Living On

Armen is heavily missed. His absence left a hole in independent observation of the political and economic risk situation in Latin America. Beyond the merely analytical though his work was wide-ranging from Armenian philanthropy and social observation of Latin and European lifestyles through to being a "fly on the wall" at the Cannes Film Festival every year and reporting back on the more exotic foibles of the international jet-set.

We miss his wit, his sense of history and his bon mots (in French, Armenian and, even, Turkish). Armen was very much a product of the Levant but then, like so many other Levantines, converted to an international stage where they offer insight into all around them. This record tries to humbly accumulate his collected writings for public consumption so they can be preserved and appreciated for the urgency of the moment in which they were written to the timelessness of the observations.

How best to categorise the uncategorisable? Maybe Armen could be described as an Armenian/Anglo/Franco Samuel Pepys for our times.....

It is ironic that ultimately it was the very mediocrity and self-satisfaction of the Chilean "system", which he documented so thoroughly, that brought about his tragic end.

Wednesday, February 27, 2008

RETROSPECTIVE Further Thoughts, Comments & Reactions to Papers


 
From time to time, it is good to look back at what one has said and written, the context in which it developed, reactions, comments and consequences. Here are a number of selected highlights.

SANTO TOMAS I have to open this paper with the by now well-publicised case of Gerardo Rocha, founder and president of the Santo Tomas educational institutions, who last week suffered severe burns after organising and taking part in the premeditated murder of an old man who supposedly was involved with his current partner.

In my over 37 years working career as an analyst, few things if any have given me as much pleasure for shouting: "I TOLD YOU SO" about the demise of that fake psychopath. We Levantines have a special flair to weed out such characters, and in my case I also learned about crooks and psychopaths in Chile the hard way since my arrival. Having been conned by nephews of ministers and various associations of retired government and military circles, and living opposite a psychopath who for some reason is untouchable to justice, I have the exact temperature of the place.

About Rocha and Santo Tomas, I had other sources too, and for the past
decade have been warning in writing and orally about staying away from
him and all his works. Vox Clamanti in Deserto. Mr Rocha was the
plague everyone loved to be infected by. The educational authorities
gave him permission to open a university when he himself does not have
a proper high education degree (as far as I know, that is illegal). He
was called as witness to congressional committees, was a co-founder of
the Chilean chapter of Transparency (that figures…), a director of
chambers of commerce. He made a point of cornering visiting
personalities for ceremonies at his university, with the active
complicity of most of the diplomatic corps (who hide away their
visiting ministers and admirals from others who give them free weekly
advice, but are ready to involve them with crooks and
murderers..bravo!!). The only person with whom he was correctly
photographed was his fellow "desgraciado" Mr Jose Maria Aznar. Nothing
was sacred. Though his institution is named after a father of the
Church whose achievements included insulting Islam, he negotiated an
agreement with Morocco to open a seat of learning there (Morocco's
king, in case you did not know, is called Mohammed).

The Mercurio of last Saturday made a point of adding salt to the wound
by showing him photographed in company of the heads of Investigaciones
& Carabineros, the two highest law-enforcement officers in the land,
and with senate president Eduardo Frei on a trip to Asia. I am sure
there must be a photograph of him with Mrs. Bachelet somewhere.
Peripatetic (pathetic?) senator Nelson Avila has risen in his defence,
also involving fellow senator Fernando Flores in his support.

He hedged his bets on the Right too, getting close to the Opus Dei
(despite his dissolute private life), got involved with Joaquim Lavin
in his populist Banigualdad project, and got both CORFO and La Tercera
owner Alvaro Saieh to invest in his ventures (among other
businessmen).

There is hardly a Chilean or foreign institution based here not
affected by what is certainly the biggest scandal I have witnessed
since I arrived in Chile. It is interesting to see that several people
are using negation (most of them falsely), to claim they had nothing
to do with him. Others are in psychological denial, still insisting
that he is a "good man" and that he could never have done such a
thing. La Nacion referred to him as the former "tsar of education". I
think he was in fact the Raspoutine.

