Market Advisory Features

Happy Days May Not Be Here Again in 2003
A Year of Surprises
Dollar at Three-year Low

Why Vegans Were Right All Along
Marx After Communism

Latin America : Praying for a Happier New Year

Bush and the Three Rogues
OPEC's Paradoxical Move


Why vegans were right all along

Famine can only be avoided if the rich give up meat, fish and dairy

George Monbiot
Tuesday December 24, 2002
The Guardian

The Christians stole the winter solstice from the pagans, and capitalism stole it from the Christians. But one feature of the celebrations has remained unchanged: the consumption of vast quantities of meat. The practice used to make sense. Livestock slaughtered in the autumn, before the grass ran out, would be about to decay, and fat-starved people would have to survive a further three months. Today we face the opposite problem: we spend the next three months trying to work it off.

Our seasonal excesses would be perfectly sustainable, if we weren't doing the same thing every other week of the year. But, because of the rich world's disproportionate purchasing power, many of us can feast every day. And this would also be fine, if we did not live in a finite world.

By comparison to most of the animals we eat, turkeys are relatively efficient converters: they produce about three times as much meat per pound of grain as feedlot cattle. But there are still plenty of reasons to feel uncomfortable about eating them. Most are reared in darkness, so tightly packed that they can scarcely move. Their beaks are removed with a hot knife to prevent them from hurting each other. As Christmas approaches, they become so heavy that their hips buckle. When you see the inside of a turkey broilerhouse, you begin to entertain grave doubts about European civilisation.

This is one of the reasons why many people have returned to eating red meat at Christmas. Beef cattle appear to be happier animals. But the improvement in animal welfare is offset by the loss in human welfare. The world produces enough food for its people and its livestock, though (largely because they are so poor) some 800 million are malnourished. But as the population rises, structural global famine will be avoided only if the rich start to eat less meat. The number of farm animals on earth has risen fivefold since 1950: humans are now outnumbered three to one. Livestock already consume half the world's grain, and their numbers are still growing almost exponentially.

This is why biotechnology - whose promoters claim that it will feed the world - has been deployed to produce not food but feed: it allows farmers to switch from grains which keep people alive to the production of more lucrative crops for livestock. Within as little as 10 years, the world will be faced with a choice: arable farming either continues to feed the world's animals or it continues to feed the world's people. It cannot do both.

The impending crisis will be accelerated by the depletion of both phosphate fertiliser and the water used to grow crops. Every kilogram of beef we consume, according to research by the agronomists David Pimental and Robert Goodland, requires around 100,000 litres of water. Aquifers are beginning the run dry all over the world, largely because of abstraction by farmers.

Many of those who have begun to understand the finity of global grain production have responded by becoming vegetarians. But vegetarians who continue to consume milk and eggs scarcely reduce their impact on the ecosystem. The conversion efficiency of dairy and egg production is generally better than meat rearing, but even if everyone who now eats beef were to eat cheese instead, this would merely delay the global famine. As both dairy cattle and poultry are often fed with fishmeal (which means that no one can claim to eat cheese but not fish), it might, in one respect, even accelerate it. The shift would be accompanied too by a massive deterioration in animal welfare: with the possible exception of intensively reared broilers and pigs, battery chickens and dairy cows are the farm animals which appear to suffer most.

We could eat pheasants, many of which are dumped in landfill after they've been shot, and whose price, at this time of the year, falls to around £2 a bird, but most people would feel uncomfortable about subsidising the bloodlust of brandy-soaked hoorays. Eating pheasants, which are also fed on grain, is sustainable only up to the point at which demand meets supply. We can eat fish, but only if we are prepared to contribute to the collapse of marine ecosystems and - as the European fleet plunders the seas off West Africa - the starvation of some of the hungriest people on earth. It's impossible to avoid the conclusion that the only sustainable and socially just option is for the inhabitants of the rich world to become, like most of the earth's people, broadly vegan, eating meat only on special occasions like Christmas.

As a meat-eater, I've long found it convenient to categorise veganism as a response to animal suffering or a health fad. But, faced with these figures, it now seems plain that it's the only ethical response to what is arguably the world's most urgent social justice issue. We stuff ourselves, and the poor get stuffed.



Happy Days May Not Be Here Again in 2003
Saturday December 21, 4:22 pm ET
By Pierre Belec


NEW YORK (Reuters) - Don't hold your breath waiting for the stock market to hand you a pot of gold next year. Deflation -- an earnings-eating monster that robs companies of the chance to raise prices -- may hold a gun to corporate America's head.

It will limit the market's upside potential because stock prices, according to the time-tested rule, represent a right to future corporate earnings, which will be sub-par.

Indeed, all is not well on the corporate front. Times are tough for the pin-stripped suits.

In today's intensely competitive environment, chief executives have lost their pricing power. The pricing issue has meant earnings problems for a slew of companies. And, if profits can't grow, how can the stock market recover?

Some companies poked their heads above water in the last quarter. Profits in the third quarter grew for the first time in two years, inching up by 8 percent from last year's quarter -- when earnings collapsed following the Sept. 11 attacks on the United States.

The reality is the plunge in some sector's earnings had been so severe that a rebound was inevitable. More easy earnings comparisons are expected in the fourth quarter, because less than half of the companies in the Standard & Poor's 500 index posted any profits in the fourth quarter of 2001.

Also helping to paint a rosier picture is that fewer companies issued disappointing results. But a closer observation shows companies were able to pull it off because they had lowered the Street's earnings expectations. It's the dumb-down effect.

