Oil fields in Iraqi Kurdistan

According to sources in the city, supermajor ExxonMobil is establishing a presence in Arbil, the capital of the Kurdistan Autonomous Region.

This is a major development because in November 2011, ExxonMobil signed an oil exploration deal with the Kurdistan Regional Government despite the fact that the different political factions in Iraq had not agreed on a law to distribute oil revenues between the provinces and the central government in Baghdad. The central government maintains that the KRG/ExxonMobil deal is illegal and threatened to nullify Exxon’s other contracts for oilfields in southern Iraq. Exxon announced that it would review the deal but appears to be going forward with implementing it.

ExxonMobil was the first supermajor to ink a contract with the KRG and rumors abound that other supermajors will finalize deals of their own soon. An industry source said that Total, ConocoPhillips, Chevron, Eni and Lukoil are all interested in working with the KRG. Kurdistan has an estimated forty-five billion barrels of proven reserves, compared to at least one hundred billion barrels of oil in southern Iraq. However, Kurdistan has proven to be a more attractive target for investors because its security situation and economy are markedly better than the rest of Iraq.

Analysis

ExxonMobil has moved forward with the KRG deal for several reasons. First and most importantly, it saw no credible threat that the Iraqi government would cancel its contracts in the southern oilfields as retaliation for an exploration deal with uncertain returns. The architects of the deal believed that because Baghdad is so dependent on oil revenues, threats to disrupt production in the south by severing ExxonMobil’s contracts there (in the largest oilfield in Iraq, no less) amounted to nothing more than bluffs. After witnessing oil minister Hussain Shahristani’s feeble response to the ExxonMobil deal, other oil companies are more likely to call this bluff as well by pursuing deals with Kurdistan.

Second, the American withdrawal has created substantial uncertainty in the security and regulatory environment of non-Kurdish Iraq and investment there will remain a risky prospect for some time. The dispute between Baghdad and the provinces cuts to the heart of the nature of the post-2011 Iraqi state and it has flared up in the wake of US withdrawal. Salah ad Din and Diyala provinces have formally requested autonomy from the central government, prompting a crackdown by Prime Minister Nouri al-Maliki’s security forces. Until these disputes are resolved and the character and powers of Iraq’s governing bodies are clarified, investors will rightly be hesistant to commit themselves to such a volatile region.

Finally, it is important to remember that this is just an oil exploration deal, not a production contract. Should oil be discovered in significant quantities, it is quite possible that Maliki’s government will not be so tolerant of ExxonMobil operating in Kurdistan without contributing revenues to Baghdad’s coffers.

The distribution of oil revenues is part of a larger ongoing conflict between Iraq’s provinces the central government in Baghdad. The dispute touches on a number of fundamental questions and factional insecurities about the nature of the Iraqi state itself. The Kurds, a stateless people who endured centuries of persecution from governments across the region, have been largely successful since 2003 in achieving their goals of sovereignty, security and economic prosperity with an eye toward eventual independence. Although Kurdistan’s accomplishments have not trickled down to the rest of Iraq, the KRG does provide an appealing model that other Iraqi provinces may seek to emulate.

Both Sunnis in the west and Shiites in the south have expressed interest in local self government with only nominal ties to Baghdad—in other words, Iraqi federalism. This is because Iraq’s national government has largely been deadlocked and unable to effectively distribute resources and services outside of Baghdad. Furthermore, there is great uncertainty as to whether the government will be representative, responsive and free of sectarian influence.

This trend toward federalism poses a problem for Baghdad because most of Iraq’s oil is located in Kurdistan and southern Iraq. If those regions were to become functionally independent without sharing oil revenues with Baghdad, the central government would collapse into bankruptcy (oil accounts for about 75 percent of GDP and 90 percent of government revenues). This basic impasse explains why a national oil law has been stalled since 2005.

Wikistrat Bottom Lines

President Nicolas Sarkozy of France gives a television interview from the Élysée Palace in Paris, January 29

In a television interview on Sunday, President Nicolas Sarkozy frankly admitted that his country lagged behind neighboring Germany and urged Frenchmen to accept austerity to revive growth.

