposed by the supposedly well-meaning political class. In true Animal Farm style, political leaders artificially determine the market in the name of the “good of the economy,” while jet-setting to the United States or Europe to buy the same products they keep from the people.

The Future of Argentina

Supporters of the three consecutive Kirchner administrations trumpet accomplishments on human rights, reparations from the most recent military junta, equality, social justice and Argentine sovereignty. While Cristina and her husband do deserve some credit, it is not enough to outweigh the restrictions imposed on personal freedom of action and thought as illustrated above. Surprisingly enough, there are many more examples that would elicit similar reactions.

 In 1853, Argentina’s forefathers based the Argentine Republic’s Constitution on the model of the Constitution of the United States of America. By 1914, Argentina had become one of the world’s richest nations.   A century later, Argentina was ranked second out of 108 nations in the CATO Institute’s 2015 economic “Misery Index,” only less miserable than Venezuela and slightly more miserable than Syria, Ukraine and Iran. Ten more pages would be required to even start to explain how a nation- a Republic- based on Constitutional freedoms is embroiled in a “separation of powers crisis” and now looks more like an Orwellian, Big-Brother State. Through a complicated history filled with crises, coups and collapses, Argentina is again in trouble despite its many natural resources and deep cultural diversity.

In addition to continued government meddling, there is also a risk of the pendulum swinging too far in the opposite direction as it has in the past. After twelve years of Kirchnerite rule, international investors are licking their chops, imagining a presidential victory for an opposition candidate that would reopen Argentina to the world market. Some pundits fear a repeat of the 1990s, when neoliberal policies allowed international corporations and investors to take advantage of industry privatizations that did not benefit the everyday Argentine.

Whatever the outcome of the election, an unbiased observer can maintain an cautious optimism for the nation of Argentina that the next executive can prioritize the rights and freedoms of its people above personal ambition, enrichment and control. It may seem trivial to focus on fútbol, price controls and consumer purchasing freedom when the Kirchner administration has been accused of large-scale corruption, repression, and even murder. But the reality for the everyday Argentine citizen speaks more to the state of the republic than the high-level political scandals.   In a nation based on the US model of individual rights and freedoms, the political devolution of all-powerful populist executives has left life in Argentina today far from what her founders envisioned.

Jared Wilhelm is a Naval Aviator who served two deployments in Africa, Central America and Europe as a P-3C Orion Maritime Patrol Pilot. He is currently attending the National University of Cuyo in Argentina as part of the General George Olmsted Scholar Program. The views expressed are those of the author and do not reflect the official policy or position of the US Navy, the Department of Defense, the U.S. Government, or the Olmsted Foundation.

The Current Brazilian Crisis Explained

Over the past several weeks, an economic and political crisis of a magnitude and scale not seen in over a generation has gripped Brazil. Economic stagnation has taken the place of what was once robust economic growth. The country’s GDP is expected to contract 0.5% this year. Unemployment is at 6% and rising fast. And inflation, which had been tame for the past 20 years, raised its ugly had once again as it passed the 8% mark. All of these developments have taken a heavy toll on second term president Dilma Rousseff, who has seen her approval rating plummet to 34%. In recent weeks over 1 million people took to the streets of Sao Paulo demanding Dilma’s impeachment.

But how did this happen? How could the fortunes of an emerging power like Brazil, a member of the BRIC bloc, and a country that until a few months ago was the darling of many financial analysts and investors, have changed so quickly?

The seeds of Brazil’s current crisis were planted back in 2003, when then president-elect Lula took office. Despite being a former head of a worker’s union and leader of the very left-wing Worker’s Party, Lula opted to mostly stick to the orthodox economic policies of his predecessor, the center-left politician, Fernando Henrique Cardoso. These policies, known as the “tripod of stability” were centered on balanced budgets, free-floating currency exchange rates, and an independent central bank. Many credited these policies with ending a period of high inflation that had plagued Brazil for over 50 years.

One of the reasons Lula opted not to break from the policies implemented by his predecessor was the fact that most of his cabinet was composed of political pragmatists that followed the adage: “if it ain’t broken, don’t fix it”. Over time however, most of the original “pragmatists” in his cabinet had to resign from their posts due to accusations of corruption.  Lula replaced them with hard-line old guard former communist guerrillas from the 1960s, and fellow union leaders, all whom openly despised the orthodox economic policies that had been in place until then.  The “tripod of stability” was completely reversed. Government banks (BNDES, Caixa and Banco do Brasil) were ordered to give out low-interest loans to pretty much anyone, but especially to people with good government connections. One of such was magnate Eike Baptista, who borrowed billions from those banks while offering very little collateral as a guarantee, to invest in oil exploration, build semiconductor plants and bio-diesel plants.