Much of the earnings improvement stemmed from massive restructurings, i.e. jobs cuts, and house-cleaning, rather than from a tremendous boost in the companies' core businesses.

Forecasts call for earnings to leap by 15 percent next year. But the smart money says don't bet the ranch on any moon-shot earnings improvement.

UBS Warburg says earnings of the S&P companies will inch up by only 8 percent next year, If the economy doesn't fall out of bed.

Going forward, it will be harder for businesses to slim down further without starving themselves to death.

Companies have found that work force cuts have always been the quickest way to rebuild their balance sheets. The harsh truth is businesses can only fire the same workers once. They will need to be more creative in the second go-round.

An example of the brutal competition: In the second quarter, revenues of the 400 industrial companies in the S&P were down 3.3 percent from a year earlier. It was the first negative comparison since the numbers were first tracked in 1958.

Revenues for 2002 are expected to be off 2 percent, with deflationary pressures cutting prices by 0.6 percent. The unexpectedly large drop of 0.4 percent in producer prices in November, the steepest since May, underscored the risk of deflation.

A declining price environment or, at best, a period when prices barely move from year to year, is not good news for the economy because it essentially translates into the same rate of growth for the nation's gross domestic product.

The Federal Reserve, which has always focused on fighting inflation, is now faced with a new script. Lately, it has gotten religion on deflation, which is the reverse of inflation.

"The minutes of the November Fed meeting were littered with the 'D' word and its possible ramifications," says Kent Engelke, capital markets strategist for Anderson & Strudwick Inc.


"There is historical precedent that the economy exhibits a lack of pricing flexibility following those once-in-a-generational changes in the economy," Engelke said, referring to the boom of the late 1990s that was followed by the bursting of the speculative bubble in 2000.

In the go-go years, companies over-invested and over-hired. Now the business leaders are paying for their excesses.

While inflation may stimulate the economy and create jobs, marked deflation affects the economy and the jobs market negatively.

"There is little question as to what the Fed is really up to," says Stephen Roach, chief economist for Morgan Stanley. "The Fed threw down the gauntlet with its larger-than-expected 50-basis-point monetary easing on Nov. 6. The ink was barely dry on the policy statement of that action when Fed Chairman Alan Greenspan went public on the deflation debate in front of the U.S. Congress."

The central bank chopped interest rates last month to the lowest levels in 41 years, putting the key rate at 1.25 percent, and warned in typical Fed speak: "....a faltering economic performance would increase the odds of a cumulatively weakening economy and possibly even attendant deflation."

Central bankers don't appear to be tremendously worried the economy may be entering a massive deflation spiral, but their concern is over the changing nature of the economy.

Just Thursday Greenspan mentioned the "D" word again, although he couched it in optimistic terms. In a speech to the Economic Club of New York he said recent evidence showed the economy was working past a soft patch and there was no reason to fear the country was at risk of price deflation.

"The United States is nowhere close to sliding into a pernicious deflation," Greenspan said. If a widespread decline in prices did develop, the Fed chief said, policy-makers had ample tools to fight it.


Still, there is a clear and present danger the current no-pricing climate in the post-bubble era, which is crimping corporate earnings, will continue for as long as the eye can see, Engelke says. Without inflation, businesses lack pricing power.

"A problem exists in the fact the U.S. economy is based on a rising price environment," he says. "People buy a product at today's prices and pay for it with tomorrow's dollars."

The economy is still not out of the woods yet, and at this stage of the game business spending will decide the direction of the economy. The problem is businesses have become much more dependent on the stock market to finance their growth.

With the Dow Jones industrial average down nearly 30 percent from its peak in January 2000, the S&P down 40 percent and Nasdaq index off an eye-popping 70 percent, chief executives have developed a serious case of "caught-in-the-headlights" paralysis and are afraid to move forward.

During the booms of the 1990s, stocks soared to dizzying heights. With record returns on stocks and fat earnings, this wealth was the biggest driving force behind the high rate of capital spending by businesses. A lot of the money went into technology spending, which increased at an unsustainable double-digit rate each year.

With the market headed to its third straight year of losses, businesses will likely continue to stick their heads in the sand and take fewer risk.

So the prospect for 2003 doesn't appear to be good. Investors who have been anticipating a return of the good times, may be in for a rude awakening if their rosy outlook does not materialize. We're talking stock portfolio survival after three straight years of awesome losses.

For the week, the Dow Jones industrial average rose 0.9 percent, the Nasdaq Composite Index  gained 0.09 percent and the Standard & Poor's 500 Index  climbed 0.7 percent. (Pierre Belec is a freelance writer. Any opinions in the Stocks-Week column are solely those of Mr. Belec. Editing by Walter Bagley)



Marx's intellectual legacy

Marx after communism
Dec 19th 2002
The Economist print edition

As a system of government, communism is dead or dying. As a system of ideas, its future looks secure

WHEN Soviet communism fell apart towards the end of the 20th century, nobody could say that it had failed on a technicality. A more comprehensive or ignominious collapse—moral, material and intellectual—would be difficult to imagine. Communism had tyrannised and impoverished its subjects, and slaughtered them in the tens of millions. For decades past, in the Soviet Union and its satellite countries, any allusion to the avowed aims of communist doctrine—equality, freedom from exploitation, true justice—had provoked only bitter laughter. Finally, when the monuments were torn down, statues of Karl Marx were defaced as contemptuously as those of Lenin and Stalin. Communism was repudiated as theory and as practice; its champions were cast aside, intellectual founders and sociopathic rulers alike.

