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PRL Volume XXXII, Number 8 August 2010


YAP in Control
Parliamentary elections scheduled for November will proceed as planned, and a resounding victory for the governing YAP is all but certain. The opposition is hopelessly weak, the result of both repression and the personal ambitions of party leaders, which have impeded efforts to form a united front. As such, the only real threat to YAP’s ability to maintain its position of uncontested dominance lies in the possibility that factions rivalries might split the party in the run up to the 2013 presidential election.

A rapprochement between Turkey and Russia is believed to have played a role in breaking an impasse between Turkey and Azerbaijan over the price for the latter’s gas supplies, a development that has brightened the prospects for progress on various pipeline projects currently under way or being considered. However, the price agreement removes President Ilham Aliyev’s main bargaining chip for securing western backing for Azerbaijan’s efforts to reclaim control of the enclave of Nagorno-Karabakh from Armenia, and the failure to resolve the territorial dispute has potentially serious negative implications for regional stability down the road.
The government is preparing a plan to reduce the country’s oil dependence, but any hope of success will require a commitment to eliminating the many obstacles to attracting non-oil investment, including widespread corruption, a cumbersome bureaucracy, heavy regulation, the sometimes arbitrary application of laws, and an inefficient and opaque legal system.


Santos Pledges More of the Same
Juan Manuel Santos, the leader of the center-right Partido de la U, romped to victory in a run-off presidential contest held in June 2010, easily defeating his Green rival on the strength of a pledge to build upon the security and economic advances achieved by his predecessor, Alvaro Uribe. Although Santos will be expected to keep leftist guerrillas at bay, the duration of any honeymoon period will be determined to a much greater degree by his handling of the economy.
Santos has set a target of creating 2.5 million new jobs by the end of his four-year term, which, if achieved, would result in a decrease in the unemployment rate to single digits and reduce the poverty rate by 30%. He has also promised to build one million new low-cost housing units as part of a program of investment that will focus on infrastructure, housing, hydrocarbons, agriculture, and education. Despite the heavy public spending such a plan implies, Santos has also set a goal of reducing the fiscal deficit to less than 1% of GDP by 2014.
The new president will attempt to close the budget gap by relying primarily on increases in income from coal-mining and oil operations, in particular, and the tax and other revenues generated by increased investment in non-extractive sectors of the economy. Toward that end, he has proposed a reduction of the corporate tax rate, which is among the highest in Latin America, and various measures to streamline the investment process. He has also proposed setting aside one-half of the proceeds from mining and oil in an overseas savings account, thereby helping to reduce upward pressure on the peso and improving the competitiveness of Colombia’s exports.
International investors are watching Colombia closely, and failure to aggressively close the budget gap could complicate efforts to attract the investment and obtain the project-financing that are essential to the government’s plans for job creation. Any setbacks on the security front—and it is not unreasonable to assume that FARC rebels will attempt to carry out high-impact terrorist operations with the aim of undermining public confidence in the new president—would make the challenge that much more daunting.


Setback for Reform
A successful campaign by lawmakers in the Parliament to force the resignation of President Susilo Bambang Yudhoyono’s reformist finance minister, Mulyani Indrawati, underscores the reality that the strong mandate won by the president at last year’s election has not significantly improved his ability to fend off the anti-reform forces acting on his government, the most powerful of those being Golkar, a key member of the governing coalition. In a move that has sown doubt as to Yudhoyono’s commitment to reform, the president named Golkar leader Aburizal Bakrie, who objected to the finance minister’s scrutiny of his business interests, as managing chairman of the governing coalition just days after Mulyani departed to take a post with the World Bank.
Yudhoyono chose Agus Martowardojo, the president-director of the state-run Bank Mandiri, to succeed Mulyani. He is a political independent who, by all accounts, favors liberal economic policies but lacks Mulyani’s reformist zeal. In any case, Mulyani efforts have established a foundation for economic stability, and the strong recovery is unlikely to be affected to any significant degree as a result of the change in personnel.
Those looking for assurances of Yudhoyono’s pro-reform intentions were heartened by the fact that the president expended a fair amount of his political capital to ensure parliamentary approval of Darmin Nasution, a protégé of Mulyani, as head of the central bank. The fact that Darmin was confirmed to the post (which had stood vacant for 14 months) over the opposition of both Golkar and the PKS, the two parties that led the effort to oust Mulyani, suggests that Yudhoyono is not entirely impotent in the face of anti-reform forces, but that he intends to use discretion in picking his battles.


