Article Courtesy from Trust Services S.A.

OFFSHORE PILOT QUARTERLY  
Commentary on Matters Offshore
 

October, 2005 Volume 7
Number 4

Political Suicide...

South America is littered with illustrations of George Bernard Shaw’s observation that political necessities sometimes turn out to be political mistakes. In 1954 the Brazilian president, Getulio Vargas, with a shot to the heart, committed suicide after resigning in the midst of a political crisis Today, politicians – whether Brazilian or not – tend to, in a manner of speaking, just shoot themselves, more often than not, in the foot. In the suicide note that Vargas left he spoke of an economic crisis and claimed to have tried to “liberate” the people, after seizing power in a 1930 revolution. Not only did he subsequently dissolve parliament, he also banned all political parties and trade unions, censored the press and suppressed all opposition.

Despite his own current political problems Brazilian president, Luiz Inácio Lula da Silva, governs a country that has matured both politically and economically in the past half century. Brazil’s currency continues to perform strongly, wholesale prices have been falling and the 2005 target of 5.1 per cent for consumer price inflation appears to be still achievable. But there are a lot of problems with the country’s infrastructure even though, according to Brazil’s budget proposals, the government will only spend 0.5 per cent of Gross Domestic Product on infrastructure in 2006. (The World Bank has reported that poor roads, railways and ports have been instrumental in delaying development in South America and says that spending on infrastructure in general has fallen on average to less than 2 per cent of GDP, which is around half of the expenditure achieved in the 1980s.)

Besides its problems with infrastructure (hampered by severe political constraints and regulatory opaqueness), Brazil is finding that its commercial ties with China have become fractious. Chinese imports are affecting manufacturers of shoes, textiles and electronic equipment in particular. Brazil’s trade surplus with China has shrunk in 2005 and it is now running a deficit in trades in industrial goods. The president’s challenges are manifold, but don’t expect any suicide note.

...and Political Survival

China’s second biggest trading partner in Latin America after Brazil is Mexico and, like Brazil, local producers are suffering from the competition, especially in the clothing, footwear and glass industries. President Vicente Fox, however, has other concerns with elections due in 2006. After his victory in 2000, ending 71 years of rule by the Institutional Revolutionary Party, there were high hopes that his presidency would accomplish much. He has, however, not lived up to the expectations of many Mexicans and the only Fox that seems to be really popular in Mexico is the one made by Volkswagen in Brazil. In both countries, where 70 per cent of car buyers purchase small cars, sales of the German compact have been strong.

Many political commentators feel that the president’s problems began right away after he took office. He modelled himself on Franklin Delano Roosevelt and publicly announced that Mexicans would see landmark changes in the first 100 days of his administration. But he spent some 3 months or so of his first year travelling abroad, celebrating his unique position as the first Mexican president in over 70 years to have been elected from the opposition. Those trips abroad gave the defeated and dejected opposition time to re-organise themselves, making it even more difficult for the president to deal with a hostile legislative majority that continually hounds him and hinders his every political move.

Issues outside Mexico are also turning hostile. The North American Free Trade Agreement entered into with the United States of America has made the U.S. aware of the fact that it has a vested interest in Mexico’s political and economic stability. But maintaining good relations has become more difficult. The increasing demand for cheap labour for farms, the hospitality industry and building sites in the U.S. has been a magnet for illegal immigrants at a time when U.S. terrorist concerns has made protecting the country’s borders a top priority, so the vulnerable Mexican border has increased tension between the two neighbours. At established Mexican border crossings American officials are carefully checking passports for evidence of trips made to the Middle East but those with evil intentions are more likely to emulate the successful illegal immigrants who slip unnoticed across the border.

Elsewhere, President Fox is reducing political tensions. Hugo Chávez, Venezuela’s president, has called for Latin American countries to unify their economies rather than adopt a U.S.-led free trade approach. Here the Mexican President has proven to be a good American ally. In July of this year at the Fourth Summit of the Association of Caribbean States held in Panama, Vicente Fox called for a strategic alliance of open markets and free trade in the region. Hugo Chávez was absent from the summit but his Foreign Secretary, Ali Rodriguez, made it clear that Venezuela believed in economies “based on solidarity, not mercantilism”. Stronger language followed when he added that Venezuela opposed “the slimy, mercantilist view of things”.

In 1908 Charles Macomb Flandrau wrote in a somewhat vivid passage in his book, Viva Mexico, that a “well-regulated, systematic and precise person always detests Mexico and can rarely bring himself to say a kind word about anything in it…” I am sure that today, when Washington is confronted by vituperative remarks from Venezuelan officials, it can find many kind words to say about Mexico despite increasing border friction


 

Offshore Pilot Quarterly has been published since 1997 by Trust Services, S. A. which is a British- managed trust company licensed under the banking laws of Panama. It is written by our Managing Director who is a former member of the Latin America and Caribbean Banking Commission as well as a former offshore banking and insurance regulator. He has over 35 years private and public sector experience in the financial services industry. Our website provides a broad range of related essays.

Engaging an offshore representative is an important decision and we advise all persons to seek appropriate legal and tax advice from professionals licensed to render such advice before making offshore commitments.


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