Emerging Markets Finance

Thoughts and links on emerging markets finance by Emilio Ocampo, Adjunct Professor of Finance at New York University's Stern School of Business and Universidad del CEMA (Buenos Aires)

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Déjà vu over and over again

Déjà vu over and over again

Déjà vu, groundhog day seem to be terms everybody is using these days to describe Argentina’s current predicament.

Below is some confirmatory evidence. The first is an editorial of The Review of the River Plate, an English language weekly that was published in Buenos Aires for over a hundred years. It was written on September 30, 1971. Yes, fifty years ago. But it could have been written…

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Making sense of Argentina’s latest crisis

A GUIDE FOR NON ARGENTINES Emilio Ocampo (September 17, 2018)

 Many in Argentina and abroad are having a hard time understanding the turbulence that hit the country’s currency and financial markets in recent months. Very few countries can match Argentina’s track record in banking, currency and debt crises. Clearly part of the problem lies in a collective inability to learn from experience.

Ever since Peron came to power more than seventy years ago the main underlying problem of the Argentine economy has been that Argentines consume more than they produce (or spend more than they earn), leading to persistent fiscal and current account deficits. The only way to resolve this problem is by either borrowing (mostly abroad in US dollars as the local financial markets are undeveloped) or increasing production (which can only be achieved with higher investment and productivity). Since the first strategy usually involves financing unproductive spending instead of productive investment, over time it inevitably leads to default.

The second strategy is not viable, as a relatively large number of Argentines are not willing to work to produce more, and those who want to work (and invest) to do so are not only burdened by a multiplicity of abusive and distortive taxes and a myriad of absurd regulations but also hampered by the deliberate efforts of many of their non-working compatriots who stage street protests and blockades on a daily basis. This is the legacy of Peronism, which turned a rich country into a poor one (Chavez, who was Peron’s most diligent pupil, managed to do the same in Venezuela albeit in a much shorter period of time).

Argentina’s inability to resolve this fundamental problem has led to low and erratic growth. When we compare the country’s economic performance since 1983 (when military rule came to an end) with that of its neighbors in the Southern Cone (Brazil, Bolivia, Chile, Peru, Paraguay and Uruguay) the results are appalling. Had the Argentine GDP per capita grown at the average rate of these six countries, in 2017 it would have been 100% higher and equal to that of Spain (around US$28,000). And if we add the difference over 35 years between Argentina’s actual GDP and the one it could have achieved growing like its neighbors the result is mind boggling: $8.4 trillion, or almost the combined GDP of Germany and Japan in 2017.

In the face of its obvious and costly failure, one would think the country’s voters and political leaders would do everything in their power to change this system. A bit over two and a half years ago Mauricio Macri, former mayor of Buenos Aires, was elected president by the thinnest of margins. His victory was remarkable given that the Peronist party, which since 1946 has dominated Argentine politics, was the incumbent.

Macri’s victory encouraged hope in Argentina and abroad that the country would finally abandon populism and return to a path of stability and prosperity. However the new president’s main economic advisors convinced him that it was possible for the economy to grow with “gradualism”. As a result, instead of quickly dismantling the legacy of twelve years of kleptocratic populism under the Kirchners, which exacerbated Argentina’s problems, Macri’s government decided to do it gradually. Supposedly the main advantage of this strategy was that it would not lead to social unrest or any political upheaval. Very low levels of interest rates and easy access to capital made it possible to finance huge fiscal deficits with foreign debt.

It should have been clear from the start that this strategy was doomed to failure as it not only failed to remove the main barriers to sustainable economic growth, but also saddled the country with more than a $100 billion in foreign debt that will be increasingly hard to repay. Macri’s economic advisors were blinded by a combination of overconfidence, wishful thinking and imprudence.

Encouraged by Macri’s decision to end Argentina’s long-standing default and to liberalize capital movements, foreign investors were initially supportive. But over time they realized that the path to fiscal consolidation was unrealistic and that it would ultimately lead to another external crisis. A severe drought, which significantly reduced agricultural export revenues, higher interest rates in the US, which generally trigger capital flow reversals in vulnerable emerging markets, plus Turkey’s crisis, which in many respects has the same root cause as Argentina’s, did the rest. In the end, the political advantages of gradualism also proved illusory. For the first time since he became president, Macri’s reelection in 2019 seems uncertain.

Macri now faces the toughest test of his presidency and his political career. If he chooses to be a statesman he will have to move forward with a radical reform of the populist economic regime that has brought the country to its knees. Cosmetic changes will only exacerbate the crisis. Fortunately, he still has time to make a real change in Argentina and reap the political benefits of the increased prosperity that it will generate. In the next weeks we will find out which path he chooses.

[emfinance]

A Replay of 2008?

The BIS Annual Report examines four risks that could threaten the sustainability of the current global economic expansion in the medium term: a rise in inflation; financial stress as financial cycles mature; weaker consumption and investment, mainly under the weight of debt; and a rise in protectionism.