The government also started injecting huge amounts of public money into the real estate market. The government implemented a policy in which any worker with a formal job would received a government backed loan of at least 100 thousand Reais (about US$30K at the time). As a consequence, overnight 100 thousand Reais became the floor price of any home, in any condition, anywhere in Brazil. A huge construction boom started, as massive amounts of government credit flooded the real estate market. Home prices sky rocketed and there was a shortage of construction workers, which pressured wages across the economy.

At the same time, control of the massive state-owned energy company, Petrobras, was handed to one of Lula’s union friends. He immediately put Petrobras’ vast financial resources to work on expensive projects of very questionable economic value, but with potential for huge political dividends.  Such projects included a US $17 billion refinery in Lula’s home state. Many technical experts within Petrobras criticized the investment, saying that such a massive refinery was not needed, and even if it was, Lula’s poor and remote home state in the north was hardly the best place for such an endeavor. Those critics were quickly silenced and the project was placed on a fast track.

Other questionable investments conducted by Petrobras included the construction of a massive shipyard, also in Lula’s home state, and an acquisition of a refinery in Texas from a Belgian company for almost $900 million. Interestingly, that same refinery had been acquired by this Belgian company for $42 million only 4 years prior.

So, the stage was set for the tragedy that would follow. The artificial real estate boom gave Brazilian families a false sense of economic prosperity, as they watched the value of their homes triple or quadruple in just a few years. As a consequence, many of them went into deep consumer debt, trusting on the high value of their homes as backing. Magnate Eike Batista, who borrowed billions from government banks without any collateral, went bankrupt as most of his enterprises went nowhere, and the taxpayers were left holding the bag. Petrobras, as a consequence of the many new investments directed by the Lula’s cronies, became the most indebted energy company in the world ($179 billion). Most of its very bad investments tanked as multiple corruption scandals surfaced, where politically appointed Petrobras executives would demand bribes from suppliers and contractors. They pocketed part of the money, the other part went to the Worker’s Party campaign fund.  So far, the police have uncovered more than US$800 million paid in bribes.

So, Brazil today is facing not only a nearly insolvent Petrobras, but state-owned banks sitting in hundreds of billions of dollars in bad loans. Having to rescue the banks, the government is facing one of the largest budget deficits in modern history. All companies suspected of paying bribes to Petrobras had all government contracts suspended pending an independent audit. This means that constructions of bridges, subways, power plants, and roads have all been put on hold. Two of those very large construction companies have gone out of business as consequence of the moratorium, which caused tens of thousands of construction workers to lose their jobs. As the bribery investigation continues, more construction companies are expected to fold.

Predictably, the government created real estate bubble has burst. Apartment buildings are sitting empty across the country.  A large chunk of the population got into debt expecting the value of their “investments” to grow but now inflation is rising quickly and with it, the payments on their inflation-adjusted mortgages.  Meanwhile, the value of their “investments” plummet.  Overly leveraged home builders are sitting on unsustainable amounts of unsold real estate inventory. Many have folded, resulting in many more layoffs. The fear exists that this is just the tip of the iceberg, and that the police will now uncover similar corruption scandals in the state-owned banks and utility companies, which would escalate the crisis by an order of magnitude.

Renato Duque at the time of his arrest. www.ecuadortimes.net

Despite all of the dark clouds in the Brazilian skies, there are positive signs that the institutions are working. The police are investigating, indicting and arresting people. The courts are convicting and sentencing them. The press is covering and investigating the events and publishing their findings. People on the streets are outraged and protesting.  Looking at things from that angle, there are some positive actions taking place. One can also argue that the Lula/Dilma and the Worker’s Party experience ruling Brazil has brought a lot of political maturity to the country. Many citizens used to fantasize about the “heroes of the people” of the sixties and how those former Marxist guerrillas were idealists, pure hearted and really cared about the poor.  Many think that their stint running the country has shattered that image, and showed to even most romantic and naive of their supporters how corrupt, ruthless and devious these people really are. These events in many ways are eradicating the last remnants of that old view of evil capitalists vs. good communists that still existed in Brazil.

Pedro M Calmon is a business development executive with extensive experience in Latin America. He attended the University Of Brasilia and has a MBA from Nicholls State University. He currently resides in the United States and works at Google Inc. The views presented in this article are his alone and do not necessarily represent the views of his employer.  

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