People in the West, their judgment not impaired by having lived in the system Marx inspired, mostly came to a more dispassionate view. Marx had been misunderstood, they tended to feel. The communism of Eastern Europe and the Soviet Union was a perversion of his thought. What happened in those benighted lands would have appalled Marx as much as it appals us. It has no bearing on the validity of his ideas.

Indeed, it is suggested, Marx was right about a good many things—about a lot of what is wrong with capitalism, for instance, about globalisation and international markets, about the business cycle, about the way economics shapes ideas. Marx was prescient; that word keeps coming up. By all means discard communism as practised in the Soviet Union and Eastern Europe (and China, North Korea, Cuba and in fact wherever it has been practised). But please don't discard Marx.

Give the man his due

There seems little risk of it. In 1999 the BBC conducted a series of polls, asking people to name the greatest men and women of the millennium. In October of that year, within a few weeks of the tenth anniversary of the dismantling of the Berlin Wall, the BBC declared the people's choice for “greatest thinker”. It was Karl Marx. Einstein was runner-up, Newton and Darwin third and fourth, respectively. “Although dictatorships throughout the 20th century have distorted [Marx's] original ideas,” the state-financed broadcaster noted, “his work as a philosopher, social scientist, historian and a revolutionary is respected by academics today.” Concerning the second point, at least, the BBC was correct: Marx is still accorded respect.

As a field of scholarship in its own right, admittedly, Marxist political and economic theory is past its peak. By now, presumably, most of the things that Marx meant, or really meant, or probably meant, or might conceivably have meant, have been posited and adequately (though far from conclusively) debated. But a slackening of activity amid the staggeringly voluminous primary sources is not the best measure of Marx's enduring intellectual influence.

Books on Marx aimed at undergraduates and non-specialists continue to sell steadily in Western Europe and the United States. And new ones keep coming. For instance, Verso has just published, to warm reviews, “Marx's Revenge” by Meghnad Desai, a professor of economics at the London School of Economics. Mr Desai argues that Marx was misunderstood and that the great man was right about far more than he is given credit for. In August, Oxford University Press published “Why Read Marx Today?” by Jonathan Wolff. It too is an engaging read. The author, a professor at University College London, is a particularly skilful elucidator of political philosophy. In his book, he argues that Marx was misunderstood and that the great man was right about far more than he is given credit for.

The newly released memoirs of Eric Hobsbawm, the celebrated historian, lifelong Marxist and unrepentant member of the Communist Party for as long as it survived, also deserve mention. The reviews were mixed, in fact, but rarely less than respectful, finding much to admire in the author's unwavering intellectual commitment. Mr Hobsbawm argues...well, he argues that Marx was misunderstood and that the great man was right about far more than he is given credit for.

Adam Smith, one might say, stands in relation to liberal capitalism, a comparatively successful economic order, roughly where Marx stands in relation to socialism. Searches on and other booksellers indicate that titles in print about Marx outnumber books about Adam Smith by a factor of between five and ten. A hard day's browsing of undergraduate reading-lists suggests that, in economics faculties, Smith is way out in front—interesting, given that Marx saw himself as an economist first and foremost. Elsewhere in the social sciences and humanities, the reverse is true. Smith is rarely seen, as you might expect, though in fact there is far more in Smith than just economics; whereas from Marx and his expositors and disciples it seems there is no escape. It is the breadth of Marx's continuing influence, especially as contrasted with his strange irrelevance to modern economics, that is so arresting.

How is one to explain this? What, if anything, remains valuable in Marx's writings? This is not a straightforward question, given that he evidently had such difficulty making himself understood.

Yes, Marx was a Marxist

When he wanted to be, Marx was a compelling writer, punching out first-rate epigrams at a reckless pace. The closing sentences of “The Communist Manifesto” (1848) are rightly celebrated: “The workers have nothing to lose but their chains. They have a world to gain. Workers of the world, unite.” He also had an enviable flair for hysterical invective. At one point in “Capital” (1867-94), he famously defines the subject of his enquiry as “dead labour, that, vampire-like, only lives by sucking living labour, and lives the more, the more labour it sucks.” That is not only unforgettable but actually very apt, if you believe Marx's theory of value. He could express himself brilliantly when he chose to.

Yet he was also capable of stupefying dullness and impenetrable complexity. Try the opening pages of “Capital” (it picks up later). In his scientific work, as he called it, he minted jargon at a befuddling rate, underlining terms to emphasise their opacity, then changing their meaning at will. Adding to the fog, what Marx believed in 1844 was probably not what he believed in 1874: the only constant was his conviction that what he said at any time was both the absolute truth and fully consistent with what he had said before. And most of the published Marx, including the “Manifesto” and volumes two and three of “Capital”, was edited, co-written or ghost written by Friedrich Engels. For many years, therefore, separating Marx from Engels in what the world understands as “Marx” was an academic industry in itself.

Still, four things seem crucial, and most of the rest follows from these. First, Marx believed that societies follow laws of motion simple and all-encompassing enough to make long-range prediction fruitful. Second, he believed that these laws are exclusively economic in character: what shapes society, the only thing that shapes society, is the “material forces of production”. Third, he believed that these laws must invariably express themselves, until the end of history, as a bitter struggle of class against class. Fourth, he believed that at the end of history, classes and the state (whose sole purpose is to represent the interests of the ruling class) must dissolve to yield a heaven on earth.