Already, some crucial evidence the investigators were about to seize
has been "stolen" from the car of Rocha's brother (what the hell it
was doing there, nobody bothered to ask). With so many powerful people
in his circles, two things can happen. Either he will die in hospital
with some help (a la Eduardo Frei senior), or he will survive and be
acquitted by the country's corrupt legal system under the excuse of
"temporary mental disorder". Hell, they might even organise a
"rehabilitation dinner" (desagravio) for him at Casapiedra (other
Chilean crooks and murderers have been so honoured).

There is another bent educational institution based in Chile, the SEK
Internacional, which runs schools and universities both here and
abroad. Its style and approach is different, but the character is the
same. You have been warned (again).

TOURISM Just after I sent out my update on travel and tourism in
Chile, someone wrote to El Mercurio telling of his experiences in
accompanying foreigners to board a cruise ship in Valparaiso. I had
singled my local harbour as the only one decently equipped for that
purpose, but it seems that I was uncharacteristically optimistic. You
have to check-in at the terminal on one end of the harbour and then
join your ship at the other end. Another reader of my papers reminded
me of a blatant omission. Though I have referred to the matter before,
I should have mentioned again the scarcity and minute size of paper
napkins in many Chilean restaurants. You have to decide in advance
which knee or breast you wish to protect against the Bolognese sauce,
because there just ain't the surface for both. Lastly, an insider
source in the Swiss secret service (you see how well connected this
newsletter is) picked up on my mention of Lichtenstein tourists in
Chile. Apparently, some years ago, a group of tourists from
Lichtenstein came over to climb some mountains (as if they were a
scarcity where they come from). They left their hire car with all
their belongings, passports etc.. at the bottom of the mountain (how
do you say "schmuck" in Lichtenstein patois? Not an easy question to
answer because even though it has only 25,000 inhabitants, they
actually have two ethnic groups there. Most are from a Germanic tribe
called "Alemanni"- how original- and speak their dialect, but they
also have immigrants from the Swiss Valais, who speak another variety)
.

Anyway, whether Alemanni or Walser, our alpinists had their car stolen
with all its contents, and the Swiss embassy (which looks after the
diplomatic affairs of its small neighbour) issued them with new
passports (after searching around the office to see where they had put
them).

SARKOZY AND SPAIN My twin assault of the present state of France and
Spain produced some interesting results. Nobody protested on my
cynicism about the sham value of Sarkozy. Events since then have
proved me 1000 % right, and my scepticism is now shared by a majority
of the French population as, in February alone, his popularity dropped
by 9 points to 38 %. The latest incident in which he gratuitously
insulted a citizen at a fair shows him like the small time "caid" from
the "bas-fonds" of Salonika that he is.

The criticism of Spain's "government by folklore" produced wider
comments, particularly as it was reproduced on a pan-European
multilingual website. There was the Catalan who really shone by
claiming his "country" was beyond criticism, because the very name
meant "country of God". I also found a blog about it among Spaniards
on a local website, which was fairly balanced between the pros and
cons (in fact the cons main criticism were some factual mistakes which
they claimed were in the text, such as which were exactly the Basque
provinces). I also received additional comments from people living or
having lived in Spain recently, who added even bigger horror stories
in terms of their experiences of the aspects I mentioned. Anyway, it
is something I had wanted to get off my chest for a long time, and now
it is done.

TRANSANTIAGO On January 19, 2007 over three weeks before the start of
Transantiago, I wrote in my paper "Civil Society & Empowerment": "The
forthcoming Transantiago coordinated public transport scheme is going
to be a disaster too". You cannot be more prescient than that. The
rest, as they say, is history. I knew that, because they were trying
to solve the wrong problem (there was nothing wrong with the routes),
were using a corrupt company (Sonda) for the computerised system, and
the whole thing was too sophisticatedly complicated for a developing
country whose population is not exactly a mass Mensa candidate.

PENSIONS My paper on the flaws of the Chilean pension system was a
great success. It was translated in Spanish and Armenian, and is on
websites on three continents. Once the dust had settled, I opened
another front by seeking out the names of the senior World Bank
officials responsible for hiring a Chilean team of consultants to
advise Armenia. I sent them a copy of my paper, also copying it to all
the various OECD officials who visited the country profusely in the
past 6 months. One World Bank official answered with a feeble defence
as to the consultant being "very experimented". He copied his own
message to other bank staff. This gave me a wider list of
destinataries when I answered with details about the real background
and value of the consultant. There was no reaction this time, but I am
sure it shook them. A somewhat sanitised version is also being
published today in a major international fortnightly insurance
newsletter based in London, of whose editorial panel I am a member.

