Catastrophic Success: A humorous term describing an ironic situation where one unexpectedly achieves all of his or her unlikely objectives.
The cynical humor of the term “catastrophic success” is not typically found in reference to international relations, but on June 12th, the President of the United States of America is hoping against hope to achieve exactly that in his meeting with North Korea’s Kim Jong Un. Indeed, Mr. Trump will become the first person in his position to meet with a North Korean leader. Though the White House is presenting the meeting as a historic “summit” between world leaders, there are a number of reasons why none of Mr. Trump’s predecessors ever attempted such a meeting. The stakes are high and the many risks are well known…except one: Any success short of the catastrophic variety may actually do more harm than good in the long run.
Any discussion of the so-called “summit” between Kim Jong Un and Donald Trump should begin with a review of why Korea was divided in the first place. On 8 August 1945, the Soviet Union declared war on Japan in what was both a show of Allied unity and an opportunistic power grab. Recognizing the strategic importance of the Korean Peninsula, America and the Soviets – and their Korean counterparts – invaded the Japanese stronghold from both the north and south and met roughly in the middle near what is now known as the Demilitarized Zone (DMZ). Following Japan’s surrender, the United States and the Soviet Union agreed to sponsor an election to determine the future leadership of an independent Korea. Though United Nations General Assembly Resolution 112 captured this intent, Cold War tensions escalated to the point where the North Korean contender, Kim Il Sung, refused to hold an election and repudiated the victory of Syngman Rhee in the south.
Following the July 1948 election, the United Nations quickly declared Rhee the legitimate president of all of Korea, to which the Soviets responded by declaring Kim Il Sung Prime Minister of the north. This is an important point. The UN recognized the government in Seoul as the only legitimate government on the Peninsula in 1948 while the Soviets only declared Kim’s sovereignty north of the DMZ. The result is history. Within two years, Soviet-sponsored North Korean troops poured over the border. The eventual military stalemate crystallized the division of the Peninsula at the DMZ and the Democratic People’s Republic of Korea (DPRK) was born. When the smoke cleared, 36,000 American, 230,000 South Korean, and 3200 other Allied troops lay dead along with 600,000 South Korean civilians in a war fought specifically to deny the aspirations of an illegitimate pretender to the throne of Korea. Kim Jong Un has simply never been a head of state.
Kim’s illegitimacy and the resultant suffering it caused is the reason no sitting US President has ever agreed to meet a North Korean leader or even to hold bilateral talks with DPRK. To recognize Kim as a head of state would legitimize the division of the Peninsula and invalidate the sacrifices made by UN forces from 1950 until today. Though this makes President Trump’s “summit” with Kim Jong Un deeply troubling, it is true we will need to move beyond the past in order to achieve peace. However, the negative effects of Trump’s approach are not just symbolic, they may actually make peace less likely. Depending on which Trump statement about the “summit” one believes, its objectives include the very worthy goals of denuclearizing the Peninsula and reaching a negotiated end to the Korean war. Even if those goals were achievable – doubtful at best because they involve numerous stakeholders – they are even less likely now that Trump has unwisely elevated Kim to head of state.
The question of leadership is the very reason for the Korean War and resolving it is critical to any future hope for an agreement. Where before there was only one legitimate head of state, there are now arguably, two. The original post-war question of who should rule Korea is now complicated immensely by the fact that the United States has abandoned any clarity on who it supports for the task. Elections will not settle the matter because, like his grandfather, Kim Jong Un knows he cannot win and will not participate. Unlike his grandfather however, he has nuclear weapons to ensure all the stakeholders consider his opinion.
The likely outcome of the ill-conceived and rushed Singapore “summit” is that Korea will be left with a more difficult road to peace; a brutal dynastic dictator with increased negotiating power to legitimize his nuclear arsenal; and a South Korean government that has now has lost its claim to sovereignty over the rest of the Peninsula. As we watch – with a mixture of hope and trepidation – the bizarre Trump foreign policy play out in the city-state, let us hope for catastrophic success because anything less may be simply…catastrophic.
 More precisely, the UN declared Rhee the legitimate president of those areas that held elections verifiable by the UN; i.e. the South, but also stated his government was the only legitimate governing body on the Peninsula and demanded its authority be extended to the entire country.
In a speech marking the first year of his administration, President Donald Trump reemphasized a message he communicated many times during his campaign: that “open borders” promote the proliferation of drugs, weapons, and gangs. As distasteful as that message is, he might be right. Central America serves as a chokepoint for much of the drugs manufactured in the south. The region’s unique geography focuses the intense violence and vast sums of money required to control the drug trade and aims it squarely at markets in the United States. With many governments in the region still developing after the upheavals of the Cold War, Central America’s political geography is just as important as the physical. Corruption, poverty, and weak institutions provide the fertilizer for growth of the ultimate symptom of the regional disease: organized crime gangs known locally as “Maras.”