In what ways, then, was Soviet-style communism a deviation from these beliefs, as modern western commentators like to argue? Chiefly, it is said that Russia jumped the gun (forgive the expression). According to Marx's laws of motion, society is supposed to progress from feudalism to capitalism at just that point when feudalism fetters the forces of production, rather than serving them, as it has up to that moment. Later, capitalism gives way in turn to socialism, the dictatorship of the proletariat, and in much the same way—once its productive potential has been fully achieved, so that henceforth its continued existence is an obstacle to material sufficiency rather than a means to it. But Russia went straight from feudalism to socialism. This was too quick. Marx could have told Lenin that it would never work.

Is this really what he would have said? There is no doubt that Lenin saw himself as a true follower of Marx—and he had every reason to. By the end of the 19th century, socialist thought was dividing. Marx's laws of motion were failing. Capitalism still flourished: no sign of the falling rate of profit that would signal its end. The working class was getting the vote. The welfare state was taking shape. Factory conditions were improving and wages were rising well above the floor of subsistence. All this was contrary to Marx's laws.

In response, the left was splitting. On one side were reformers and social democrats who saw that capitalism could be given a human face. On the other were those who believed that Marx's system could be developed and restated, always true to its underlying logic—and, crucially, with its revolutionary as opposed to evolutionary character brought to the fore.

Whose side in this would Marx have been on? Revolution or reform? Would he have continued to insist that the vampire be destroyed? Or would he have turned reformer, asking it nicely to suck a bit less blood? The latter seems unlikely. Marx was a scholar, but he was also a fanatic and a revolutionary. His incapacity for compromise (with comrades, let alone opponents) was pathological. And in the preface to the 1882 Russian edition of the “Manifesto”, his last published writing, Marx hoped that a revolution in Russia might become “the signal for a proletarian revolution in the West, so that both complement each other”; if so, Russia, despite its pre-capitalist characteristics, “may serve as the starting-point for a communist development.” Lenin was surely right to believe that he, not those soft-headed bourgeois accommodationists, was true to the master's thought.

Apart from the gulag

Even if Soviet communism was true to Marx's ideas, or tried to be, that would not condemn all of Marx's thinking. He might still have been right about some things, possibly even the main things.

Aspects of his thought do impress. However, his assorted sayings about the reach of the global market—a favourite proof that “Marx was prescient”—are not in fact the best examples. The 19th century was an era of globalisation, and Marx was only one of very many who noticed. The accelerating global integration of the past 30 years merely resumes a trend that was vigorously in place during Marx's lifetime, and which was subsequently interrupted in 1914.

Marx was much more original in envisaging the awesome productive power of capitalism. He saw that capitalism would spur innovation to a hitherto-unimagined degree. He was right that giant corporations would come to dominate the world's industries (though not quite in the way he meant). He rightly underlined the importance of economic cycles (though his accounts of their causes and consequences were wrong).

The central paradox that Marx emphasised—namely, that its own colossal productivity would bring capitalism to its knees, by making socialism followed by communism both materially possible and logically necessary—turned out to be false. Still, Marx could fairly lay claim to having sensed more clearly than others how far capitalism would change the material conditions of the world. And this in turn reflects something else that demands at least a grudging respect: the amazing reach and ambition of his thinking.

But the fact remains that on everything that mattered most to Marx himself, he was wrong. The real power he claimed for his system was predictive, and his main predictions are hopeless failures. Concerning the outlook for capitalism, one can always argue that he was wrong only in his timing: in the end, when capitalism has run its course, he will be proved right. Put in such a form, this argument, like many other apologies for Marx, has the advantage of being impossible to falsify. But that does not make it plausible. The trouble is, it leaves out class. This is a wise omission, because class is an idea which has become blurred to the point of meaninglessness. Class antagonism, though, is indispensable to the Marxist world-view. Without it, even if capitalism succumbs to stagnation or decline, the mechanism for its overthrow is missing.

Class war is the sine qua non of Marx. But the class war, if it ever existed, is over. In western democracies today, who chooses who rules, and for how long? Who tells governments how companies will be regulated? Who in the end owns the companies? Workers for hire—the proletariat. And this is because of, not despite, the things Marx most deplored: private property, liberal political rights and the market. Where it mattered most, Marx could not have been more wrong.

Right in principle

Yet Marxist thinking retains great influence far beyond the dwindling number who proclaim themselves to be Marxists. The labour theory of value and the rest of Marx's economic apparatus may be so much intellectual scrap, but many of his assumptions, analytical traits and habits of thought are widespread in western academia and beyond.

The core idea that economic structure determines everything has been especially pernicious. According to this view, the right to private property, for instance, exists only because it serves bourgeois relations of production. The same can be said for every other right or civil liberty one finds in society. The idea that such rights have a deeper moral underpinning is an illusion. Morality itself is an illusion, just another weapon of the ruling class. (As Gyorgy Lukacs put it, “Communist ethics makes it the highest duty to act wickedly...This is the greatest sacrifice revolution asks from us.”) Human agency is null: we are mere dupes of “the system”, until we repudiate it outright.