According to Claudio Borio, BIS’ head of research, “leading indicators of financial distress point to financial booms that in a number of economies look qualitatively similar to those that preceded the GFC.”

https://www.bis.org/publ/arpdf/ar2017e_tcintro.htm

[emfinance]

Facts impertinently get in the way of Pope Francis' campaign against "heartless capitalism" According to the World Bank, for the first time in human history, “less than 10 percent of the world’s population will be living in extreme poverty by the end of 2015.” Those countries where the percentage is higher are those such as Venezuela and Argentina where governments embraced the type of "compassionate socialism" that the Pontiff advocates. 

https://fee.org/articles/the-end-of-extreme-poverty-and-the-great-fact/?utm_campaign=coschedule&utm_source=twitter&utm_medium=LearnLiberty&utm_content=For%20the%20First%20Time%20in%20History%2C%20Less%20than%2010%25%20of%20Humanity%20Lives%20in%20Extreme%20Poverty%20%7C%20Marian%20L.%20Tupy

[emfinance]

An Anthology of Trumposts

It’s been almost a year since Donald Trump becoming president became a possibility. Since then I argued that Trump was a classic populist leader. In fact, I argued that he was the closest thing to Juan Perón that the US could come up with, something Trumpistas vehemently deny.

Below is my take on the recent rise of populism in the US and the UK (some in Spanish)

Estados Unidos y el Mundo frente al Populismo de Trump (20 February 2017)

Trump is not the real danger (6 February 2017)

Making America Great Again (9 November 2016)

On the dangers of argentinitis (6 November 2016)

Obama is wrong about populism (1 July 2016)

Brexit and Populism’s New Dawn (24 June 2016)

Trump, Argentina and the dangers of populism (8 May 2016)

¿Un populista en la Casa Blanca? (16 February 2016)

[emfinance]

Trump is not the real danger

(6 February 2017)

Most of the world and a majority of Americans are watching the first weeks of the Trump presidency with a mix of dread and incredulity. The new president of the United States not only has shown complete disregard for the informal rules, conventions and traditions that go with his office but has also openly attacked two of the foundations upon which the American republic was built: press freedom and an independent judiciary. There are good reasons to be concerned.  But Trump is not the real danger. The real danger is what will come after him.

Trump portrayed himself as the candidate that would “drain the swamp” in Washington and make America great again. He will do neither. Instead he will make the world a more dangerous place and delay the day of reckoning for America’s plutocrats.

Let’s not forget that Trump won the presidency with 3 million less votes than his rival. He owes his victory to an archaic and non representative electoral system. And with this system he won by the thinnest of margins, only 70.000 votes in three key swing states.

During the primaries, Trump and Bernie Sanders presented themselves as the anti-establishment candidates of their respective parties. Both argued that for most voters the fabled American dream was over. The data proves them right. For the last three decades, middle income Americans have been falling behind. They feel much closer to the poor than to the rich. This is what relative inequality means. I call it the frustration gap, which is the fertile ground in which the seeds of populism grow.

It is important to emphasize that populism is not an ideology but a way of doing politics. Depending on a society’s demographic, cultural and social idiosyncrasies, populism can be articulated from the right or from the left. Hitler and Mussolini were populist leaders of the right wing variety. Peron tried to ape them but later opportunistically veered to the left and praised Fidel Castro. Chavez took Peron’s mantle, setting the model for the modern Latin American leftist populist caudillo.

Even though Sanders and Trump offered a similar diagnosis of what was wrong with America, the solution they proposed was quite different. Sanders wanted to close the frustration gap with massive income redistribution at the expense of the top 1% and Wall Street. Trump instead focused his tirades on foreign culprits (China, Mexico, Muslims, etc). There is no better definition of plutocracy than Trump’s cabinet. Goldman Sachs is in charge of the Treasury so the fat cats will be safe for now.

But since Trump’s mercantilism will not make America great again, the frustration gap will continue to widen. Under his presidency, a greater polarization of American society is inevitable. Demographic trends are against the Republican Party. The pendulum will swing back in the other direction with even more momentum. Many Sanders supporters who voted for Trump will soon regret their decision. Those who always opposed Trump will become increasingly energized and motivated. Both groups only need a young, charismatic and truly anti-establishment politician who can interpret and embody their discontent. And in politics like economics, demand creates its own supply. When such leader appears, neither the Electoral College nor low voter registration will prevent him or her from reaching the White House.

By then, Trump will have significantly degraded America’s institutional fabric and set a high water mark in American politics. Whoever succeeds him will also ignore those conventions, traditions and unwritten rules of behavior and defy the formal institutions that until now have limited the power of the executive. Trump will not only trigger a dangerous political reaction but also pave the way to a brand of populism that once in power could seriously undermine the foundations of the system that once made America great.

There is a lesson to learn from Argentina. In the 1930s, fearing communism, conservative elites supported a military coup and electoral fraud. During the following decade, relative inequality increased. A widening frustration gap set the stage for populism. Peron ably interpreted the growing discontent of the majority and once in power, he gave the coup de grâce to Argentina’s already degraded institutions. Under his misguided leadership, the country started a long and painful decadence. The 10th wealthiest nations in the world when he took power, today it stands 60 or lower in global GDP per capita rankings. Yes, the United States is different, very different. Maybe. But Trump’s presidency has shown that what was once unthinkable is now possible.

[emfinance]

Video of my presentation at the CSIS in Washington DC on January 31, 2017

[emfinance]

Making America great again

(9 November 2016)

Donald Trump will become the 45th president of the United States. I am not surprised. In fact, I predicted this outcome. Well, to be perfectly honest, I didn’t really predict that Trump would win this election. Like everybody else I was influenced by the polls (which have proved once again to be useless) and by my own opinion that Trump was unfit to be president (I am not a big fan of Hillary either; it was the dilemma of choosing the lesser evil). 