For Trump and his supporters, construction of a border wall seems like a common sense defense but the problem is more complex than bad people that want to cross the border. The Maras represent only one aspect of a complex regional problem that doesn’t lend itself to national solutions and certainly not to simple ones. So much so that President Trump’s politicization of border security reveals the weaknesses in his simplistic and unilateral solution: success requires the cooperation and assistance of regional partners. In some cases, these are countries the President recently referred to in derogatory terms. The subsequent cacophony of protests from around the world and the resignation of at least one US Ambassador (Ambassador John Feeley in Panama) indicate President Trump’s approach may enjoy limited success.
Highway to the USA
The Central American corridor has long been a direct path to the United States for gangs like the Maras. In the 1980s, they emerged in poor neighborhoods in Los Angeles, California. At that time, many Central American countries, particularly Guatemala and El Salvador, were suffering violent civil wars that displaced thousands of people to American cities. The traumatized and largely uneducated victims of those wars found shelter for their fragile new lives in poor expatriate communities there but it was not perfect; the perpetrators understood the utility of violence and organization and they lived among their victims in America.
When peace began to take hold in Central America in the 1990s, many of the combatant “guerilla” groups demobilized, expecting to inherit a place in peaceful societies that respect human rights. However, they faced an unbalanced political and economic environment with big social differences and poverty that inhibited structural change. As a result, former guerillas and gang members living in the United States found themselves unable to assimilate in their home countries. The problem was not a small one. With an estimated 100,000 gang members in the three small countries that make up the “Northern Triangle” alone, prison systems were beyond their capacity to serve as a deterrent. Today in El Salvador, the prisons are at 320% their capacity and are now simply a base of operations for the Maras.
NUMBER OF GANG MEMBERS
UNODC (2011 statistics)
Ministry of Justice and Public Safety
With all the advantages of a peaceful sanctuary, the gangs began to strengthen. Groups like the Mara Salvatrucha (MS-13), Barrio 18, and the Batos Locos expanded their criminal networks and learned to survive as international outlaws. They established codes with tattoos, sign language, specific words, and proprietary clothing. They established a division of labor and territory and used violence to consolidate their control. By late 2016, the murder rate attributed to MS-13 in El Salvador approached 20 per day prompting more than one government to declare war against them.
“A group of three or more persons that was not randomly formed; existing for a period of time; acting in concert with the aim of committing at least one crime punishable by at least four years’ incarceration; in order to obtain, directly or indirectly, a financial or other material benefit”.
The Maras certainly fit this definition, but existing tools of international law enforcement lack the muscle to address the sheer scale and intensity of gang violence leaving governments around the world struggling with whether to treat this as a criminal or terrorist problem. Recognizing this, and perhaps capitalizing on the Trump Administration’s own war on MS-13, Guatemala declared the Maras to be international terrorist organizations in January 2018, a move likely to win wide support from outside Central America. Salvadoran Maras for example, operate as far afield as Argentina, Canada, Mexico, Spain, and Italy where they actually established a capital in Milan, one of the most important cities in Europe and home to the largest concentration of Salvadorans outside the Americas. In 2016, the Buenos Aires Minister of Security, Cristian Ritondo, declared the presence of Maras there after dismantling a gang of drug traffickers connected to MS-13.
Labeling the Maras as terrorists seems a bit of a stretch given how they are organized and recruited. Social dynamics, not politics, fuel the Maras in Central America where some 45% of gang members come from a violent family background, 91% have illiterate parents, and 70% have experienced abuse or abandonment. Alcoholism and drug addiction are commonplace and for some, the gangs are their only real source of support, love, and loyalty. Maras are organized in neighborhood “clicas”, making it very hard for gang members to leave. Those that do wish to separate from the gangs face the twin stigmas of disloyalty and dishonor but also the structural realities of having to relocate. Those that manage to leave face a life full of harsh judgment, social isolation, and fear.
These young gang members are the foot soldiers of their organizations, executing most of their operations and falling into a paramilitary structure as depicted below. Their tactics include extortion of vulnerable individuals and small businesses by the threat of violence against them or their families. The young Maras also manage drug distribution on land, accounting for 59% of the overall trade.
STRUCTURE OF A “MARA” OR GANG
Whether the Maras are criminals or terrorists or a hybrid of the two, governments agree they present a transnational challenge. Fueled as they are by regional social issues, the Maras are therefore very difficult to control. Dealing with the threat posed by these groups requires governments to change their perspectives in terms of strategy, security, and power. Enforcement requires police with the intelligence capacity to gather information on Mara smuggling routes, weaponry, membership, specific mechanisms for moving money, and the type of people that protect them. Intelligence sharing mechanisms with neighboring governments are paramount in order to combat cross-border crimes. Additionally, corrupt politicians that secretly support the Maras for personal gain must also be prosecuted. Though walls like the one President Trump wants to build will keep some people out of the United States, it’s exactly the wrong approach for this complex problem. Success depends instead on the creation of international partnerships, information sharing, and reduction of social anxieties that drive members into a life of crime. Mr. Trump, tear down these walls.