Strategic Alliance Slows PRI’s Momentum
The main opposition PRI proved to be less of an electoral juggernaut than anticipated at state elections held in early July, as President Felipe Calderón’s PAN managed to avert an anticipated clean sweep for the PRI by forming an electoral alliance with the left-leaning PRD, a strategy that enabled Calderon’s party to win governorships in three of the 12 states holding contests. The implications of the outcome of the recent state elections for the national contests scheduled for July 2012 are not entirely clear. To a degree, the results in Sinaloa, Oaxaca, and Puebla, where the PRI was defeated for the first time in more than 80 years, turned on purely local issues. Moreover, it is open to question whether an anti-PRI front would enjoy the same level of success when control of the federal government is at stake, even if the PAN and the PRD were willing to attempt it, which is also debatable.
The preferred presidential candidate among the PRD’s membership, Andrés Manuel López Obrador, enjoys the support of just 14% of the broader electorate, according to the most recent polling data. Santiago Creel, the early front-runner for the nomination of the PAN, is polling no better than López Obrador, and both are running well behind the early favorite for the PRI’s nomination, Mexico State Gov. Enrique Peña Nieto, whose support has held at slightly more than 40% since late 2009.
But it must be kept in mind that at a similar stage of the last election cycle, López Obrador was in a position very similar to the one currently enjoyed by Peña Nieto, and Calderón was not yet on the pollsters’ radar. In short, there is still plenty of time for a significant reshaping of the electoral landscape.
Whether time will work to the PAN’s advantage depends on what Calderón is able to accomplish over the final two years of his term. The achievements that voters are likely to care most about are those in the economic and domestic security arenas, and, given the PRI’s control of a majority in the lower chamber of Congress, it is unlikely that the president will be able to do much to improve his party’s prospects in 2012.


Limited Scope for Policy Departures
A general election will be held on September 19, and the results of recent polls indicate that the governing center-right Alliance for Sweden has opened a slight lead over the oppositon Red-Green alliance, whose support has slumped significantly since jumping above 50% early in the year. The current margin of 49% – 44% in favor of Prime Minister Fredrik Reinfeldt’s coalition is very close to the results of the 2006 election, at which the Alliance for Sweden won 48.2% of the vote, good enough to win 178 seats in the 349-member Riksdag. However, it is not clear whether a similar showing this year would be enough to ensure a majority of seats, as increased support for the SD suggests that the right-wing party could win the minimum 4% share of the vote required to claim at least some seats in the Parliament, thereby leaving both Reinfeldt’s coaliton and the Red-Green alliance short of 175 seats.
As things stand, Reinfeldt’s coalition is forecast to triumph by a slim margin, and the prime minister will govern for another term with the slimmest of majorities. The government’s position towards the EU will remain positive, but there is little chance of any substantive moves toward joining the euro zone, especially in light of the lingering uncertainty surrounding the debt-related difficulties of Greece and other members of the monetary union. In terms of tax policy, the government has conditioned its pledge of additional tax cuts on the achievement of a budget surplus. An anticipated weak economic recovery in key European markets will dampen demand for Swedish exports, which account for roughly one-half of GDP, and a combination of weak growth and strong center-left opposition to any further income tax cuts that are financed through reduced spending on welfare, will limit the potential for any significant easing of the tax burden in the near term.


Coalition May Lack Staying Power
Local elections scheduled for late September 2010 will be watched as a gauge of party support ahead of a general election that must be held by November 2012. Recent polls indicate that the governing PR is running well ahead of the main opposition BYT, and a strong showing by the PR at the local contests will increase the probability of an early general election, possibly even before the end of this year.
Although the PR-led government has implemented some unpopular economic policies—in particular, a 50% increase in energy prices – to satisfy the IMF, President Viktor Yanukovych’s party is favored to retain its position as the largest party following parliamentary elections, and will continue to govern with its current coalition partners, the Communists and the centrist Lytwyn’s Bloc.
The divergent stances of the governing parties on some important issues, including economic reforms, relations with Russia, and Yanukovych’s already apparent ambition of undoing political reforms that transferred significant powers from the president to the prime minister, will give rise to tensions within the coalition. Moreover, the PR’s close ties to powerful business interests will create an obstacle to implementing some of the structural reforms demanded by the IMF, resulting in periods of troubled relations with international lenders that will undermine investor confidence, to the detriment of the country’s economic recovery. Consequently, the odds that the PR-led government established after the next elections will survive for a full term are only slightly better than even.


Opposition Faces Uphill Struggle
The global financial crisis and the ensuing worldwide recession have laid bare the weaknesses of Hugo Chávez’s statist economic model, creating a potentially dangerous political situation for the president. The oil-dependent economy remains mired in recession, inflation shows no sign of abating, and shortages of basic services, including water and electricity, are making life especially difficult for the poor and middle class Venezuelans whose support has been essential to Chávez’s success at fending off challenges from his opponents. All of these factors have contributed to the president’s weakening popular support, but the issue with perhaps the greatest potential electoral implications is the steady increase in crime-related insecurity, a quality-of-life issue that cuts across class lines.
Chávez’s difficulties have invigorated the opposition parties, which have joined forces under the banner of the MUD, and will present a single slate of legislative candidates at elections scheduled to take place in late September. The creation of MUD marks a strategic watershed for the opposition, which has been weakened by internal divisions. In contrast, the unity of the governing PSUV is beginning to break down, amid heightened tensions between social democrats who insist on rule according to the constitution, and hard-line socialists who have no reservations about amending, or ignoring, the constitution as political and ideological interests dictate.
Even so, Chávez’s opponents face an uphill struggle. Since the 2005 elections, which were boycotted by the opposition parties, Chávez had taken advantage of his opponents’ self-imposed exile from the legislature to secure passage of a series of laws that have stacked the deck heavily in the favor of the incumbents. As such, the PSUV is likely to retain its majority, enabling the president to continue implementing his revolutionary program, with disastrous results for the economy.


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