Let me explain, four years ago I was invited to speak at the Beijing Forum, an annual gathering of academics, intellectuals and political leaders from all over the world. The theme was “Challenges and Opportunities” in the aftermath of the global financial crisis and the title of my presentation was “Lessons from Argentina for a world in crisis”. My conclusion was that unless governments in the developed world did something to reduce growing levels of income inequality there was a serious risk of a populist backlash like Argentina had with Juan Perón in 1946. With Trump’s victory my worst fears have been confirmed.

Marx once said that great men and great events in history tended to repeat themselves, first as a tragedy and then as a farce. It would seem the order has been reversed. The United States is now putting on stage a tragedy inspired by a farce that has been repeatedly played out in other countries. Make no mistake, Donald Trump is a populist. This statement may not be totally helpful to readers. Sociologists, political scientists, economists and historians debate endlessly about the meaning of the term “populist”. So it is important to understand what we are talking about and why it matters.

“Populism is not an ideology but a way of doing politics,” warned the late Ernesto Laclau, one of its most fanatical ideologues and promoters. As long as those “at the bottom of the scale” have unsatisfied demands and oppose the establishment, populism will exist he wrote. But as Laclau rightly pointed out, the opposition to the establishment can be articulated from the left or the right. That explains why any list of populist leaders would include Hitler and Chávez, as well as Donald Trump and Bernie Sanders, to name just a few.  

I define populism as the supposedly easy, arbitrary, simplistic and costless solution to structural problems imposed by an electoral majority when those structural problems open a gap between its aspirations and reality. Through a simplistic narrative full of empty slogans, populist leaders propose an easy, painless way to close this “frustration gap”. Essentially, when seeking votes what populist politicians propose is a free lunch. In reality, once in power they try to make somebody else pay for the lunch. That “somebody else” obviously has insignificant electoral weight or political power. Foreigners or small ethnic groups are the ideal targets. In the populist’s rhetoric, they become “the enemy.”

More than a century ago in The Crowd: A Study of the Popular Mind, French psychologist Gustave Le Bon explained how to manipulate the masses. Decades later, Hitler put Le Bon´s teachings in practice with great effectiveness. “Affirmation pure and simple, kept free of all reasoning and all proof, is one of the surest means of making an idea enter the mind of crowds,” wrote Le Bon. The simpler the statement, the better. According to Hitler, it had to be intelligible to the least educated member of the audience. That’s why slogans were particularly effective.

However, according to Le Bon, affirmation was not enough. It had to be accompanied by repetition. “The repeated statement is embedded in the long run in those profound regions of our unconscious selves in which the motives of our actions are forged. At the end of a certain time, we have forgotten who is the author of the repeated assertion, and we finish by believing it,” he explained. The final ingredient in a populist’s discourse was contagion. “Ideas, sentiments, emotions, and beliefs possess in crowds a contagious power as intense as that of microbes. This phenomenon is very natural, since it is observed even in animals when they are together in number.” Mass media made this rhetorical trilogy much more effective and dangerous. Hitler added another powerful ingredient to the mix: negative emotions. Nothing stirs them more rapidly than the perception that one is being attacked or deprived of something rightfully owned. It is a natural self-defense reaction.  

In Nazi rhetoric the Jews were the main enemy of the German people. In Latin America most populist leaders chose instead the landowning “oligarchy” allied to Yankee imperialism. In Trump’s narrative the Chinese, the Mexicans and Muslims are to blame for the end of the American dream. In Bernie Sanders’ view, the culprits were globalization, Wall Street and the top 1%.  

The “narrative” is an essential element of a populist leader’s political strategy. It provides a simplistic and conspiratorial model to interpret reality that not only generates lasting negative emotions but also provides a moral justification to act against those responsible for the “expectations gap” (and if necessary, to infringe their rights).    

Although populism comes in many ideological flavors, reflecting the zeitgeist of and values of a particular society, it always shares a common feature: it is self-destructive and extremely damaging. It is self-destructive because as Milton Friedman once said: “There is no such thing as a free lunch.” Eventually, the populist solution runs into trouble and the electoral alliance that brought populism to power unravels. Secondly, the longer populisms lasts in power, the deeper and more lasting is the damage inflicted upon society’s culture and institutions. Even Laclau once reluctantly admitted that populism could end “very badly” and he died without witnessing the disastrous effects it had in Argentina and Venezuela.

Trump’s powerful electoral slogan, “Make America great again”, clearly shows the root of the problem. His voters obviously believe that America is no longer great. It is not clear what is their, or Trump’s, point of comparison. However, we can easily identify certain cultural, economic and geopolitical trends that have undermined Americans´ confidence in their future, i.e., the source of their “frustration gap.”

First, after a couple of decades of undisputed military and diplomatic supremacy following the fall of the Berlin wall, the United States is being challenged by rival powers. In recent years, Russia and China have reasserted their military ambition more defiantly. In addition, Muslim radicalism has been an irritating and murderous nuisance. It also seems that many of Trump’s voters, both male and female, were prejudiced against Hillary because she is a woman. Besides the other failings they found in her as a presidential candidate, they did not believe that, as president of the United States, she could project an image of American strength and greatness in the international stage.   

Second, right now the prospects for continued growth of the US economy don’t seem particularly bright. Since the 2008 crisis, many well-respected economists have raised the specter of secular stagnation. At the same time, the average American feels his or her income is lagging behind, while the top 1% becomes increasingly wealthier. They cannot fail to see that the beneficiaries of globalization have been the lower and middle classes in emerging market economies, particularly China, India and Mexico. This group of voters, which includes a big chunk of Bernie Sanders supporters, buys the idea that protectionism is the solution to their problem, i.e., repealing TPP and renegotiating NAFTA will give them back high paying jobs and make America great again.