THE EXCHANGE RATE In my constant criticism of the handling of the
peso exchange rate, I had missed out two important aspects. One I
subsequently amended, not least in a published letter in El Mercurio.
It refers to the loss in peso value of the budgetary "savings", of
which over 90 % is invested abroad in foreign currency. Calculated in
real pesos, each dollar saved abroad as of December 2006 is now worth
some 19 % less. If you had been "clever" and gotten into Euros, you
would still have lost 9 %. In Pounds sterling the loss would have been
over 18 %. I am therefore flabbergasted that the committee in charge
of managing these funds recently congratulated itself for having
obtained "a return of 10 %" in 2007. I wonder how they measure that,
or do they use the same New Age arithmetic textbook than ministerial
macroeconomic adviser Luis Felipe Cespedes (the guy who tried to
convince me that + 8.7 was a negative number)?

In a blog discussion of my letter on the Mercurio's website, someone
added the other dimension I overlooked. Those who live on remittances
sent by relatives abroad are also suffering, because in most cases the
sender cannot increase the amount remitted, to compensate for the
lower exchange rate.

ENERGY I cannot remember how many times I warned not just about
energy shortages, but the fact that the LNG plants being built (now up
to two different projects) will provide gas at a much higher price,
none of which is being disclosed to the public. It seems I was once
again erring on the side of caution. Chile is currently paying some U$
4 to 5 per million BTU to Argentina. The price of LNG is at least in
the U$ 9 to 10 range. However, due to the world supply and demand
situation, the situation could be much worse. In a late February press
interview, the chairman of the Centre for Liquified Natural Gas, which
is a producers' association, estimated that the price could be as high
as U$ 19.

As if this were not bad enough, public opinion is also being misled on
the supposed "improvement" in Argentine gas supplies this year. There
is nothing of the sort.

On the contrary. The supply situation in Argentina is getting more
critical by the day. According to Chile's minister of Agriculture, the
country is said to be experiencing the worst drought in a century, and
no rain is expected for the next 3 months (according to her at least),
and 144 municipalities have been declared in agricultural emergency.

GAGGING THE MEDIA Though the radio is still pretty open, every
single printed press organ of any importance (bar some struggling
marginal publications) have either disappeared or been gagged by
takeover in the past decade.

The government has now moved to the web-based critical press. I
mentioned sometime ago the virtual death of the website
www.granvalparaiso.cl. There are moves afoot to lean on the two other
remaining internet media. I suppose once they achieve that goal, Armen
Kouyoumdjian will be next. To the extent that virtually nobody backs
their support for me with concrete reciprocity (beyond the occasional
lunch or cocktail invitation, none of which pay my bills), you would
have participated in the cull.

THE VILLEGAS BOOK I bought the book "Muerte a los latinos" by
columnist and broadcaster Fernando Villegas thinking it was a
light-hearted novel on the tribulations of a Chilean post-graduate
student in Miami. It turned out to be a seminal work on the Latin
character and the psychological pillars of regional underdevelopment.
Villegas, who graduated in sociology, has written a readable textbook
worthy of being a compulsory read for many university courses. I
reproduce below (in my translation) part of a paragraph which I think
is fundamental in understanding how Latin America works (in fact, why
it does not). Published October 2007 by Random House Mondadori.

"In Latin America, speeches, words and talk in all its expressions
tend to replace action, any action. Words are not the preamble, or the
verbal agreement necessary to carry out with others any concrete task,
but in fact substitute that same goal. Words replace action. Whispered
insults replace vengeance. Promises which will never be accomplished
replace commitments. Verses of passionate poetry replace loyalty.
Complaints about what the world is doing to us take the place of moves
to change it or change ourselves.

Programmes to end poverty replace measures to overcome it. Fiery
speeches denouncing injustice take the place of whatever action is
needed to achieve justice. Calls and meetings replace real agreements
and joint action. And paradoxically, as words replace action and
reality, they end up acquiring some sort of reality."

How true. Just to give one example among thousands, and return to
something I mentioned before. On two occasions (end 2006 and 2007),
the Chilean government announced with great panache the granting of
discounts on electricity bills and the distribution of energy-saving
light bulbs to low-income families. On both occasions, as far as I can
make out from my enquiries, neither discounts nor light bulbs were
ever given. Chile used to be run by Pinochet. It is now run by
Pinocchio.

