The Mae West Principle and the renewal of Brazil

If you have read this blog for a while, you will remember my deeply held belief that Mae West holds the future of Brazil in her hands, so to speak.

Mae West, was a leading Hollywood “femme fatale” in the 1930s and 40s.  She was also renowned for her double entendres and quick wit.  My favorite remark of hers is: “I can resist everything except temptation.” 

Had the Royal Swedish Academy of Sciences been more perceptive, it would have awarded her its Nobel Prize for Economics in 1980, before she died, rather than to Lawrence Klein, the father of econometrics.  Seriously, I believe that the above Mae West Axiom has greater potential for economic growth in Brazil than any combination of Klein’s models.

Back in 2015, I wrote a post in which I argued that the massive corruption scandal at Petrobras had been facilitated by its status as government-controlled national champion, leaving politicians too close to the levers of power and to the cash coffers.  Similar instances of corruption were uncovered at Eletrobras, the giant electric energy holding, also controlled by the government. 

The Mae West Axiom, if it had been followed, would have offered a simple solution: privatize Petrobras and transfer control out of government hands, and you will greatly reduce instances of corruption.  Indeed, Vale (the iron ore giant), the telecoms and the steel companies the control of which had been sold to private investors, didn’t suffer the same corruption abuses.

Which brings us to the present.  Today, the Public Prosecutor’s Office charged Aldemir Bendine with corruption for facilitating the business of Odebrecht with Petrobras in return for personal payments.  What is so damning, and instructive, is that Mr. Bendine was appointed CEO of Petrobras in 2015 to clean its finances and practices, after the huge Lava Jato scandal had come to light!

I must confess that I totally misjudged the man at the time, perhaps because we both are fans of the rock band Queen (?).  If one needs any further proof of the lack of accountability at government-controlled behemoths, I don’t know what beats that.

Also today, the stock price of Eletrobras shot up a massive 32% to 49%[1].  What triggered such unheard movement?  The news that the Ministry of Finance intends to privatize the company.  Since its shares are already publicly traded, this means selling shareholder control to private interests with the state retaining the equivalent of a golden share to veto certain key decisions. 

A greater no-confidence vote in government control, I have never seen!

When Petrobras did its IPO, popular and political resistance made it impossible to actually privatize the company.  The later discovery of massive offshore deposits actually caused a quasi renationalization, and brought Petrobras close to bankruptcy.  It remains to be seen if the current unpopular government will be able to also free Petrobras; one would hope that the Brazilian people would be fed up with the scandals and pick the obvious way out, but “black gold” elicits much stronger emotions than do kilowatts.

Which brings us back to Mae West:” between two evils, I always pick the one I never tried before.”  Brazil has long had government control over its national champions, Petrobras and Eletrobras.  This did provide its politicians with sinecures and juicy consulting contracts for them and their friends; but it also brought prison sentences, personal embarrassment and destabilized the country.  How about trying something new, clearly unpalatable, but safer?  Maybe.

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[1]  Depending whether one considers the non-voting or the voting shares.

North Korea, no good options but no middle ground outcomes either

It is decision time for North Korea, China, South Korea and the US.  As North Korea has reportedly mastered ICBM technology and possibly nuclear warhead miniaturization, the world is at a crossroad.  There seems to be little room left to safely kick the can down the road.

Each of the above actors will have to make momentous decisions in the weeks and months to come.  None will be easy or popular.  For better or for worse, both payoffs and penalties will be outsized.

The quasi-consensus advice, from here at home and abroad, is for the US to “engage in meaningful negotiations” with North Korea.  In my view, it would be premature or wrong.

The US has tried to dissuade North Korea from building nuclear weapons for a quarter century, to no avail.  Such effort was undertaken by both Democratic (Clinton, Obama) and Republican (Bush) presidents, variously viewed as thoughtful, dovish, impulsive, hawkish or pragmatic.  It made no difference.  It is thus logical to conclude that North Korea doesn’t want to negotiate away its nuclear militarization.

North Korea is governed by a repressive elite which presides over an impoverished country which treats its people very badly.  Even its ambassadors, privileged as they are, defect when given the chance.  There is little doubt that this elite views its nuclear achievements and armament as the way to repulse would-be attackers and stay in power.  Could the US guard them against such threats?

The answer is simply NO because the greatest threats are from within North Korea.  Neither China, nor Japan, nor the US would want to conquer the DPRK[1], a country devoid of natural resources and populated by 25 million poor people.  South Korea may wish for a reunification, as West Germany did, but it would make no sense to do it militarily; even a peaceful reunification would be difficult: the cost of integrating one North Korean would have to be borne by two South Koreans; in the German case, the ratio was a better, yet still taxing, 1:4.  The only real threat to Kim’s regime is from within.  The US couldn’t and wouldn’t protect the Shah of Iran or Mubarak in Egypt, where it had greater strategic interests; this is truer still for Kim.

China has enjoyed having North Korea as a buffer along its border.  Their relations could never have been described as cordial, but both countries found some mutual benefits.  As China seems to take a more authoritarian tack, its tolerance for the DPRK may endure.  Nevertheless, a nuclear North Korea brings big short and long-term challenges: it could force the US to strike and destabilize a neighbor with 25 million people to eliminate an existential threat;  longer term, Japan, and possibly South Korea, may conclude that the US won’t risk a nuclear war to fulfill its military obligations and decide to build their own nuclear arsenals.

For the rest of the world, a nuclear North Korea brings obvious risks, the biggest one being proliferation.  There is evidence that North Korea provided technical assistance to both Iran and Syria in the nuclear arena.  A pariah nation with nukes would logically increase trading on its weapon expertise, and such activity may not be limited to nation states.  Finally, it would encourage countries close to the threshold of nuclear power, such as Iran, and others to push the envelope.

In my view, the two most likely outcomes are as follows:

1)   Covertly prodded/encouraged from abroad, local factions unseat Kim with the understanding that they will dismantle their nuclear weapons.  Joint inspections by the International Atomic Energy Agency, China and the US will insure compliance.  China and the US agree to a multi-year, multi billion dollar economic assistance program.  The US agrees not to move its South Korean military bases or units further North.  The US recognizes North Korea.

2)   The US strikes North Korean ballistic installations and nuclear assets.  It also effectively disables its communication networks and electricity grid.  It warns that any North Korean attack on the South will be met by an overwhelming conventional response.  The US also offers to initiate talks about nuclear disarmament with legitimate North Korean counterparts, effectively forcing Kim to step down.

There is a third possibility, although I see it as less likely: as the world gets increasingly concerned about the fallouts of a military confrontation in the Korean peninsula, Europe, China and the US step up their sanctions to the point where they really hurt everybody in North Korea and endanger the stability of the regime.  At that point, the DPRK government turns to (personal) survival mode and agrees to enter into negotiations.

In conclusion, parties negotiate when it is the most palatable option they have.  A very good example of this is the recently signed Colombian peace accord after the FARC started to suffer heavy tactical and strategic losses.  For decades, the US has been willing to negotiate denuclearization while North Korea hasn’t.  Recently, the commercial and military pressure on North Korea has increased notably, but time is running out.  This is why I believe that the above two scenarios are the most likely.

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[1]  The Democratic People’s Republic of Korea.