Trump’s political base is not limited to the white, blue-collar, less educated Americans. It also includes affluent and well-educated Republicans. This elite also feels that America is no longer great. They are willing to forgo free trade if they can get lower taxes and right-wing Supreme Court appointees. In their mind, Clinton was set to impose the radical socialist agenda laid out by Obama. For these voters, growing levels of income inequality are not a concern. The fact that such trend exists is inconsistent with creeping socialism does not enter their mind either.

Declining productivity and growing inequality are America´s most serious structural problems. The former is the result of years of underinvestment in education and training and growing regulations. The skill level of the American workforce is lagging in the face of technological disruptions and automation. This contributed to wage stagnation and growing inequality, which in turn was exacerbated by crony capitalism and regulatory capture, particularly in the financial industry. Instead of solving the problem, protectionism will worsen it.

The “frustration gap” is not only economic and geopolitical. Another important group of Trump voters, the evangelicals, feel that America has lost its moral compass. For this group, abortion, equal rights for women, homosexual marriage and the theory of evolution are all anathema. Without any supporting evidence (in fact, despite contradictory evidence), they view Trump as their savior.

It is too early to make predictions about a Trump presidency. Making America great again will take time and require the adoption of policies that will show results in the medium and long term. It will also require preserving and strengthening certain values and institutions (independent judiciary and legislative branches, racial tolerance, press freedom, etc.) for which Trump has shown little respect.

Right now everything seems possible, including a sensible government. Trump’s speech last night was certainly a small step in that direction. However, he has so alienated the establishment of his own party during the campaign that it will be hard for him to surround himself with capable, honest and experienced public servants. His key cabinet appointments and his rhetoric in the coming weeks will provide some indication of what kind of administration he intends to lead. However, his character, his prejudices and his checkered career as a businessman don’t offer much hope.

[emfinance]

On the dangers of argentinitis

My article on a dangerous cultural disease that seems to be affecting the developed world.

[emfinance]

The biggest losers of globalization

Great article by Branko Milanovic summarizing the work he has been doing on world inequality

The effects of of globalisation on income distributions in rich countries have been studied extensively. This column takes a different approach by looking at developments in global incomes from 1988 to 2008. Large real income gains have been made by people around the median of the global income distribution and by those in the global top 1%.  However, there has been an absence of real income growth for people around the 80-85th percentiles of the global distribution, a group consisting of people in ‘old rich’ OECD countries who are in the lower halves of their countries’ income distributions.

[emfinance]

Obama is wrong about populism

Emilio Ocampo (July 1, 2016)

 Just when Latin America got rid of populism it started to become fashionable in the developed world. The term populism comes up in most analyses of the upcoming presidential election in the US, the result of the referendum in the UK and the current political situation in Europe. However, there is an ongoing debate about its definition and, more importantly, its fundamental causes.

A few days ago, at a joint press conference with the leaders of Canada and México, president Obama made some comments that adds to the confusion surrounding populism. Obama reacted to a remark by president Peña Nieto, who criticized the populism and demagoguery that permeates current political discourse. His comments were directed to Donald Trump, whose venomous rhetoric has México and its citizens as constant targets.

To the surprise of Peña Nieto (and many in the audience), Obama then launched an impassioned defense of populism. “I’m not prepared to concede the notion that some of the rhetoric that’s been popping up is populist,” said POTUS. In his view, a populist politician is somebody who not only cares and worries about the lot of the less privileged and the working class but also actively defends their interests. Trump is not a true populist but a nativist and a xenophobe, said Obama. Only he and Bernie Sanders and himself could be considered “true populists” (Hillary Clinton for some reason was excluded).

For those of us who have suffered first hand the scourge of populism (and for those who risk suffering it in Europe and the US) Obama’s statement was not only unfortunate but also potentially quite damaging. Let’s remember that during the 20th century only three countries in the Americas counted themselves among the ten wealthiest on earth: the US, Argentina and Venezuela. Thanks to populism Argentina’s position in global GDP per capita rankings is now around 60 whereas Venezuela is above 90.  

Certain clarifications are in order. In the first place, it is a fallacy to claim that having social sensitivity or caring about the poor or less privileged is the defining characteristic of a populist politician. Secondly, to pretend to know and understand the true interests of millions of people of different age, ethnic origin, sexual orientation, place of residence, level of education and faith reveals dangerous levels of intellectual arrogance.

“Populism is not an ideology but a way of doing politics,” warned the late Ernesto Laclau, one of populism’s most fanatical ideologues and promoters on both sides of the Atlantic. As long as those “at the bottom of the scale” have unsatisfied demands and oppose the establishment, populism will exist. But as Laclau rightly points out the opposition to the establishment can be articulated from the left or the right. That explains why the lists of populists can include Hitler, Mussolini, Perón, Chávez and Kirchner, as well as Donald Trump, Bernie Sanders, Nigel Farage and Marine Le Pen, to name just a few.

It is key to distinguish between populist rhetoric and populist policies. To gain power the populist leader obviously needs the vote of the majority at election time. There is a law in economics that states the supply creates its own demand. But in the political market, the supply of populism offered by the populist leader cannot create its own demand unless there is an underlying discontent. When this basic condition is met, supply and demand feed on each other. However, the populist leader plays the key role, since he or she interprets, encourages and promotes the unsatisfied demands that give him political power. In Laclau’s words, the people “symbolically crystallize” such demands and in this way build up their own sense of identity.