Ligia Lee Guandique is a political analyst living in Guatemala City, Guatemala. She holds a Bachelor’s degree in International Relations and a Master’s degree in Political Science from Latin American institutions. Ligia has worked with human rights-based NGOs and recently published this excellent piece on immigration issues.
On the night of July 15th 2016, Turkish Military Forces moved swiftly in the streets of both Ankara and Istanbul. What appeared to be a security operation slowly took the shape of a coup d’état as military units occupied key locations in the country’s two largest cities. Despite a history of successful coups by the Turkish military, this coup started to fail as soon as it began. Revolutionary units suffered from a lack of leadership and their seizure of critical infrastructure in and around the capital was haphazard at best. Most importantly, the coup failed to make any credible attempt to kill or capture President Recep Tayyip Erdogan, the strongman leader of the incumbent Justice and Development Party (AKP) and the lynchpin between success and failure. Despite dramatic scenes from around the country, loyalist forces were firmly back in control before sunrise and were pointing the finger of blame at a shadowy organization known by its Turkish acronym, FETÖ, the Fethullah Gülen Organization.
Erdogan’s apparent success emboldened him the following day. His security services had performed brilliantly. They were one step ahead of the coup at every turn and were already rounding up FETÖ members within the state. Despite 300 dead and more than 2100 wounded, Erdogan and AKP appeared to be in a strengthening political position and were consolidating authoritarian power across all the institutions of the Turkish government. Still, the situation remained complicated. The remaining military leadership did not have an amiable relationship with the AKP, a party whose Islamic leanings conflict with the military’s secular legacy. Erdogan the authoritarian will have to reconcile that relationship with the AKP’s devout Islamic voting base; a base that once looked to Fethullah Gülen for direction.
Stroke & Counterstroke
In 2002, Erdogan’s AKP swept the Turkish general election with an overwhelming majority. The victory was a shocking turn of events in a nation that traditionally embraced a secular order underpinned by vast military power. The secret of AKP’s success at the time was social mobilization in support of a more politically Islamic Turkey. In this endeavor, Erdogan received direct support from FETÖ media outlets and schools that enjoyed great popularity amongst Islamic voters. Though for years Erdogan benefitted politically from the relationship with FETÖ, it pitted him against the secular nationalist leadership of the military. Inspired by the secular legacy of Mustafa Kemal Ataturk, the “Kemalists” in the military were growing alarmed at the Islamization of Turkish politics led by the AKP and guided by Fethullah Gülen. Pressure mounted until 2012 when judges associated with Gülen convicted 322 military officers of plotting to overthrow the government. The failure of the plot, known locally as “Sledgehammer”, defanged the military and set its Kemalist leadership against Gülen for what the military believed was a political move against the legacy of Ataturk.
The relationship between the AKP and FETÖ dissolved shortly thereafter when Gülen criticized Erdogan over the handling of the 2013 Gezi Park protests; upheavals that supported freedom of the press while maligning the government for encroaching on Turkish secularism. Accusing Gülenists of running a parallel state, Erdogan expelled them from law enforcement and the judiciary. In turn, Gülen’s religiously-minded supporters viewed Erodgan’s actions as an attack on their organization and the Islamic path they sought for Turkey. Over time, as Gülen’s opposition to Erdogan’s growing power intensified, the Kemalists began to sense an opportunity to take their revenge.
After years of souring relations between AKP and the Gülenists, the National Security Council declared FETÖ a threat to national security in 2014; a partial victory for the Kemalists but one that did not regain them control of the military or the government. That would not happen until 2016 when Gülenists within the military sought the help of the remaining Kemalists to overthrow Erdogan and AKP. The move was not without merit. The Kemalists had already suffered at the hands of AKP and were increasingly uncomfortable with the ongoing erosion of secularism and consolidation of power by Erdogan but they calculated revenge was ultimately more beneficial than collaboration. Initially pledging their support for the coup, the Kemalists stepped aside at a critical moment, betrayed FETÖ, and declared themselves in full support of Erdogan’s government. The subsequent failure we all witnessed on television was therefore less of a success for Erdogan than it was a victory for the Kemalists. In one night, they regained control of the military and drove the wedge between AKP and its Islamic base a little deeper.
Recognizing the new reality, Erdogan changed his stripes from a one-time supporter of political Islam to an authoritarian nationalist; a position supported (for now) by the military but rejected by AKP’s traditional base. How long he can maintain this tenuous political charade will depend on his success in wielding the tools of authoritarianism; specifically, his relationship with the military and suppression of freedom of the press. The simultaneous and often conflicting vilification of FETÖ, the Kurds, and Daesh, continue to fuel police and military operations like Operation Olive Branch in Syria that serve to expand Erdogan’s power and keep his Kemalist allies busy.
Despite the outward appearance, Erdogan and AKP are without a political anchor and dangerously dependent upon the Kemalists they once betrayed. While western governments and media continue to operate on the assumption of Erdogan’s strength since the failed coup, it is likely the real master of puppets is wearing a military uniform, and he has yet to pull all his available strings.