FOR FILM BUFFS It is difficult to catch quality classical films in
their original versions in Chile, but there is an unsuspected source
worth exploiting. The Chamber of Deputies' cable TV channel often
broadcasts such films to fill-in time in-between repeats of sterile
committee meetings. Last week alone I caught two classics of Soviet
cinema : Serguei Bondarchuk's The Fate of Man, and Grigori Chukhrai's
Ballad of a Soldier, both released in 1959. There are Spanish
subtitles.

HUEVADA DE LA SEMANA Did you know that 2008 was the International
Year of Languages? The Chilean Association of Greenhouses (actually it
has an official English name, the ANDES NURSERY ASSOCIATION or ANA)
decided to give a French flavour to a new variety of nectarines they
were launching. To start with, they formally gave the fruit a registered French name: "Magique". That was not all, they held a launch event in Paine last February 20, which they advertised with a half-page insert in El Mercurio's agricultural supplement published on February 18. In it, they described in French (well, sort of) what the fruit was like. The phrase said: "Magique, Une fruits exceptionnelle". I know that the punch line is lost on non-French speakers, but there it is. I wrote to the organisation behind the advertisement. In good Chilean fashion, they did not even bother to acknowledge.

One yearns for a campaign similar to that just started in Venezuela,
to discourage the use of foreign words and expressions in commercials
and business circles.

Sunday, February 10, 2008

COUNTRY RISK ANALYSIS: Time for a new approach



   Though perceptive people have been analysing country risk since times immemorial (observations of many famous travellers since Antiquity who have left us their memoirs often include useful information in that sphere), the formalization of the exercise is only a few decades old. The re-emergence of sovereign lending in a big way from the late 1960’s, meant increasing bond issues, and then large syndicated bank loans following the oil shocks of the 1970’s. Directly concerned financial institutions, helped with the growing importance of rating agencies, decided that it was time to look “scientifically” at countries’ ability to pay.

There was probably one of the original sins of the game, with the whole effort concentrating on the ability to service and reimburse external debt. It left aside all the other cross-border activities such as trade and investment which had their own risk patterns, not always linked to currency cash flows. For most analysts, it all became a mere accounting exercise. It left aside the human, political and social aspects, often ignoring geopolitics altogether. It sought a one-size-fits-all methodology, and comparative tables as to which country was “better” or “worse” than another. It introduced totally false premises such as the famous statement by Citibank’s Walter Wriston to the effect that “Countries do not go broke, and they do not disappear”. The serious gap in teaching economic and financial history, or mere geography, in the educational establishments of some countries is reflected here. Countries have appeared and disappeared throughout history, a process still going on, and both old and new countries can go broke, both de facto and de jure (obviously the chairman of Citibank had never read about the “faillite des deux-tiers” formally declared by a Republican French government of old.

This paper only aims to be a sampler of some current mistakes in looking at country risk. It is not a full methodology handbook, though I am ready and available to expand on the subject conceptually, as I have done on many occasions during my nearly 38-year analytical career, 32 of which devoted to Latin America but also encompassing Europe, the Middle East and the Caucasus. I have advised the InterAmerican Development Bank on its analytical methodology in the 1990’s, lectured on the subject on four continents, and trained many corporate and financial sector analysts as well as academics in modern techniques. My contact details are in the heading of this paper. This note can be circulated or published freely, as long as I am given full credit.

A Personalised Approach   The first sin of most country risk analysts is to look at a country intrinsically in terms of risk, whereas they should start by asking: “what am I or my client planning to do there”. This is the weakness of the rating agencies (whose reliability was much affected by the Asian and Argentine crises, both of which they failed to predict). They have to come up with a single “judgment”.