At a certain basic level, populism is the easy and costless solution to structural problems that have opened a gap between an ideal to which the majority aspires and reality. Populist leaders always propose an easy way out to this dilemma (or a free lunch). Essentially he or she seeks to impose on someone else the costs of meeting the unsatisfied the demands of the majority (or closing the gap between ideal and reality). This is why it is so important for a populist leader to build up an easily identifiable enemy (or enemies).

More than a century ago in The Crowd: A Study of the Popular Mind, Gustave Le Bon explained how to do this. Hitler was his eager disciple. In Nazi rhetoric the Jews were the main enemy of the German people. In Latin America most populist leaders chose instead the landowning “oligarchy” and/or Yankee imperialism. Trump claims that the Chinese, the Mexicans and Muslims worldwide are to blame for the end of the American dream. In Sanders’ view, the culprits are Wall Street and the top 1%. According to Nigel Farage, EU bureaucrats in Brussels and illegal immigrants are responsible for the English malaise. In these days, globalization is an ideal target for any populist leader.

The “narrative” is an essential element of a populist leader’s political strategy. It provides a simplistic, conspiratorial and Manichean model to interpret reality. This narrative not only generates lasting negative emotions among the supporters of a populist leader but also provides him or her the moral justification to act against the enemy (and if necessary, to infringe its rights).

It is important to point out that the real or imagined unsatisfied demands of the majority are not necessarily of an economic nature. During the 1930s, the Nazi regime remained highly popular while inequality increased. But in those days, the German people cared more about national pride than the distribution of income.  

In any modern society, the majority has multiple interests and those interests don’t share the same priorities. There is no such thing as the interests of the majority. As Nobel Prize winner Kenneth Arrow demonstrated decades ago uncovering the will of the people through a voting system is a theoretical impossibility. In other words, populism is not viable in a democratic system and ends up being strategy to satisfy the political and economic ambition of the nomenklatura. Just what Nietzsche said about socialist activists: they preach a false altruistic morality to disguise its own will to power.

Although populism takes an idiosyncratic shape that reflects the zeitgeist and culture of a particular society, it always shares an essential characteristic: it is entropic and self-destructive. Laclau, a fervent advocate of populism, once reluctantly admitted that it could end “very badly.” He died without witnessing the disastrous effects that it had in Argentina and Venezuela. Marx’s dictum about capitalism is applicable: Populism sows the seeds of its own destruction. 

With the passage of the time, implementing the “easy way out” to society’s structural problems (which rapidly reveals itself not to be a solution) inevitably undermines the populist leader’s political base. At the prospect of his or her impending demise, the populist leader has only one way to prevent it: resort to authoritarianism, the infringement of individual rights and liberties, and possibly, war. The longer the time a populist leader remains in power, the deeper and more lasting is the damage inflicted upon society’s culture and institutions.

Contrary to what president Obama suggested, populism is not innocuous and most certainly, not benign. Peña Nieto was right. If you have any doubts you should visit Caracas.

[emfinance]

Brexit and Populism’s new dawn

Emilio Ocampo (24 June 2016)

The first era of globalization ended abruptly in the summer of 1914. The second, which started in 1989, is ending in a much slower and less traumatic way. Brexit is just the beginning. To paraphrase Churchill, it is not the beginning of the end but the beginning of the beginning. In both cases, globalization unleashed the forces that eventually brought about its demise. The Archduke Franz Ferdinand, whose murder triggered the First World War, was the victim of nationalism. Just like the UK’s membership in the EU.

It would be a mistake to think that Brexit’s triumph was simply a call by an educated majority for greater sovereignty or a reaction to the excesses of the Brussels bureaucracy. That may have been the motivation of a minority. But the Brexit vote was much more representative of Nigel Farage than Boris Johnson, more The Sun than The Spectator. The referendum results in fact show a nation divided by income, education, geography and social position. On average Brexit voters were older, poorer, less educated and in many cases, unemployed. Interestingly 75% of the voters aged 18-24 voted “Remain”. Usually it is the young who want change. Not in this case. The Brexit vote essentially reflects a rejection of globalization. 

The second era of globalization happened almost simultaneously with another disruptive force: the technological revolution. The biggest beneficiary of both trends has been China, which thanks to the embrace of some basic principles of capitalism, in a lapse of a generation evolved from being a backward and poor country to an industrial powerhouse. As a result more than 400 million Chinese escaped poverty since 1981.

But the effect of globalization and technological change was not so benign on the advanced economies. Globalization meant a lot of low paying blue-collar jobs moved overseas to countries like India, China and Mexico. At the same time, the technological revolution eliminated a whole set of low skill white collar positions in the service sector, particularly those that could performed more efficiently by computers. The biggest loser was the middle class in the US and Western Europe. As economist Raghuram Rajan has pointed out, the most important force behind the rise of inequality in the advanced economies, particularly the US, “is that technological progress... requires the labor force to have ever greater skills.” The root of the problem is structural: the educational system has not kept up with technological change and as a result there is an excess supply of unskilled labor. But solving this problem takes time. And the people who feel displaced and have seen their standard of living decline have no patience. When the middle-income segment of the population feels closer to the poor than to the rich, a political dislocation is inevitable.  

Trump, Brexit and the rise of nationalism throughout Europe are symptoms of the same disease: populism. A similar thing happened after the first era of globalization collapsed. The first signals were felt in the periphery of Europe, with Mussolini’s advent to power. But the disease quickly spread all over Europe reaching its climax in Germany under Hitler. Not even the UK was spared, as proved by the popularity of Sir Oswald Mosley’s British Union of Fascists. It is important to remember that nazi-fascism was a form of populism.