Nuno Felix is a former non-commissioned officer with Portuguese Army Special Operations Forces. He is a sniper and special reconnaissance expert and is currently working as a consultant to top executives in the financial sector.
On Christmas morning 2017, protesters filled the streets of Lima, Peru in opposition to a controversial decision made by President Pedro Pablo Kuczynski (known locally as PPK). His pardon of former authoritarian President Alberto Fujimori—a deeply divisive figure in Peruvian political history—inspired the manifestations that disturbed a holiday hiatus in the characteristic buzz of the capital city. Kuczynski responded to the protests with a television address, advocating for reconciliation towards the polemic former ruler and his violent past. Kuczynski’s decision leaves the citizens of Peru struggling to reconcile the surprising influence the Fujimori family still commands in Peruvian politics and a recently elected President who campaigned, then and now, on national unity.
In a region with a rich history of such transgressions, the pardon of a human rights abuser is certainly controversial and President Kuczynski is in no position to take political risks. Just three days prior to granting Fujimori’s pardon, Kuczynski himself narrowly escaped impeachment on corruption charges associated with an $800 million bribery scandal involving the Brazilian construction firm Odebrecht. As a result, his approval rating is at a historic low (19% as of February 11, 2018). The pardon also forced him to reshuffle nine of his cabinet ministers into an aptly named “cabinet of reconciliation,” which he hopes will repair his party’s relationship with the Peruvian people in the coming months—an outcome easier said than done. Swelling street protests suggest Peruvians believe Kuczynski’s humanitarian impulses are a cover for what is actually a political survival deal to co-opt the powerful opposition. Obtaining a Presidential mandate in this manner has become an even greater point of civil contention than the actual pardon of Fujimori.
Sins of the Father
At the time of Fujimori’s election in 1990, Peru was in a state of national crisis. Guerilla terrorist groups were waging a violent insurgency and the economy was suffering from debilitating hyperinflation. Acting quickly and boldly, he instituted drastic measures to stabilize the economy and combat the insurgency. Under pressure and seeking to maintain his political freedom to maneuver, he staged a coup of his own government in 1992 with support from key military leaders in order to rewrite the constitution and purge his political opponents. The memory of the infamous purge elicits one of two responses from Peruvians: some demand justice for friends and loved ones that disappeared during that time, but many others welcomed the coup, viewing the government’s tactics as necessary to stabilize the country’s economy and bring an end to the terrorism.
Despite the lives Fujimori took, his children—son Kenji, a Congressman, and daughter Keiko, head of the main opposition party, Fuerza Popular—are the former president’s political legacy. But they are now a family divided. During Kuczynski’s impeachment proceedings, Kenji led a group of opposition lawmakers in abstaining from the impeachment vote, allowing Kuczynski to keep his seat long enough to enable the pardon of the elder Fujimori. This came as a blow to Kenji’s sister Keiko, that had just lost the 2016 presidential election to Kuczynski by a razor-thin 0.12% margin. In response, Fuerza Popular officially expelled Kenji and his allies, enforcing party discipline but destroying its simple-majority in Congress. Though Kenji and Kuczynski publicly deny accusations of quid pro quo, Reuters reported on January 26 that a back channel deal had been negotiated between them months earlier.
Pardon Me Too
Though the corruption allegations against President Kuczynski have not yet been proven, and his impeachment proceedings were politically driven, the charges against him are still troubling. Having run for President on an anti-corruption platform, he was quick to deny allegations that his private company, Westfield Capital, received any payments from Odebrecht. However, he now acknowledges Westfield was paid $780,000 between 2004 and 2006 while he served as Minister of Economy and Finance and later, Prime Minister. The shifting stories coincide with his reversal on the issue of Alberto Fujimori’s pardon and erode the credibility of his claims of innocence. Still worse, his rhetoric in response to calls for his resignation make him appear both desperate and despotic; he insists his removal from office would “disrupt political and economic stability” in Peru.
Moreover, Kuczynski boldly declared during his 2016 campaign there would be no pardon for the elder Fujimori. His righteous “unity” campaign platform narrowly won him the presidency, but nevertheless left his agenda vulnerable due to a lack of congressional support. Even in the wake of Keiko Fujimori’s presidential defeat – and before the fallout with her brother weakened her position – her Fuerza Popular opposition still held a commanding 71 of 130 congressional seats. Kuczynski’s questionable pardoning of Alberto Fujimori, be it a desperate act of self-preservation or a stroke of ambitious genius (or both), has secured Kuczynski’s presidency and weakened the opposition’s hold on Congress. Whether this was truly the result of a secret deal or just sibling rivalry, it set the stage for the next move against him. A new opposition – sans Kenji but now with some disgruntled former Kuczynski allies upset over the Fujimori pardon – has pledged a new impeachment proceeding when Congress resumes in March. Whether they have enough votes to be successful this time remains to be seen.