What goes for ethics also goes for history, literature, the rest of the humanities and the social sciences. The “late Marxist” sees them all, as traditionally understood, not as subjects for disinterested intellectual inquiry but as forms of social control. Never ask what a painter, playwright, architect or philosopher thought he was doing. You know before you even glance at his work what he was really doing: shoring up the ruling class. This mindset has made deep inroads—most notoriously in literary studies, but not just there—in university departments and on campuses across Western Europe and especially in the United States. The result is a withering away not of the state but of opportunities for intelligent conversation and of confidence that young people might receive a decent liberal education.

Marxist thinking is also deeply Utopian—another influential trait. The “Communist Manifesto”, despite the title, was not a programme for government: it was a programme for gaining power, or rather for watching knowledgeably as power fell into one's hands. That is, it was a commentary on the defects and dynamics of capitalism. Nowhere in the “Manifesto”, or anywhere else in his writings, did Marx take the trouble to describe how the communism he predicted and advocated would actually work.

Marx's theory of cattle

He did once say this much: “In communist society, where nobody has one exclusive sphere of activity...society regulates the general production and thus makes it possible for me to do one thing today and another tomorrow, to hunt in the morning, fish in the afternoon, rear cattle in the evening, criticise after dinner, just as I have in mind, without ever becoming hunter, herdsman or critic.” Whether cattle would be content to be reared only in the evening, or just as people had in mind, is one of many questions one would wish to see treated at greater length. But this cartoon is almost all Marx ever said about communism in practice. The rest has to be deduced, as an absence of things he deplored about capitalism: inequality, exploitation, alienation, private property and so forth.

It is striking that today's militant critics of globalisation, whether declared Marxists or otherwise, proceed in much the same way. They present no worked-out alternative to the present economic order. Instead, they invoke a Utopia free of environmental stress, social injustice and branded sportswear, harking back to a pre-industrial golden age that did not actually exist. Never is this alternative future given clear shape or offered up for examination.

And anti-globalists have inherited more from Marx besides this. Note the self-righteous anger, the violent rhetoric, the willing resort to actual violence (in response to the “violence” of the other side), the demonisation of big business, the division of the world into exploiters and victims, the contempt for piecemeal reform, the zeal for activism, the impatience with democracy, the disdain for liberal “rights” and “freedoms”, the suspicion of compromise, the presumption of hypocrisy (or childish naivety) in arguments that defend the market order.

Anti-globalism has been aptly described as a secular religion. So is Marxism: a creed complete with prophet, sacred texts and the promise of a heaven shrouded in mystery. Marx was not a scientist, as he claimed. He founded a faith. The economic and political systems he inspired are dead or dying. But his religion is a broad church, and lives on.




Latin America

Praying for a happier new year
Dec 19th 2002
The Economist print edition

Old vulnerabilities and unfortunate coincidences combined to produce an awful year for the region

A YEAR ago this week, after two days of rioting in Buenos Aires, Fernando de la Rua resigned as Argentina's president. The following ten days saw four more presidents, a debt default and devaluation. The long-feared collapse of Argentina's currency board, which had pegged the peso at par to the dollar for a decade, ushered in a dreadful year for Latin America.

According to the World Bank, the region's GDP will shrink by 1.1% this year—the worst performance since 1983. In a report issued on December 18th, the UN Economic Commission for Latin America and the Caribbean (ECLAC), using a slightly different methodology, estimated the shrinkage this year at 0.5%, after growth of just 0.4% in 2001. After eight years of decline, inflation, that old Latin bugbear, has edged up. Mediocre economic performance means that income per head in the region has declined by 0.3% per year since 1998. ECLAC says that Latin America has suffered a “lost half-decade”, harking back to the “lost decade” unleashed by Mexico's 1982 debt default.

Stagnation has increased poverty, wiping out some of the gains of the 1990s. Open unemployment has risen to 9.1%, higher even than in the 1980s. Some 44% of Latin Americans are now poor, and 20% suffer extreme poverty, says ECLAC. These woes have brought discontent and political turbulence, raising questions about the health of Latin democracy.

Are the difficulties just cyclical? Or does Latin America suffer deeper structural problems—despite a decade or more of liberal reforms? Will 2003 bring recovery, or does Latin America risk being left behind as globalisation marches forward elsewhere?

Certainly, there is a cyclical element to the economic woe. But Latin America's dependence on raw-materials exports and inflows of foreign capital makes it more vulnerable than many Asian countries when the world economy slows or investors grow shy of risk. Currency depreciations make debts more expensive, undermining investor confidence in a vicious circle that this year saw a net outflow of capital from the region of $39 billion, according to ECLAC. Another structural element concerns the public finances. Failure to run budget surpluses during good times means that most countries have to tighten their belts during recessions.

Across the region, however, the differences are as important as the similarities. What made this year so difficult was the coincidence that Argentina's default was followed closely by a presidential election in Brazil whose result was uncertain for months. Elsewhere, there were entirely different problems: political conflict steered Venezuela's economy to disaster (down perhaps 10%); drug-financed guerrillas and paramilitaries continued to slow Colombia's economic recovery.

Mexico survived the year largely untouched, its economic fortunes depending on those of the United States. Peru grew sturdily at around 4.5%. And Chile clinched bilateral trade deals with the EU and the United States.

Not so long ago, economic turmoil would have brought the army into power. The good news is that democracy is holding up—though it is under strain in some countries, notably Venezuela. There has been much talk of a shift to the left. But the trend is far more variegated than that, with a congregation in the confused centre of populist rhetoric and creeping regulation but also of a reconciliation with the market and fiscal responsibility by former leftist firebrands.