There is no point in joining the debate that the definition of populism generates among economists, sociologists and political scientists. At a basic level, it is simply the easy way out to structural problems imposed by a majority of the electorate when those structural problems open an increasing gap between the ideal to which the majority aspires and reality. The easy way out is simply a form of collective denial. Solving structural problems requires structural reforms. But structural reforms impose costs, particularly in the short and medium term. The populist approach is simply to ignore such costs or to impose them on someone else (usually foreigners, such as the Chinese or Mexican, or easily identifiable racial minorities such as Muslims). This is the reason why all populist movements are essentially nationalistic (the reverse, however, is not necessarily true).

Obviously this form of collective denial requires and finds its own preachers. Populist leaders are extremely good at reading the mood of the majority and even better at persuasively articulating “the easy way” out to the structural problems that burden a nation. Almost 150 years ago Gustave Le Bon explained how to do the latter:

“To imbue the mind of a crowd with ideas and beliefs… leaders have recourse to different expedients. The principal of them are three in number and clearly defined — affirmation, repetition, and contagion. Their action is somewhat slow, but its effects, once produced, are very lasting. Affirmation pure and simple, kept free of all reasoning and all proof, is one of the surest means of making an idea enter the mind of crowds. The conciser an affirmation is, the more destitute of every appearance of proof and demonstration, the more weight it carries.”

Repetition of a simple slogan in every situation and every context is necessary to firmly implant an idea in the mind of an audience. Contagion is achieved by appealing to sentiment and emotion, the most effective of which are always negative. That’s why fear, hatred and resentment underlie all populist rhetoric.

Mussolini, Hitler and Peron proved the effectiveness of Le Bon’s maxims. Trump, Farage and the populist-nationalists leaders of the modern age are proving their lasting power. A few months after Hitler’s rise to power Bertrand Russell complained that “the fundamental cause of the trouble is that in the modern world the stupid are cocksure while the intelligent are full of doubt.” His warning rings true today. All populist leaders are cocksure. That’s why they are so appealing. It is impossible to predict the next act of this tragedy. Let’s hope history has taught us a lesson and that we will not repeat the mistakes of the past.

[emilioocampo]

Trump, Argentina and the dangers of populism

Emilio Ocampo (May 8, 2016)

Last week Argentina and Donald Trump, presumptive presidential nominee of the Republican Party, were strangely linked in the news. First, Trump warned in an interview that if he wasn’t elected president of the United States, the Supreme Court would turn the country into something “totally different” like Venezuela or Argentina. This comment seems ill informed, and at least to Argentine voters also insulting, given that last November they put an end to twelve years of unfettered and destructive populism. It is also ironic because thirty years ago Mauricio Macri, Argentina’s new president, negotiated with Trump the sale of a big chunk of real estate owned by his family in the Upper West Side of Manhattan.  

Trump’s comments passed unnoticed in the US but provoked a brouhaha in Argentina. “Mr. Trump has an opinion from a perspective that isn’t healthy… He ignores what we have been doing for the last five months,” declared Argentina’s foreign minister. The revenge serendipitously came in the form of a cable TV advertisement aired in Argentina that mocked Trump to promote the upcoming Copa America soccer tournament (which will be hosted by the US). The ad, which rapidly became viral, took comments from Trump’s speeches about illegal immigrants from South American as if they referred to the Argentine national soccer team (one of the cup’s favorites) and its fans.

At first sight, one might think this was another of Trump’s insulting foreign policy gaffes. It wasn’t, but for reasons Trump probably ignores. In fact, his comment is a warning about the consequences of adopting any form of populism, including trumpism. So, in essence, Trump was warning his fellow Americans about the dangers of electing him as their president.

Let me explain why. During the 20th century only three countries in the American continent counted themselves among the ten wealthiest on earth: the United States, Argentina and Venezuela. Argentina’s position in global GDP per capita rankings is now around 60 whereas Venezuela is close to 90. Their economic decline was caused by populism.

This is why it is also ironic, or maybe tragic, that right when Argentina decided to shake off populism, the United States seems ready to embrace it (together with some European countries). As The Economist pointed out in a recent article, both Trump and Bernie Sanders represent the rise of populism in American politics. Both candidates share the same diagnosis of what is wrong: the American dream is over. Their popularity should not be a surprise, since a large portion of the American electorate believes this is the case. The difference between the candidates is where they lay the blame for this sad state of affairs. In Sanders’ view, the culprit is Wall Street and the top 1% (interestingly, given the fact that Sanders according to his tax returns is among the top 5% of earners). Whereas according to Trump, Mexico and China are to blame. He claims the former is sending killers and rapists across the border which put the life of ordinary Americans in danger, while the latter is flooding the US economy with unfairly cheap imports that put American workers out of work (interestingly given that Trump is known for having employed illegal immigrants and also outsourced manufacturing to China).

This is not the first time Argentina goes against global political trends. In 1946, after the world leading democracies had defeated nazi-fascism at a very high human and material cost, Argentina embraced its own home-grown version of it thanks to Juan Peron. His most devoted and adroit follower was Hugo Chavez, who managed to ruin Venezuela’s economy.