The embattled French leader, who is up for reelection in April, pointed out that social taxes on salaries in his country were “double” those across the border; that the Germans had three times as many youngsters in apprenticeships; and that France lost half a million manufacturing jobs in the last decade when German employment grew.

“The German economy chose to prioritize jobs, jobs, jobs,” he said. “If it worked for them,” he added, “why wouldn’t it work for us?”

The president specifically proposed a “convergence” of tax rates between Europe’s two largest economies which would force the French to rein in their oppressive tax regime. If reelected, Sarkozy vowed to abolish €13 billion worth of social charges currently paid by employers in favor of an increased value added tax rate.

Sarkozy’s party, currently in government, hiked taxes last August and again in November in an attempt to balance the budget. Consumption taxes on liquors, tobacco and soft drinks were raised as was the lowest value added tax bracket from 5.5 to 7 percent. The top corporate tax is still 34.4 percent compared to 15.8 percent in Germany. Total tax revenue as a percentage of economic output was 44.6 percent in 2010. In Germany, it was 39 percent.

Germany also does better in terms of employment. The French jobless rate is near 10 percent compared to 6 percent in Germany. Sarkozy said on Sunday he wanted to enable companies to negotiate extraordinary working hours with personnel in imitation of the German Kurzarbeit model which has been successfully replicated in Austria and the Netherlands as well.

Under this program, businesses are able to avoid laying workers off by reducing their working hours. Government subsidies make up for the loss in income while workers are required or encouraged to enroll in training programs to improve their skills and productivity.

According to data from the Organization for Economic Cooperation and Development, the program in Germany saved half a million jobs at the height of the recession in 2009. Austrian and Dutch unemployment rates last year hovered around 4 percent in part thanks to similar efforts.

Once the economy recovers, the French president said he wanted to give employers more flexibility permanently to increase working hours although he stopped short of advocating an end to his nation’s treasured thirty-five hour work week.

After five years as president, critics may wonder why Sarkozy didn’t seek to learn from the German success sooner. In the aftermath of the 2009 financial panic, he spent more time lambasting the “freewheeling Anglo-Saxon model of finance” than pushing for the sort of entitlement and labor market reforms that are necessary if France is to regain economic competitiveness relative to Germany.

Politically, there is no better time than the present to aggressively champion a pro-growth agenda for the conservative. His socialist rival for the presidency, François Hollande, may run on a platform of defending the welfare state from callous budget cutters on the right but he does so in a managerial fashion that appears to resonate with centrist French voters, a constituency that Sarkozy cannot afford to lose if he is to make it into the second round of the presidential vote in May.

The one structural reform enacted during the Sarkozy presidency was a raise in the retirement age from sixty to sixty-two years of age. Even if France’s public pension system is still projected to fall into deficit by 2018, the left is rallying against the measure and in staunch defense of the thirty-five hour work week. If Sarkozy really means to take the country in a different direction, he started to make the case for it this weekend.

In doing so, he cannot act too much of a European for it would enable the isolationist Front nationale to attack him from the far right. Some 20 percent of likely French voters, many of them small business owners and blue collar voters who have seen their industrial jobs outsourced to low wage countries, would back its presidential candidate, Marine Le Pen. She advocates a protectionist economic policy and French withdrawal from the eurozone. Sarkozy needs her voters too if he is to win again.

German chancellor Angela Merkel in Laatzen, Lower Saxony, March 4, 2008 (Sebastian Gerhard)

European leaders on Monday prepared to enact a fiscal pact that will write balanced budget rules into their national laws despite British opposition to such far reaching fiscal integration. “To write into law a Germanic view of how one should run an economy and that essentially makes Keynesianism illegal is not something we would do,” was how one official from the island nation put it.

Britain effectively deserted the Franco-German led push for economic integration in December when Prime Minister David Cameron vetoed a pan-European reform effort. The seventeen nations in the single currency area will move ahead nevertheless. Most other European Union member states, except Great Britain, are expected to join them, if not formally then de facto.

German demands for strict fiscal consolidation have been watered down significantly in anticipation of Monday’s European Council summit. Where the 1997 Stability and Growth Pact demanded that public deficits remained under 3 percent of gross domestic product, drafts for the latest fiscal pact refer to “structural deficits” which may still allow the sort of short term Keynesian stimulus which the British fear will be “illegal.”