Let me illustrate this with the striking example of the Lebanon at the height of its civil conflict on the 1970’s and 80’s. Prima facie, it would have been the epitome of worst possible country risk. But look again at the particular case of three business risks from abroad into the Lebanon.
The owners of the Beirut Holiday Inn hotel, on the dividing line of the conflict, obviously had the short end of the stick (and were in legal disputes with their insurers for years as to how the conflict could be legally defined for the purpose of cover). Definitely a bad risk. However, if you had a sovereign loan to Lebanon, which at the time had a very low public debt, more than covered by external reserves mainly in gold safely kept outside the country, your risk was neutral. In fact, despite the sharp subsequent deterioration of the country’s public finances, and the continuing political instability, the country has yet to fail on its debt service. A third example would be an exporter of flat glass to the Lebanon, with a warehouse in Cyprus, which became the main entrepot base during the conflict. After each of the many ceasefires, households and businesses would repair their broken windows and glass panes. That foreign supplier never had it so good as during the civil war, and was probably paid without problem too. Positive risk.

In short, one country, at the same moment of time, three businesses, three different risk conclusions. Not something you could deduce from Standard and Poor’s.

This has a corollary when it comes to remedial action taken under salvation or remedial programmes from foreign lenders, bilateral or multilateral organisations. The important thing is to make sure that the right problem is diagnosed and treated. The country crisis viruses have been mutant, starting with balance of payments and currency cash-flow crises, but soon turning (not least often as a consequence of the palliative measures taken against the first problem), into fiscal crises, with several massive defaults of the banking system thrown-in for good measure.

The best example of such behaviour was the handling of the Mexican crisis of 1991/92, which paradoxically was an old fashioned currency cash flow shortage. In order to treat it, in a country which had a balanced budget and single digit inflation, the foreign ju-ju doctors obliged the country to raise domestic interest rates to three digits. The result was recession, inflation, a bankrupt banking sector and a gaping budget deficit. All of these could have been avoided with a U$ 50 bn currency facility, which came partially and much later, after all the damage was done.

The Obsession with GDP   An indecent number of results, investigations and theories, are based on comparisons measured as a % of GDP. These are not approximations and orders of magnitudes, but detailed edifices with two decimals. This is ridiculous. We all know that GDP is a nebulous and capricious figure, the first estimate for which is not available until well into the following year, after which it is often corrected (up or down) in subsequent years, to which one has to add base-date and composition changes, and the impact of erratic exchange rates. Even the components of GDP are uncertain, not least when most of the countries one analyses have a substantial black economy, the quantification of which is problematic.

What matters, particularly when one is talking of debt and payments are the actual quantities. Irrespective of how large the debt or its servicing are as a percentage of a phantom GDP, the important thing is how much money it is, and whether the fiscal, currency and borrowing resources for such an amount are available from different potential sources. Brazil’s current interest bill on its public debt of nearly U$ 1000 bn is U$ 10 million per hour (24/7).

Current vs. Trade Account   As mentioned earlier, balance of payments analysis has traditionally been the kernel of country risk evaluation. Here again, it started on the wrong foot and kept at it. Admittedly, high commodity prices and other changes in terms of trade and investment have meant that few countries today (particularly in Latin America, but also elsewhere) have severe external problems. In fact, many have record levels of reserves. However, the situation may go into reverse one day (Mexico in 2007 had a non-oil trade balance deficit of some U$ 55 bn, with a falling oil output which, barring reforms, may mean an end to its oil exporting capacity in the medium term).
Probably one of the most used and also most irrelevant ratios used in traditional country risk analysis has been Debt Service as a % of Exports. This stupidly presupposes that export revenue could and should primarily be destined to debt service. It also presupposes that export revenue (or the resulting currency) accrues to the government treasury (which is true in some countries but they are the small minority). It forgets the fact that the country also needs to import. If it only imports Champagne and Cognac, these could be done away with, but is a country supposed to stop importing the energy with which to operate, food with which to feed its population, and the intermediate and capital goods with which its various sectors develop, in order to service debt? There is only one such experiment in modern times, hat of Rumania’s last Communist leader, Ceaucescu, who in his final years left the population cold and starving in order to repay all the country’s foreign debt, including penalty interest. You know what happened to him as a result. “Penalty” interest took a completely new dimension.

A more logical ratio, which nobody ever uses, would possibly be Debt Service as a % of the Trade Surplus, which is the money left after imports have been paid for. Even then it is insufficient, because the real measure of external health is not the Trade but the Current Account (which includes interest payments). A good measure of the ability to service external debt should be Interest as a % of the Gross Current Account (which I would define as all current transactions but excluding interest payments). I would then use the overall balance of payments in a similar way to deal with capital repayments.