Last year, public polling indicated that up to 60% of the population favored pardon of Fujimori. Even after the pardon was granted, public polling indicated 50% of Peruvians still support Fujimori’s release. Presidential pardons are often controversial, but in this case the high-profile act of clemency faces international human rights scrutiny. The President that was supposed to represent stability instead wielded the pardon as a blatant tool of political manipulation—to the detriment of democracy. President Kuczynski will struggle to regain his reputation as a stabilizing political figure, and a shifting opposition will continue to maneuver against him, keeping the political focus on scandals and political controversy rather than on the much-needed and noble goal of national reconciliation. For the time being, whatever initiatives Kuczynski attempts, he will do so with the legal mandate of President of Peru, but without the pardon of the people.
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.
Major John “JB” Boswell is a U.S. Air Force Intelligence Officer with deployments and operational experience in Afghanistan, South Korea, Hawaii, and Germany. He is currently a graduate student in History at the Pontifical Catholic University of Peru in Lima as part of the George and Carol Olmsted Scholar Program.
The 2016 Brexit referendum in the United Kingdom (UK) was the surprising outcome of a national plebiscite. Initially dismissed as a long shot by many political scientists, there is now a degree of consensus that the result reflects a delayed response to the effects of globalization in general and to the 2007-2009 Great Recession in particular. The problem is very real as large groups of blue-collar workers see their opportunities decreasing and their jobs moving to cheaper labour markets in Asia and elsewhere. As the dust settles on the referendum, the question remains whether Brexit is really the cure for the malaise that led to it or whether more sober voices in the United Kingdom will drive alternative solutions.
Project Fear Redux
In the campaign before the vote, the Remain argument relentlessly focused on the likely economic consequences of Brexit, arguing that living standards would fall and jobs would be lost as investment dried up. Brexit campaigners labelled this “Project Fear” and mocked the professional economists that issued warnings as “know-nothings”. For a time, it seemed the Brexiteers were right.
After Brexit day in June 2016, the United Kingdom’s economy continued to prosper and showed little evidence of damage other than an immediate 12-15% fall in the value of the British Pound relative to both the US Dollar and the Euro. In fact, in 2016 the UK’s economy remained one of the best performing of the G7 large Advanced Economies, growing at 1.8%. It was as if the ship had hit an iceberg but nothing had changed up on deck. Though Brexiteers continued to ridicule the “know-nothings”, by the end of 2017 a very different story was emerging.
The United Kingdom is now one of the slowest growing of the G7 Advanced Economies, likely to register only a 1.5% growth rate for 2017. Investment is down and inflation is now over 3%; the highest in the G7. Inflation adjusted wages and consumer confidence are also falling with particularly dramatic decreases in car sales, down over 12% year on year in October 2017 according to the Financial Times. As the threat of Brexit grows imminent, the International Monetary Fund is very clear about Brexit’s increasingly negative effects on the United Kingdom’s economy. More worrying, the British Government cut its own economic growth forecasts for 2018 to 2022 more heavily than it has for any other five-year period in the last 40 years. Private forecasts are also broadly of the same view.
It is now abundantly clear that the so called “know-nothings” were not so much wrong as simply guilty of underestimating the strong forward momentum of the British economy at the time. A sharp fall in the exchange rate following the June 2016 referendum, combined with the Bank of England’s accommodative decision to cut the UK Base Rate from 0.5% to 0.25%, certainly aided the economy’s short-lived momentum. If the central bank did this with the intention of softening the blow, it did not last long. Project Fear it seems, is making a comeback.
The Will of the People
At this point, avoiding Brexit will not be easy. Any reversal of Brexit depends upon a significant and sustained shift in public opinion. Without it, Parliament is highly unlikely to vote down the Government’s impending deal, due in late 2018, that will set the terms for the UK’s exit from the European Union (EU) in March 2019. The earlier deal with the EU in December 2017 provided proof—if it were required—that the UK is being out-negotiated by a much better prepared team in Brussels. Indeed, on all main points of agreement so far, the UK has accepted the EU’s demands; something many Brexit supporters are starting to see as a sign of the UK’s weak negotiating position.
However, Britain’s poor negotiating performance in the halls of the European Commission in Brussels will not turn the tide alone. This will only happen when ordinary men and women begin to suffer from Brexit’s negative consequences. Given the way the economy is now slowing, it seems the average Briton is in for some very poor economic news over the course of 2018. In the initial referendum, 48.5% voted to remain in the EU but polls suggest the British are changing their minds. The most recent poll taken just before Christmas shows 53% now wish to remain in the EU, with a noticeable shift by middle and working class women concerned about potential impacts on jobs and family finances.
As this national change of heart accelerates in response to bad economic news, calls for a second referendum will become louder. The Government can and probably will ignore them initially but once the polls start showing 60% in support of a second referendum and/or a desire to stay in the EU, the dam will break. Just as “the will of the people” was used by the pro-Brexit media to bludgeon the current Government into a Brexit-at-any-cost policy, so too will public opinion embolden Parliament to stop the Government on this reckless path.