So what are the prospects for 2003? A weak recovery is already under way. Most forecasts are that the region will see modest growth of around 2% in 2003. But that is nowhere near enough to make a dent in poverty. Whether it can be bettered, or even attained, turns particularly on developments in four countries.

In Brazil, Luiz Inacio Lula da Silva of the left-wing Workers' Party has done much to reassure investors since his October election victory. He has named moderate economic officials. But although the risk premium on Brazil's bonds has fallen, it remains at a level that would make the public debt unsustainable in the medium term. A burst of inflation prompted the central bank to raise interest rates this week by three percentage points (to 25%). Regaining stability requires swift action after Mr da Silva takes office on January 1st.

In Mexico, victory in a mid-term election in July for President Vicente Fox's party would help his plans for economic liberalisation. Depending on the result of the current power struggle, Venezuela could move towards a leftist quasi-dictatorship, or elect a new government which might be committed to reform.

And Argentina? The year ends with Argentines much poorer, and seemingly little closer to the agreement with the IMF that has eluded President Eduardo Duhalde for months. The government has stopped debt repayments to the World Bank. But there are some gleams of hope. Although GDP has shrunk by 11% this year, the economy has found a precarious stability. The government has lifted the freeze on bank deposits that triggered Mr de la Rua's fall. Further progress probably depends on the outcome of an election in April and, sadly, none of the leading candidates inspires much confidence in Argentines or investors. But after this ghastly year, Latin Americans will hope that things can only get better.



A year of surprises
Dec 19th 2002
The Economist print edition

The past year, believe it or not, was surprisingly good. How about 2003?

WITH gifts, as with most sources of pleasure or pain, how we feel about them depends on what we were expecting. So it is in economics and politics. The past year has been full of dark shadows and gloomy moods, of fears of what might soon transpire. What is surely striking though, is how good things have been, not how bad. For 2002 has been a surprisingly good year. That even augurs well for 2003.

Certainly, there have been plenty of reasons for gloom. International terror marched murderously on, in Bali, Mombasa and elsewhere, and in a Moscow theatre became entangled with Russia's domestic battle over Chechnya. The conflict between Palestinians and Israelis was as deadly as ever. North Korea admitted that it has a secret uranium-enrichment programme, flouting the terms of its 1994 deal with America and its neighbours. Saddam Hussein denied that he has any programmes to develop weapons of mass destruction, making a war with the West look likelier. Meanwhile, the world economy grew rather sluggishly, if slightly less so than in 2001. In many countries, unemployment rose. Many stockmarkets had their third successive year of decline. Argentina, once the darling of “emerging” markets, collapsed and defaulted on its debts. And, mainly though not only in America, scandal after scandal showed that corporate accounts had been fiddled and that bosses and investment banks had taken greed and the abuse of power to new heights.

How, though, did this bad tale compare with what was expected? It was reasonable, and common, to expect a very bad year economically and a dangerous one politically. Relative to that, things have actually turned out quite well.

In our Christmas issue for 2001, our panel of economic forecasters were saying that the United States would grow by just 0.6% in 2002, the euro area would grow by 1.0% and Japan's economy would shrink by 0.8%. Figures for the full year are not yet in, but now the panel expects America to have turned in growth for 2002 of a surprisingly lusty 2.4%. Japan's economy is expected to have shrunk by just 0.5% and only the euro area has been worse than expected, with growth forecast to have been 0.7%. Britain is almost bang on the forecast, at 1.6% (versus 1.7%). Australia (3.6%) and Canada (3.4%) have done much better than the panel thought. And, on our emerging markets page, 17 of the countries listed have growth rates that are higher now than a year ago, and only seven have fared worse. That, remember, is despite Argentina's collapse.

Things have looked a lot bleaker to investors, with the world stockmarket index down by a fifth since December 31st 2001, and nearly half its record high. Yet the mismatch between financial markets and economies is one of the most pleasant surprises. In recent years, stockmarkets have suffered one of their biggest falls in history. Normally, when such crashes occur, they bring about widespread collateral damage in the economy because banks collapse and lending contracts. The great surprise of the crash of 2001-02 has been that this has not happened. Insurance companies, pension funds and individual investors have taken big losses, but banks have so far proven more resilient than in the past. Measured against profits, many stockmarkets still look dear by historical standards. Given the pressure to clean up accounts, and plausible fears of a widespread backlash against capitalism and its scandals, they too have been surprisingly resilient.

And world politics? This time last year, India and Pakistan looked on the brink of war, even of nuclear war, a conflict that no longer looks likely. Despite America's patient and determined conduct in Afghanistan, a chorus of critics throughout 2002 denounced its adventurism, its bossiness, its recklessness, its destabilising behaviour. Such critics ought by now to feel pleasantly surprised. In military terms, the world's superpower has been notable by its inaction, not its action. Far from lashing out unilaterally against Saddam Hussein (or anyone else), it chose to work through the United Nations and won an extraordinary unanimous resolution in the Security Council as its reward. As for terror, al-Qaeda still exists, but its operations have been disrupted; and (fingers crossed) there have been no successful acts of mega-terrorism to match September 11th. That is a small mercy, but a mercy even so.

A world getting brighter

Risks galore can be cited for 2003. A war against Iraq looks probable, and it could send oil prices soaring, destabilise the Middle East and encourage terrorism. High debt levels among American companies and consumers could restrain investment and cramp demand. House prices could collapse in all sorts of places. Japan might again fail to reform its economy, and so might Germany. North Korea's unpredictable dictator, Kim Jong-Il, could, well, act unpredictably.