Having said all this, the whole exercise has become somewhat sterile because in the meantime, though many analysts, journalists and politicians talk about the problems of “external debt”, the virus has mutated into a wider definition, that of Public Debt, most of which is internal and therefore irrelevant to the currency flow problems.

The Fiscal Situation   There is not a lot of in-depth dedicated literature on country risk methodology, but at the height of the 1980’s debt crisis, two prestigious publications on the subject were published. One was written by a senior director at the largest Swiss bank of the time, and another (published by EUROMONEY magazine) was from the pen of a bank economist who had also worked at all the main multilateral agencies. Both committed all the sins described above, but the major flaw they had in common was that they hardly mentioned, if at all, the main problem befalling the crisis stricken countries: the fiscal situation.

In the 1980’s, the crisis was mainly (if not entirely) due to the substantial rise in the interest bill of indebted countries, which had accumulated debt throughout the 70’s and in the early 80’s), after the post-Iranian revolution second oil shock caused a rise in inflation, and therefore interest rates. Contrary to the bond issues of the previous century and a half, these loans were at floating rates.


The rise in interest rates on public foreign debt obviously created an extra demand on currency resources, but what nearly everybody overlooked, is that it also paid havocs with budgets. Worse was to come. In an effort to stop another problem (the flight of capital), countries were coerced to increase domestic interest rates, often to stratospheric levels as they had right rates of inflation. The combined impact of costlier foreign and domestic debt service led to a rapid deterioration of fiscal balances, none of which was very healthy to start with. None of the movers and shakers appeared to notice. In fact, there were many proposals to “solve” the debt crisis by replacing foreign borrowing (say at 8 %) by domestic borrowing (costing say 20 %), with the prior effort of  developing a domestic capital market.

As the situation became untenable and debt restructuring followed debt restructuring, sometimes before the previous programme could even by implemented, countries fell in and out of contravention to their IMF agreements. In the late 1980’s, in an effort to save the increasingly shaky reputation of the crisis managers, someone came up with the idea to change the definition of fiscal deficit. They invented the Primary Balance, and made it the target.

Basically, the authors of this aberration decided that by taking away from the figures the worst reflection of the problem, they would make it more presentable. To the extent, as described earlier, that the interest bill had become the main expenditure element in the budget, ignoring it was akin to a clinical director to instruct all doctors and radiologists to omit from their written diagnosis any threatening illness which may turn up in the examinations.

This of course throws the baby away with the water, forgetting that the purpose of the analysis is not to show up artificially distorted figures, or apply cosmetics to a dead body, but to find out how much money the country needs in order to pay its main obligation. The interest bill is not a vague virtual notion but a real expense (and, at the risk of labouring the point), the main expense. In most cases, contrary to capital repayments or other items of expenditure, it cannot even be delayed or rescheduled.

It was to be hoped that this concept, invented as was mentioned to save face in relation to a specific Mexico-IMF agreement, will soon come to pass. On the contrary, it has not only survived, but has developed into the main statistic quoted when referring to a country’s fiscal situation. The self-delusion has been so successful that there is a strong movement to extend it even more. There is now talk of removing from expenditure figures the amounts of “investments” (as if they were not an expense either, even if their effect is a durable one). The innocent may think that such games were reserved for developing countries. Not at all, several EU members, and some of the oldest and largest, in an effort to artificially squeeze within the 3 % of GDP fiscal deficit limit, have been lobbying for years in order to change the deficit definition by excluding capital expenditure from the expense column.

The consequence of this silliness is that it is often a substantial effort to find out the exact fiscal situation of a country. Sure, it is available, if you are an Egyptologist and know your way in excavating the websites and publications of the public entities in charge of publishing the figures. It is hardly ever mentioned in the shorter versions of press communiqu├ęs.






FOREIGN INVESTMENT CREATES JOBS?  Not necessarily. In fact, for a decade and a half, foreign investment in Latin American and other developing countries has been a very mixed blessing.

It is true that in its heyday, it was hailed as the answer to a maiden’s prayer. It brought-in badly needed foreign exchange, created jobs for a young and growing population, contributed to regional development in underprivileged areas, increased the tax base, and brought-in a technological leap.

For a long time, it did many of those things, and in some countries, still does. Unfortunately, in many others, it has been doing the contrary, and even more unfortunately, the national and international statistical apparatus has not evolved to distinguish between the various types of foreign investment.