Addressing the challenges of globalization, the Great Recession, and the loss of secure jobs for average to low-skilled workers remains a critical policy challenge for all Western governments. And whilst the populist spasm that resulted in Brexit is understandable, it is surely not the solution. The alternative to the low tax and small government mantra of right wing populism is likely to be a centre left agenda comprising more state intervention and investment in public services such as healthcare and education. Experimentation with more radical ideas such as a citizens’ basic income may also become more widespread, especially as artificial intelligence and other job destroying technology washes over the economy.
All this favours Jeremy Corbyn’s Labour Party, which is committed to a more radical, anti-globalization agenda than the current Brexit-supporting Tory Party. With the British anti-globalization fight thus championed from the left rather than the right, it is possible the same phenomenon could take place in the United States, reversing the rightward trend occurring in politics there since 2012. If events in the UK continue this way—a prospect which seems likely—the death of Brexit could mean a return from the right. This effect will be felt not just in London, but in Washington too, producing a global impact that will make an increasing number of British voters very proud indeed.
Adam Pharaoh is a former Auto (Volvo & GM) and Pharma (J&J) industry executive that now runs Pharaoh & Company SPRL, a consultancy on Strategy and Organisational challenges, mainly in Europe and Asia. He is a close observer of UK and EU politics and contributes regularly to debates in The Financial Times. He lives in Brussels.
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The results of today’s referendum in the United Kingdom present an unprecedented situation for a strained European Union. For the first time in its history, a member state voted to leave the Union. In an organization that grew exponentially, the exit of a powerful contributor will force remaining nations to make some tough choices. The UK will also need to make some hard decisions about how to move forward outside of “Europe”. Needless to say, the Brexit will not be an easy process for anyone.
The UK has historically played balancing role on the continent, but this referendum represents a decisive departure from Britain’s neighbors and a vote of no-confidence in the European Union. Eurosceptic voters of the UK have many reasons to want to sever ties with Brussels: the aftermath of the economic dysfunction made manifest by the near-miss of the Grexit,the inconsistent and frantic response to the refugee crisis, and the resurgence of a bold and unpredictable Russia. British voters, however narrowly, ultimately lost faith with the European Project.
In choosing to leave the union, the UK has lost its privileged position as one of the leaders of a modern, unified Europe. Great Britain had a unique position in the Union as one of the only states with a balance of political, economic, and military might – a position it built over the decades through active diplomatic and economic engagement in continental affairs. It was arguably the most independent of EU members, enjoying many of the benefits of Union membership without the risks of the Euro, or the borderless society of the Schengen Agreement. Britain’s options for influencing the continent are now weakened, and the benefits of Union membership lost –a unilateral disarmament of what was once a formidable diplomatic and economic arsenal.
Europe had a lot to lose from a British exit. Strong and independent Britain played a stabilizing role: ensuring no single country –namely France or Germany– could push a unilateral direction upon the EU. It was a role only the UK could play. Italy and Spain are prone to economic and political instability; the Low Countries and Scandinavia, though economically formidable, do not have the clout or muscle needed to balance their larger neighbors; and the Višegrad economies of Eastern Europe are too new, many with elected governments more interested in moving away from Europe than towards it. Germany is the de facto leader of the EU, which is a source of great discord among the smaller, more economically-vulnerable nations that do not appreciate Chancellor Merkel’s heavy-handed style or the historical aftertaste of German leadership.
Though division within the EU is not new, the departure of its great offshore stabilizer starts the political centrifuge spinning. Right-wing leaders in France, and the Netherlands are already demanding independence referendums of their own. Spain’s call for dual-sovereignty of Gibraltar is a sign that some disputes between the UK and other EU member states may reemerge after being held dormant by a spirit of intra-Union cooperation. In the immediate aftermath of the vote, prominent leaders in many of the EU’s major nations called for their nations to follow Britain’s lead.
Not surprisingly, independent-minded regions within European nation-states will also ride the winds of change to clamor more loudly for their independence. In a bizarre twist, Scotland may have voted to remain in the EU, but may not want to stay in a non-EU Britain. No doubt Basques and Catalans in Spain will watch closely if a second independence referendum takes place in Scotland, and aspiring EU members in the Balkans are unlikely to tolerate a long and painful application process while the more developed countries are voting to leave.
The Brexit may well be the spark that brings about the dissolution of the European Union. Its erosion and potential breakup would deprive its member states of a useful venue for cooperation to solve common problems; an international political situation closer to 1914 than 2016. At a time when transnational issues are more relevant than national ones, it is not at all clear why European leaders are divesting themselves of international tools to deal with them. Europe should take a moment to reflect on its fractured past.
Opportunity in Discord
As noted European diplomat, Victor Angelo recently predicted: Europe will survive Brexit. What is not clear is whether the EU or the UK will survive their divorce intact. Perhaps the Union grew too quickly, haphazardly attempting to unify the continent in the wake of the collapse of the Soviet Union, pushing “Europe’s” borders ever outward. In this manner, Brussels hardwired weaknesses into the future unity of the European Union.