What happened in Argentina in 1946 and what is happening right now in the United States and some countries in Europe sheds light on the origins of populism. As it is usually the case with complex social phenomena, a widely accepted definition of populism is elusive. Social scientists have debated ad nauseam what are the key defining features of populism. But at a basic level populism is nothing more than a reaction of the majority of the electorate when the dreams and aspirations with which it grew up are no longer valid or viable. This is usually because of structural problems caused by deep economic or social transformations. Populist leaders appeal to this group of voters because they offer a simple diagnosis of a complex situation and an even simpler and costless solution (e.g., let’s build a wall at the border with Mexico and the Mexicans will pay for it). In all cases, the diagnosis involves blaming someone that can be clearly identified as not being part of society’s mainstream (i.e., they are the ones who will pay for the solution). The culprits are foreigners, members of ethnic minorities and the rich (or the “oligarchy” as Latin American populists like to call them). Just hammer this message in all your speeches and make sure everybody understands it. You might think this is too simple, but it worked for Mussolini, Hitler, Perón and many others.

In 1946 the Argentine electorate felt the same way the American electorate feels today. The Argentine dream of everlasting prosperity without effort was over. Following the Great Depression, inequality grew while political freedom was curtailed. Perón claimed that this was due to a conspiracy between the oligarchy and anglo-saxon imperialism to exploit the Argentine people. His cure –a muddled admixture of nationalism, interventionism, clientelism and redistributionism– was much worse than the illness. Thanks to Peronism, the country never managed to adapt to changing circumstances in the global economy. Argentines are still paying the price for this huge mistake.

It would be a mistake to think that populism could never take hold in the US. Granted, it has cultural and institutional anti-bodies to populism that Argentina never had. However, everything is relative. Each society and each era generate their own form of populism and their own type of populist leader. Peron embodied certain negative traits and paranoid fears that were prevalent in Argentine society in 1945. The same thing can be said today about Trump and the United States.

Let’s also remember that the US was the birthplace of the first populist party of the modern era. In the 1892 presidential election the populist candidate won 8.5% of the popular vote and carried five southwestern states. Finally, let’s not forget that Germany was the most educated and cultured nation in Europe. This didn’t prevent Germans from choosing an uneducated foreigner to lead them. In May 1933, shortly after Hitler became Chancellor, Bertrand Russell wrote:

What has been happening in Germany is a matter of the gravest portent for the whole civilised world. Throughout the last hundred and fifty years, individual Germans have done more to further civilisation than the individuals of any other country; during the latter half of this period, Germans, collectively, have been equally effective in degrading civilisation. At the present day the most distinguished names in the world of learning are still German; the most degraded and brutal government is also German… Given a few years of Nazi rule, Germany will sink to the level of a horde of Goths.

According to Russell, “the fundamental cause of the trouble is that in the modern world the stupid are cocksure while the intelligent are full of doubt.” His warning rings true today.

[emfinance]

Currency Crises: Deja vu all over again

Interesting article by Carmen Reinhart via Project Syndicate on the return of the currency crash. Economists say a country experiences a currency crisis when its currency depreciates by more than 15% over 12 months.

According to Reinhart, since 2014 nearly 90 countries have experienced annual depreciations in excess of 15%.

The average cumulative depreciation versus the US dollar has been almost 35% from January 2014 to January 2016. For many emerging markets, where depreciations have been considerably greater, weakening exchange rates have aggravated current problems associated with rising foreign-currency debts.

What is different today from past emerging market currency crises is of course  China. As Reinhart points out:

What distinguishes the Chinese case from others is the sheer size of its economy relative to world GDP, as well as its effects on numerous countries across regions, from suppliers of primary commodities to countries that depend on Chinese funding or direct investment. The broader point is a simple one: Emerging markets now account for around 60% of world GDP, up from about 35% in the early 1980s. Restoring global prosperity requires a much broader geographical base than it did back then. The return of the currency crash may make achieving it all the more difficult.

[emfinance]

The precautionary principle

As the debate on climate change intensifies, it is worth re-reading this article by Michael Pollan about “the precautionary principle.” It was published in The New York Times Magazine on 9 december 2001. As Pollan explains, “Even in the face of scientific uncertainty, the principle states, actions should be taken to prevent harms to the environment and public health.“

“New technologies can bring mankind great benefits, but they can also cause accidental harm. How careful should society be about introducing innovations that have the potential to affect human health and the environment? For the last several decades, American society has been guided by the “risk analysis” model, which assesses new technologies by trying to calculate the mathematical likelihood that they will harm the public. There are other ways, however, to think about this problem. Indeed, a rival idea from Europe, the “precautionary principle 2/3″ has just begun making inroads in America.

The problem with risk analysis, which came out of the world of engineering and caught on during the late 70’s, is that it hasn’t done a very good job predicting the ecological and health effects of many new technologies. It is very good at measuring what we can know—say, the weight a suspension bridge can bear—but it has trouble calculating subtler, less quantifiable risks. (The effect of certain neurotoxins on a child’s neurological development, for example, appears to have more to do with the timing of exposure than with the amount.) Whatever can’t be quantified falls out of the risk analyst’s equations, and so in the absence of proven, measurable harms, technologies are simply allowed to go forward.”

[emfinance]

Other dangers lurking in Brazil

Brazil is currently going through political and economic turmoil. Petrobras was downgraded to junk status by Moody's and the Real recently reached another historical low. Of the much vaunted BRIC countries only India is showing signs of dynamism thanks to sensible economic and monetary policies.

The markets are focusing on all the economic and financial troubles besetting President Dilma Rousseff. But there are other dangers lurking in the horizon that will have a serious impact not only in Brazil but also its neighbors. We are talking about climate change.