The best “positive” foreign investment is the green-field, labour intensive projects, preferably in high-tech industries. A good example of that would be the giant INTEL chip plant in Costa Rica. So good in fact that you could trace its impact on the Central American country’s GDP, though in lean years for chips, the effect was less positive. Marginally less exciting are the natural resource projects such as a mining and investments. Beyond the initial construction stage, they are not labour-intensive, and most of the initial cost consists of imported specialist machinery. If legislation and negotiation were well conducted, there would be fiscal benefits from royalties and income taxes.

When it stops being exciting is when a mature business is transferred from one foreign owner to the other. It appears as a foreign investment in the statistics, often inflating the totals and allowing for triumphant statements from the authorities. In practice, no money or new technology enters the country, no jobs are created except during the week-end preceding the closing, when printers and sign painters redesign the premises in the new name. If the buyer has an existing operation in the target country, it will merge it with its new acquisition, and reduce the combined staff. So much for job creation.

The worst consequence for jobs were the series of privatisations carried out by many Latin American countries since the 1980’s, as part of their debt workout programmes. Admittedly, the buyers (some more than others), brought in new management and technology, and badly needed investment. What is sure is that they started by reducing the payroll. Essential? Probably, but the point I am trying to make is that contrary to legend, foreign investment does not always equate with job creation. Many times, it does not even equate with better management, or is not “privatisation” at all, hence the original sale of the Chilean telephone monopoly to a Spanish state-owed company (idem for its Armenian equivalent), or the Peruvian steel complex to a government-owned Chinese group.

Banking Sector’s Health  As a cause or consequence of systemic crises, major crises in the banking sector have often accompanied a wider deterioration in a country’s situation. Though there has been some improvement in the monitoring of the banking sector in developing countries, most past crises have come as “surprises”. Something as easy as keeping an eye on the percentage of past-due loans in the portfolio, is a good start, though it is insufficient. A close examination of the real quality and efficiency of the supervisors, beyond the impressive regulations, handbooks and legislative texts proudly handed out to visiting delegations, is a better approach. The gap between texts and realities in the developing world is a wide one.

Inflation and Monetary Policy   Monetarists have dominated economic policy-making for the best part of three decades, and they have perdured for longer than the undemocratic governments under which most initially flourished.

It would be very useful if analysts spent some time in the souks, shops and luxury malls of the countries their visits, and learn something about the real situation of interest rates. With most countries in Latin American having inflation rates within the 3 to 10 % range, and official intervention rates often double that level or more, what the borrowing businessman or consumer actually pays to his bank, finance company (or loan shark) has no relation at all with either inflation or the Lombard rate. Even with countries where single-digit inflation has been achieved (at a great cost), borrowers pay from 20 to 200 % on mortgage or consumer credits, depending on the country, their status and the nature of the borrowing instrument.

Why does it matter? It affects the public impact of monetary policy to the point of irrelevance. Reducing or increasing the central bank rate by half a point to “boost” or “restrict” consumption, is really neither here nor there for consumers paying up to 120 % on their in-store credit cards. In many countries, such levels of interest are actually illegal, but authorities turn a blind eye.

Similarly, using monetary policy as a way of controlling inflation, as per the textbook, is often wholly or partially sterile. The current bout of inflation is mostly caused by the increase in world energy and food prices. In many countries, those who have money will use their cars irrespectively of the cost, because they can afford it, and much of the rest of the population will similarly continue because it is essential and they have no alternative forms to transport themselves or their goods. Similarly, to the extent that the increases have affected basic staple foods, which constitute the bulk of the consumption of the lower strata of the population, there is little they can do short of starving. Putting up interest rates, whatever the book says, is not going to influence how much bread the poor eat in these countries.

Other Considerations  I started this note by stating that it had no ambitions to be comprehensive. Its aim is to sensitize analysts as to the necessity to adopt a new approach. Much can be added about the need to study political and social aspects, ranging from the sheer possibility to successfully implement some policies in certain societies, to the background of the economic managers which is a good indication of their future performance (finding out the subject matter of their doctorate thesis is one way of doing it).

I would be the first to admit that much of this is influenced by my Latin American experience of over three decades, but I think I have tried to make the points conceptually, because I am convinced they have a more universal application.