But, as I’ve said before, there is opportunity in crisis. Challenges can break a weak union or strengthen a strong one. Perhaps this is the kind of shock Europe needs to wake up and implement further democratization and a unified fiscal policy towards a federal union. Any other course could doom the entire project to failure, and erase all the good Europeans have built, together.
LT Nick Avila is a U.S. Naval Officer and Olmsted Scholar in Belgrade, Serbia. He received his B.A. in History with a focus on American Diplomacy from Amherst College in 2008. He is an MH-60S helicopter pilot by trade and has military experience from two deployments in the western Pacific to include operations in Guam, Japan, and Australia. The views expressed here are his own and not those of the US Navy or the George and Carol Olmsted Foundation.
On 23 June 2016, the voters of the United Kingdom will decide the fate of their country’s relationship with the European Union. “Brexit” — a blend of “British” and “exit” mirrors Greece’s aborted “Grexit”, and is a term fraught with volatility and prone to demagoguery and abuse in public discourse.
One major issue is the net effect of European Union (EU) membership on the security situation in the United Kingdom. The question is not whether Britain is better off with or without the EU, but whether its security situation will change in any meaningful way. Despite conventional wisdom, Brexit will probably not have a significant impact on Britain’s national security at all, for better or worse.
Realistic Brexit Fears?
A host of personalities, politicians, and experts of all stripes have commented about Brexit’s consequences, both for the UK and the EU. Sir Richard Dearlove, former Director General of MI6, believes the impact would be minimal, and that Europe gets more from the UK than the UK receives from Europe. Sir Dearlove bases his position upon the demonstrated utility of the UK’s bilateral security relationships worldwide which eliminate dependence on EU institutions. On the other hand, the Director of Europol, Rob Wainwright, a former British law enforcement officer, claims Brexit would make it harder for the UK to protect its citizens from terrorism by adding, rather than removing barriers for cooperation. Unfortunately, declarations on both sides correspond more with domestic political interests and a desire to shape public opinion than with reality, leaving the British population confused about the real pros and cons of EU membership on their security.
Sensing this, Prime Minister David Cameron addressed the United Kingdom’s strength and security as a EU member state during a 9 May speech at the British Museum in London. He highlighted four reasons the UK should remain in the EU: to lead from a position of strength in Europe, to maintain a spirit of collaboration with European neighbors, to develop closer security cooperation between member states, and because he believes the EU amplifies Britain’s power by allowing it to influence other EU countries. This special position enables the UK to achieve its strategic goals by placing its interests among the top of EU priorities.
Though his points were important, Prime Minister Cameron probably exaggerated the benefits of EU membership in order to make his case. He presented his arguments with sensationalism, repeatedly suggesting Brexit would automatically weaken defenses against terrorist networks such as Daesh (the Islamic State of Iraq and the Levant). He claimed that some useful tools like the European Arrest Warrant, the Schengen Information System, and membership in Europol, would be unavailable should Britain leave. These statements certainly misled some to believe Brexit will prevent extradition from EU countries or prohibit British access to EU information and intelligence despite numerous examples of effective cooperation of this type with non-EU nations.
Cooperation Outside the EU
International cooperation in law enforcement and security is based on solid bilateral relations between states. International organizations augment this cooperation with capabilities that may be unavailable to some members. This occurs in both a regional context, via EU agencies like Europol or Frontex, but also globally, with Interpol or various United Nations agencies. These organizations provide mechanisms for diverse cooperation agreements ranging from operational ones that include the exchange of personal data, to technical or strategic agreements with third parties that provide benefits for “full members” of the organization.
These organizations do not limit these benefits just to their member nations. Europol, for example, has cooperation agreements with eighteen non-EU states including the United States of America, Switzerland, and Australia, among others. Most of these important partners have full access to available data of an operational or strategic nature. For example, the US Federal Bureau of Investigation (FBI) is a participant in the Europol Focal Point Travellers agreement, a sensitive program that collects and distributes intelligence from participants in order to facilitate the search for “foreign fighters”.Leaving the EU would not affect such programs nor weaken cooperation between British and European security organizations.
The Sky is Not Falling
All UK citizens, including Northern Irish and Commonwealth citizens over eighteen who are resident in the UK, and UK nationals living abroad but who have been on the electoral register in the UK in the past 15 years, will be eligible to vote in the referendum. These voters will determine the destiny of one of the strongest players in international security. Yet, when the referendum is held on 23 June, citizens of the UK should be aware that leaving the EU will not have the impact on their internal security that some of their leaders claim.
Though leaving the EU is arguably not helpful for Britain’s continued security against terrorism and organised crime, the UK’s strong bilateral relationships on security affairs will not be diminished and would continue to operate effectively. What is important for Britons, is that no matter how they vote later this month, their country’s strong relationships with its neighbors and other international organizations is the real source of Britain’s security and will continue regardless of the nature of its relationship with the EU.