Although everybody talks about the impact of CO2 emissions, few people are paying attention to the impact from increasing deforestation of the Amazon region. The report "Global Trends 2030" published in 2012 by the US National Intelligence Council warned that "The environment could play a critical role in Brazil’s fortunes during the next 15-20 years—the Amazon Basin produces about 20 percent of the Earth’s fresh water flows into the oceans and has a major impact on global weather. An Amazon die-back or deforestation could alter the region’s water cycle in a way that would devastate Brazilian and much of Argentinian agriculture. Recent models suggest a die-back tipping point could be when deforestation reaches 20 percent; it presently stands at 18 percent." This conclusion was partly based on a report commissioned by the World Bank and published in 2010. 

Data provided by the Brazilian National Institute of Space Research (INPE) and the United Nations Food and Agriculture Organization (FAO) suggest that the deforestation rate at the end of 2013 was 18.5%, closer to the "tipping point."

Satellite data shows the deforestation of the Amazon has intensified in recent years. The trend is troubling. In neighboring Argentina, heavy rains and floods have become increasingly common and disruptive.  

The Global Trends 2030 report warned that Brazil would "play an outsized role on the region’s future."  Not only politics or finance but also in terms of climate change, whatever happens will have an impact on all of its neighbours.

[emfinance]

The strange case of Argentina and Venezuela

In the pastdecade it has been common to point out the similarities between Argentina and Venezuela, two Latin American countries that embraced populism with great enthusiasm. That such an affinity exists is acknowledged both by those who deplore it and those who celebrate it. So much so that a new word has been coined to describe it: Argenzuela.

The truth is however that there are many important differences between what has happened in Argentina and Venezuela in recent years. Although both countries embraced populism, they applied it with different degrees of intensity (less in Argentina), and, consequently they have not suffered its consequences to the same degree. But taking a longer term view there are certain parallels between the two countries that are worth highlighting, as they distinguish them from the rest of Latin America.

To start with, Argentina and Venezuela are the only two countries in the region that at some point belonged to the exclusive club of the ten wealthiest nations in the world. According to the GDP per capita statistics compiled by British economist Angus Maddison, Argentina entered this club in 1885 and remained in it with ups and downs until 1946. Venezuela instead joined in 1938 and exited in 1964, a much shorter period.

The second thing that distinguishes both economies is the abrupt decadence they have experienced since reaching their highs in the world’s GDP per capita rankings. In 2010, the last year for which Maddison published his data, Argentina and Venezuela had dropped to 41 and 38 respectively. If instead we use the data provided by the IMF, in 2014 Argentina ranked 61st and Venezuela 60th in the world’s ranking. It is difficult to assess whether they should rank lower given that in recent years both governments have resorted to tampering with their official statistics.

Argentina and Venezuela: Position in the World’s GDP per capita Ranking (1900-2010)

Source: Angus Maddison

It is important to note that none of the other countries that were part of the select “top ten” club have fallen so low. It also worth noting that none of those countries resorted so often to populist policies that curtailed the economic and political freedom of their own citizens. In contrast, according to a 2014 global ranking of economic freedom Argentina ranked 169th and Venezuela 176th (only Cuba and North Korea have lower scores).  

Populism is the main culprit behind the abrupt economic decadence of Argentina and Venezuela, a decadence which has no parallel in modern history. What explains it? Why have strong caudillos with military backgrounds such as Juan Peron and Hugo Chavez been so popular? 

Maybe part of the answer has to do with the way both countries view their own past. Argentina and Venezuela are the only two countries in Latin America that have strong caudillos in their foundational history that have a continental projection (i.e., are also part of other countries’ history).  I am referring to José de San Martín and Simón Bolívar, considered by many as the continent’s liberators from Spanish oppression. Over the last century, Argentine and Venezuelan historians have elevated both men to godlike status and created enduring myths around them. Their exploits are compared to those of Napoleon and Hannibal.

In both countries, populist leaders used these myths to advance their own political agenda. Chavez’ efforts to convince Venezuelans that he was the reincarnation of Bolívar would be comical if it wasn’t for their tragic consequences. But in this as in many other things, Chavez only took a page from Juan Peron’s book. Peron was the founder of the most enduring and politically successful populist movement of modern times. During his first presidency, he sought to identify himself with San Martin and even suggested that if the latter were alive he would support him.  Chavez simply took this lesson to the extreme. 

The point I am trying to make is that the way a society interprets its own path is not innocuous. In Argentina and Venezuela, children learn from first grade that the independence of their countries (and of most of Latin America) was obtained through the single handed efforts of San Martin and Bolivar. 

In reality what both men did was to lead an incomplete revolution that ended in anarchy. San Martin and Bolivar were able to secure the external freedom of the continent and prevent a tyrant based in Madrid from ruling their countries. However, they were incapable of building the institutions that would protect their citizens from being oppressed by a local despot. In both countries, the birth of the nation is traced back to the military victories of their “founding father”. 

The prevalence and popularity of messianic strong caudillos (or “liberators”) among Argentines and Venezuelans is a direct consequence of this way of understanding their countries past. History is basically a way of interpreting reality and there is an inextricable link between the past and present reality. Argentines and Venezuelans believe in an epic history of their countries’ birth. This version of history glorifies their national hero and dismisses the importance of institutional development. As a result their history is simply a list of biographies to which each populist leader tries to add his or her own. Peron succeeded in Argentina and, so far, it seems Chavez did so as well in Venezuela. The legacy of both men is still very much alive. This is the main reason why these two potentially rich countries are poor.

NOTE: Later updates from the Maddison project published in 2018 suggest two things: a) Venezuela never belonged to the “top ten” club, and b) the economic decline of both countries was much worse than I originally believed.