As we enter the new year, though, things actually look better than those risks imply. Wars can always go wrong, but with United Nations support, and hence acquiescence from the Arab neighbours, the one against Saddam is overwhelmingly likely to be short (eg, a couple of months) and successful. Oil prices may jump when it starts, but are likely to fall (perhaps sharply) once it is over. Debt is likely to mean that America (and thus its trading partners) does not grow as fast as in the late 1990s, but it could well exceed this year's figure, even so. Europe might not recover rapidly, but reforms now being discussed for its single currency promise to make monetary policy more accommodating to growth, and could even allow fiscal policy to offer more assistance. Overall, the world economy looks like growing faster than in 2002, and should disappoint only those who dream of new booms.

Even so, two big tasks deserve a mention. The first is that of pushing Israel and Palestine back to the negotiating table; it will be made easier by a successful war in Iraq, but also much more important. The second is that of building on the useful start made in 2002 of reviving overseas aid to poor countries, but doing so much more generously with regard to three of today's great scourges of the poor, AIDS, malaria and tuberculosis. A really determined effort to deal with those diseases would be the most pleasing surprise of 2003.



Bush and the three rogues

Dec 13th 2002
The Economist Global Agenda

George Bush now faces stand-offs with Iraq, North Korea and Iran over weapons of mass destruction. He will deal differently with each of the three members of his “axis of evil”

INSTEAD of one rogue nation testing his patience, President George Bush now has all three members of his “axis of evil” openly defying attempts by America to limit the proliferation of weapons of mass destruction. In a defiant move, North Korea has announced the reactivation of a nuclear-power site that had been mothballed under an arms-control agreement. Iran has brushed off American concerns that two of its nuclear facilities might be used to produce weapons. And Iraq’s declaration of its chemical, biological and nuclear facilities to the United Nations is said by the Americans to contain “omissions big enough to drive a tank through”.

Although a detailed response to Iraq’s 12,000-page declaration is not expected for many days, preliminary reports suggest that much of it is recycled material and that it fails to explain what has happened to some equipment, such as shells filled with mustard gas, that had remained unaccounted for even when weapons inspectors were last in Iraq four years ago. “What’s remarkable is how little new there is,” said an unnamed American official quoted by the New York Times.

This increases the possibility that America will declare that Iraq is in “material breach” of UN resolution 1441, which was unanimously passed by the Security Council last month. Although a number of nations, especially France, China and Russia—three of the five permanent members of the Security Council—want the UN and not America alone to take that decision, Mr Bush has reserved the right to take unilateral action. His administration has been canvassing support for an international coalition to mount an invasion to oust Iraq’s dictator, Saddam Hussein.

America is expected to take a more diplomatic approach with the two other nations whose weapons programmes have come under the spotlight in recent days. In part, this is because negotiations with Iran and North Korea could stand a better chance of success. But it is also because military threats made against either could provoke a much broader war. Moreover, while the Iraqi weapons crisis remains unresolved, Mr Bush already has his hands full. He has held out some hope that negotiations might work in North Korea. “Not every issue requires a potential military response,” he told ABC television. “There’s ways to keep the peace through diplomatic pressure, through alliance and that’s what we’re doing in the Korean peninsula.”

A number of countries are keen to talk North Korea into making the Korean peninsula an area free of nuclear weapons—even China and Russia, both old allies of the North from the cold war. Japan, too, has also been trying to establish relations. But Kim Jong Il, the North’s leader, is unpredictable. Only days before announcing the reopening of its nuclear plant, North Korea antagonised America when one of its ships was caught in the Arabian Sea carrying a hidden consignment of Scud missiles bound for Yemen. The ship was released on December 11th after the Yemeni government protested that it had purchased the arms legitimately. America has been cultivating Yemen as a regional ally in its fight against terrorism, and was given assurances that the weapons were for use by the Yemeni army and would not be sold on to a third country.

North Korea said it was reactivating the nuclear plant to make up for a shortfall in electricity caused by the ending of aid shipments of heavy oil. These were suspended after North Korea’s stunning revelation in October that it had an illicit nuclear-arms programme. The oil shipments were being made as part of a 1994 agreement under which North Korea promised to freeze reactors capable of producing plutonium in return for America, Japan, South Korea and other countries providing the impoverished country with new reactors—but of a type that would make the production of weapons-grade material much harder.

The stand-off has come at a particularly sensitive time, with South Korea holding a presidential election later this month, in which future relations with North Korea are a central issue. South Korean officials have suggested the North Korean announcement could be a negotiating ploy by Mr Kim, who has used menace before to win offers of aid.

Unlike North Korea, Iran has said weapons inspectors are welcome to take a look at what it is doing. On December 13th, the government dismissed concerns expressed by some American officials that two nuclear facilities in central Iran were of a type that could be used to develop nuclear weapons. “We don’t have any hidden atomic activities,” said a spokesman for the Iranian government. “All our nuclear activities are for non-military fields.” The spokesman added that the International Atomic Energy Agency (IAEA), the UN's nuclear watchdog, had been informed about the sites and was welcome to visit. The IAEA said that it was aware of the new facilities and planned to inspect them in February. “We don't jump to conclusions. We will visit shortly and determine for ourselves what the facilities are,” said a spokesman for the organisation.