Victor Perez Sañudo is a Spanish Law Enforcement officer with more than two decades of professional experience in international cooperation working for the UN, NATO, EU and OSCE. Victor has been Project Manager in relevant EU projects for law enforcement agencies, like the European Explosive Ordnance Disposal Network (EEODN) and the EU Bomb Data System (EBDS) among others.
This is a difficult time to be an optimist in Brussels. It is even more challenging to advocate for a positive look at European affairs. And it becomes almost impossible to talk about collective hopes for a more united Europe in the future. Many will say such optimism belongs to another epoch. Now, the dominant discourse is one that announces a new catastrophe every week. Like Chicken Little, these so-called realists shout, “The sky is falling! The sky is falling!”
As a contrarian, I want to maintain faith in the European project. And be inspired by a forward-looking approach. The best way to build a prosperous and safe future for all of us in Europe is through a united endeavor.I say it whilst realizing the European Union is at present facing two major crises. They crowd everything else off the agenda, giving strong arguments to pessimists and those who are against continuing the Union. I mean a possible Brexit and the realities of mass migrations.
Challenging the Unity of the European Union
With the UK spinning further away from common approaches and policies, arguments for integration and joint responses have indeed become more fragile. In effect, such arguments are practically inaudible because many leaders prefer to focus their attention on their own national agendas. The silence of most of them on the affairs of the European Union is deafening.
The UK´s position has brought a lot of uncertainty to the table. At this stage, nobody can predict the outcome of their referendum. It is also difficult to forecast the consequences of a Brexit for the future of the European Union.
Nevertheless, the European Union would survive a Brexit. Why? Because the UK and the other member states have already learned to go their own separate ways in many areas – the Euro, Schengen, labour laws, justice, and internal security, just to mention a few.Perhaps the biggest worry is what a Brexit would do to the British themselves, to the status of Scotland, as well as to their tiny neighbor to the west, Ireland.
Brexit or not, the European Union shouldn´t be too worried.
The larger question is about immigration. Can the European Union survive a continued and expanding mass migration crisis? Many believe it cannot. We keep hearing that without a solution to the current migratory flows, the European Union will soon collapse. There is a good degree of exaggeration in the air. The soothsayers of disaster easily capture the headlines. Obviously, the mass arrival of refugees and migrants does pose major challenges and it is essential to recognize this. It is a situation well out of control. Furthermore, this crisis shakes the key foundations of the Union, its values and the role of Europe in the international arena.
More importantly, the migration issue touches the core of a vital dimension of European states—the question of national identity. The people of Europe have shown that they are ready to give away a good number of their sovereign prerogatives, accepting that Brussels can deal with them. This has been the case in a wide range of areas related to economic management, budgets, agriculture, trade, environment, justice, development aid, external relations and other important matters.
Yet, they are not at all prepared to abdicate or dilute their national features, language and everything else that creates a people´s identity. Nor should they. Europe is a complex mosaic of languages, cultures, nationalities and even prejudices. Yes, our views of our neighbours are still shaped by prejudices in significant ways. History and many wars have both divided us and created the diverse assortment we are today. Patriotism is still, and will continue to be for a good while longer, far stronger than pan-Europeanism.
Seeing the Glass “Half Full”
All this must be taken into account. Populists are effective in doing just this, trying to gain the political advantage in the process by exploiting feelings of nationalism. It’s all a little more complicated for an optimist.
This reality notwithstanding, let´s be clear about the present crisis. Let´s imagine we had to face the current migratory instabilities and frictions that the migrations have created in a past context of separate nation states. We can readily assume that some of us would already be at war with our neighbours. We would see coalitions of countries taking military action against others, trying to defend their borders and their own perceived national interests. We would be responding to the threats facing us with weapons drawn upon one another. In the past, this challenge would lead to armed conflict and chaos. We know that the long history of Europe has been written through a succession of wars.
This all changed when the European Union was established. Now, disputes are taken to summits. Summits come and go, often without many concrete outcomes. But, sooner or later, they end up producing acceptable results of one sort or another. We have learned to take the right decisions at the eleventh hour, that´s true. But we have done so around a conference table and through diplomacy. That´s the kind of lesson we should keep in mind as we get closer to two more summits on the migration crisis: one with Turkey, on the 7th of March and one among the European Union leaders on the 17th.
Let´s keep talking and pushing for an agreement. From the cacophony of diverse European voices and the play of varied interests, action will follow. The most relevant contribution of the pessimists, Eurosceptics andnay-sayers has been to create a greater sense of urgency. Now, the optimists among us have to state that there is only one answer to the big question on the table: Do we allow this challenge to destroy the hard-won political and economic achievements of the European Union or do we build on these successes to constructively address this crisis and, in the process, strengthen our union?
I am convinced that realism that will prevail. The European sky isn’t falling.
Victor Angelo is a Portuguese columnist based in Brussels and a former Special Representative of the United Nations Secretary General.
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.
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.
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.
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 anddo not reflect the official policy or position of the US Navy, the Department of Defense, the U.S. Government, or the Olmsted Foundation.
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.
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.