PRL VOLUME XXXIV, NUMBER 1 – JANUARY 2012

CHILE

More Headaches for Piñera

The generally favorable performance of the economy—real GDP growth accelerated to an estimated 6.2% in 2011—helped to boost President Sebastian Piñera’s standing among the electorate late in the year, but poll data released in early January 2012 put his approval rating at a still dismal 33%. Perhaps unfairly, Piñera has come to be seen as unequal to the task of heading the government, and each disaster that befalls his administration, regardless of who or what is to blame, will merely serve to reinforce that view.

On that score, the fact that an anticipated deceleration of economic growth in 2012 will be in large part attributable to external developments over which Piñera’s policy-making team has no meaningful control will matter less to the Chilean public than the fact that it will reinforce the income inequality that a growing number of Chileans believe could be at least partially remedied by education reforms the president has refused to consider.
Both education reform and tax increases to pay for them will figure prominently in political discussions across Chile this year, and the president could very well confront pressure from his political allies to make concessions. Members of the governing center-right coalition are not likely to give Piñera much time to rebuild his popularity before they shift their focus to the presidential and legislative elections scheduled to take place late next year. Assuming an early shift into campaign mode, RN lawmakers looking for a pre-election boost might very well team up with the opposition CPD to push through populist tax measures.

COTE D’IVOIRE

Elections Bolster Ouattara’s Position

President Alassane Ouattara’s RDR won exactly one-half of the 254 seats in the National Assembly at legislative elections held in December 2011, while the allied PDCI won 76 seats, and another 16 seats were claimed by smaller pro-government parties. Assuming Ouattara and PDCI leader Henri Konan Bédié manage to establish a solid basis for sustained cooperation between their parties, the government will have little trouble implementing its agenda, and the alliance of the northern-based RDR and the southern PDCI will help to bridge the regional divide that has fueled conflict in the country for more than a decade.
That said, the success of the pro-government parties is in part the result of a boycott by the former ruling FPI, which cited Ouattara’s control of the electoral process and the alleged harassment of the opposition by the military as the reasons for its non-participation. Whatever the truth of the matter, the fact remains that a substantial portion of the electorate—turnout was a dismal 36%—now lacks representation in state institutions. At the same time, reports of the continuing heavy-handedness of northern militias, which are nominally loyal to the new government, indicate that Ouattara lacks either the will or the capacity to ensure the timely disarmament of the former rebel forces and their integration into the national army.
Efforts to restore order to public finances have been rewarded by the Paris Club of creditors, whose members have offered debt relief that will result in a savings of $1.8 billion in debt-service and arrears payments due by the end of June 2014. Finance Minister Koffi Diby is pursuing an IMF-backed agreement that will clear the way for further debt relief in the second half of 2012 and send a positive signal to investors. However, the IMF will likely condition its support on achievement of numerous challenging objectives, including broadening the tax base, limiting current spending, deepening the financial sector, and improving government oversight in the energy and cocoa sectors.

ECUADOR

Correa Tightening His Grip

The opposition majority in the National Assembly rejected tax reforms proposed by President Rafael Correa in mid-November, but the president simply ignored the legislative vote and signed the measure into law. The blatant usurpation of the legislature’s authority reflects the inadequate separation of powers under the current constitution, which empowers the president to call an early legislative election at his discretion. Correa has made clear that he will not hesitate to make use of that authority if his lack of a majority becomes an obstacle to pursuing his preferred policy course, and the toothless reaction of lawmakers suggests that the president’s opponents are not prepared to see if he is bluffing.
Of more direct concern to investors is a new anti-monopoly law that empowers the government to control prices and order the breakup of companies for the purpose of enhancing competitiveness. The president’s authority to suspend enforcement of the law on a case-by-case basis by executive decree creates a high risk that it will be used to reward friends and punish enemies. The fact that such authority has been handed to a president who has by word and deed made clear his contempt for the private sector merits serious consideration by any foreign investors weighing the risks of doing business in Ecuador.
The government is negotiating with foreign companies to develop the country’s largely untapped mineral reserves, and its insistence on the inclusion of a steep windfall profits tax in contracts so early in its foray into the sector is curious. The approval of a similar tax on oil production in 2006 was the first step toward the eventual nationalization of the country’s oil reserves under Correa, and it is possible that the president intends to follow a similar course in the mining sector if he should win re-election in 2013.

EGYPT

Islamists Face Challenges for Control

The FJP, the political arm of the Muslim Brotherhood, scored a decisive victory in Egypt’s first post-Arab Spring election. The FJP-led Democratic Alliance claimed 235 (or 47.1%) of the 498 elected seats in the lower house of the National Assembly, and the FJP’s total of 213 seats highlights the Muslim Brotherhood’s undeniable popularity.
Concerns about the FJP’s intentions remain, but the Muslim Brotherhood has made a conscientious effort to avoid even the appearance of religious overreach, and has repeatedly offered assurances of its full commitment to the development of democratic institutions. The Democratic Alliance will need to find at least one more partner to give the bloc a legislative majority, and it is likely that the expansion of the coalition will bolster secular influence within the bloc.
In terms of political stability, the biggest immediate risk stems from the still uncertain willingness of the 20-member SCAF to cede political control to a civilian government. Beyond the danger that renewed street protests by democracy activists might create a pretext for halting the political transition, a looming economic crisis also poses a threat to hopes for creating a stable foundation for democratic governance in Egypt.
Central bank reserves have been nearly halved since June 2011, and Egypt’s external financing needs are rising rapidly. Sovereign lenders will be wary of making a substantial commitment until the Egyptian government has shown that it is willing and able to satisfy the conditions attached to IMF support, and leaders of the FJP have signaled that they will only back an agreement with the IMF if the loans come with no conditions attached.
Even if the FJP agrees to sign on to a deal with the IMF and the political transition moves forward according to schedule, creating a solid foundation for long-term fiscal stability will entail a reduction of the state’s role in the economy, a strategy that will threaten the significant economic interests of the military. Military-owned companies currently pay no taxes. An IMF-imposed program of fiscal consolidation will necessarily entail boosting the level of state income from taxes, and any move in that direction will inevitably generate public pressure to make the military pay its fair share.
The generals will jealously guard the military’s substantial economic interests and special privileges, putting the armed forces brass on a collision course with the civilian government. As it is doubtful that a civilian government, particularly one led by Islamists, would emerge victorious from such a clash, threats to the survival of democracy in Egypt are unlikely to diminish substantially even if the near-term challenges are met.
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