Dollar at three-year low

Oil and gold go up, shares go down and the markets nervously wait for war

Larry Elliott, economics editor
Saturday December 14, 2002
The Guardian

The renewed threat of a war against Iraq and production curbs from the oil cartel Opec sent the US dollar tumbling to three-year lows against the euro yesterday and prompted falls in share prices in both Europe and North America.

Financial markets paid little heed to a less gloomy than expected snapshot of US consumer confidence and instead were preoccupied by geopolitical risks and the effect of rising fuel prices on already weak corporate earnings.

The jittery mood was reflected in the strength of gold prices, which stood at $330 an ounce last night, close to three-year highs, and the poor performance of equities.

In London, the FTSE 100 closed down 57.2 points at 3878.1, its lowest level for two months, while an early 80-point drop in the Dow Jones industrial average meant Wall Street was on course for its second week of losses.

Some support was given to both the dollar and shares following the release of the Michigan consumer confidence survey, which showed an improvement in sentiment from 84.2 to 87, above Wall Street's estimate of 85.0.

Analysts said, however, that despite the recovery in sentiment from the nine-year low reached two months ago during frenetic falls in the stock market, consumers were still only marginally more upbeat than they were in the period immediately after September 11. Consumers remained sensitive to fresh bad news, either from the fragile US economy or from events in the Middle East.

They cited an American military strike against Iraq, North Korea's decision to reactivate a nuclear power plant and reports that extremists linked to al-Qaida received a chemical weapon from Saddam Hussein as sources of concern.

"There's just not a lot of conviction here from the point of view of buyers," said Richard Cripps, chief market strategist at Legg Mason Wood Walker.

"It's hard to get things started here - the market is looking very heavy," he said.

The euro shed nearly a quarter of a cent to almost $1.0200 on the better than expected US data, but it quickly recovered to trade around $1.0230 - more than 0.5% higher than the previous US close.

Earlier the single currency built on Thursday's sharp gains to climb as high as $1.0259 - its highest level since mid-January 2000.

The dollar also bounced up against the yen to ¥120.80, more than ¥0.25 above the three-week lows hit just before the release of the data, but down more than 1.5% from the previous US close.

Oil futures were up sharply yesterday following Saudi Arabia's speedy move to implement its share of the 7% cut in oil production - about 1.7m barrels a day - agreed by Opec in Vienna on Thursday. The price of crude for January delivery in New York was up by more than 50 cents to $28.58 a barrel, while January Brent crude in London rose by 43 cents to $27.30.

Dealers fear that dearer energy will hit the spending power of consumers and also affect the bottom line of companies which are already struggling to pass on higher costs in an increasingly competitive environment.

Figures from the American government yesterday showed that the price of goods leaving factory gates fell by 0.4% last month.



OPEC's paradoxical move
Dec 13th 2002
The Economist Global Agenda

The OPEC oil cartel raised quotas at its December meeting this week, while also asking members to cut output. The paradoxical move is aimed at curbing cheating. Combined with a strike in Venezuela and an impending war in Iraq, the news has pushed up oil prices

IT IS the world’s worst-kept secret that members of the Organisation of the Petroleum Exporting Countries (OPEC), the world’s oil cartel, openly flout their production quotas. This explains why OPEC was able to make seemingly contradictory decisions at its December 12th meeting in Vienna: to increase the overall quota by 1.3m barrels per day (bpd), but to cut actual output by 1.7m bpd. The ten members of OPEC, excluding Iraq, are currently producing around 3m barrels a day above their 21.7m-barrel collective quota. Reducing production at this time of year, during winter in the northern hemisphere, is an aggressive move, as demand is not due to start to fall until the beginning of February. It suggests that OPEC, which is dominated by Saudi Arabia, is not prepared to make concessions to the weak state of the world economy.

The OPEC decision seems especially likely to aggravate big oil consumers, like the United States, coming as it does at a time when oil prices are already relatively high. An impending war on Iraq, which exports around 2m bpd, and which has the world’s second-biggest oil reserves after Saudi Arabia, has put a floor under prices during the past year. In recent days, prices have been buoyed by a massive general strike in Venezuela, where oil production has plummeted by around two-thirds, to around 1m bpd. Moreover, some 40 vessels have been stranded off the Venezuelan coast, and exports have slowed to a trickle. In trading in London on Friday, oil prices reached two-month highs.

Saudi Arabia has already told Europe’s big oil companies that it will cut crude supplies for January by about 10% compared to December. It has already cut supplies to Asian buyers. The United States is becoming increasingly concerned about potential disruption to its own supplies. On December 12th, America’s energy department said that it would lend crude oil from the country’s strategic reserve to American oil companies whose refineries were suffering a shortage of supply due to the Venezuelan crisis.

In a separate development, Iraq this week terminated a contract with Lukoil, Russia’s biggest oil company, to develop the 15 billion-barrel West Qurna oil field. The Iraqis are suspicious that Russian oil companies have been negotiating with the Americans and with the Iraqi opposition to secure their rights in the event of a war that topples Saddam Hussein. Moscow has urged restraint on the United States in its dealings with Iraq, and its stance is widely understood to reflect its commercial interests in the Arab country. Iraq already owes Russia $9.5 billion from the Soviet era, loans that are not currently being serviced.

There is widespread scepticism about whether OPEC members will obey the new quota. High prices have typically tempted members to cheat. Algeria, for example, is currently producing a third more than its quota, thanks to its burgeoning production capacity. This rule-bending generally allows the price of oil to drift downwards. But with war in Iraq still looking probable, the price is unlikely to fall by much—even if OPEC’s members flout the new rules.