There will still be semi-automatic sanctions for profligate governments that only a supermajority of European countries can overturn and fines imposed by the European Court of Justice worth up to 0.1 percent of a nation’s GDPs.

The northern eurozone countries, led by Germany, insist that deficits must be reduced in the short term and the competitiveness of peripheral states improved for the continent to grow out of its debt crisis. There is mounting apprehension in the south about this plan as people there have seen markedly little progress in recent months.

In Greece and Spain, nearly one out of five workers is unemployed. The jobless rate in Italy and Portugal hovers near or above 10 percent.

Italy, where Prime Minister Mario Monti and his cabinet of technocrats are rushing through reforms to rein in public spending and liberalize the economy, has seen its borrowing costs fall but Greece, Portugal and Spain remain mired in recession with dismal growth forecasts for 2012.

Greece is expected to reach an agreement with banks and investors about reducing its debt obligations this week. Its bailout financing from other European countries could be in peril however if there isn’t a more convincing effort to balance the budget and modernize the economy.

Portugal’s slide toward becoming the next Greece has gathered pace as banks recently raised the cost of insuring government bonds against default. The conservative administration, in power there since last summer, has been enacting cuts and reforms to balance the budget but like other eurozone countries, including France, it is relying mostly on tax hikes to reduce the shortfall in the short term.

If there isn’t more robust growth in Portugal this year, the country could need a second bailout to avoid bankruptcy.

In Spain, where conservatives have also recently taken power, growth is lackluster and unlikely to meet the 2.3 percent target this year. That raises the question whether Madrid will manage to cut its deficit from around 8 percent of economic output last year to 4.4 percent by the end of 2012 as promised.

The Germans, meanwhile, are still reluctant to pour more money into the European rescue fund which many analysts and southern European governments believe will calm markets.

In Davos, Switzerland last week, Chancellor Angela Merkel pointed out that despite last year’s expansion of the European Financial Stability Facility, which now has an effective lending capacity of €440 billion, there is pressure to expand it again. “Now they say it should be twice as big,” she lamented.

Some say, “it should even be three times as big, then we’d really believe you.” And I always ask myself how long is that credible and when is that no longer credible?

What Germany doesn’t want, she added, “is a situation in which we promise something we can’t back up in the end.”

Traffic in New Delhi, India, February 13, 2010 (Kalpana Chatterjee)

India’s central bank last week cut its growth forecasts for 2012 and moved to increase liquidity in an effort to contain a nearly 7.5 percent inflation rate. It specifically cited the government’s “policy and administrative uncertainty” as one of the reasons for India’s weakened economy.

The bank lamented “the absence of credible fiscal consolidation” and urged efforts to “induce investment that will help alleviate supply constraints in food and infrastructure.”

India has made it easier for foreigners to invest directly in domestic firms but structural industrial and labor market reforms, which are critical if the country of 1.2 billion is to live up to its economic potential, are unlikely to be enacted in the short term by the center left administration in New Delhi.

Neither of India’s two major political parties has so far been willing to risk losing votes from people who dependent on government for their livelihoods by reining in a pervasive bureaucracy that is rife with corruption. Ridden by scandals, Prime Minister Manmohan Singh’s government lacks the credibility to push ahead with reforms which the former finance minister himself pioneered in the 1990s.

Starting a business in India takes up to two hundreds days if one is to complete the excessive licensing requirements and can cost more than sixteen times the average annual income. That is, unless an entrepreneur has the financial resources to bribe officials and streamline the process.

Corruption is a major impediment to growth in itself. Property rights are not effectively protected nor enforced. Judicial procedures tend to be protracted and can be subject to political pressure.

The economic liberalization of India has lifted hundreds of millions out of poverty and allowed the country to attract international business and investment. The process has stalled at a time when China, India’s largest competitor for access to food, hydrocarbon, mineral and water resources abroad, is expanding its reach across the Indian Ocean.

Even as it enjoys an informed workforce that speaks English, laborers in China are better educated on average than their Indian counterparts. They are also more productive. China enjoys an almost complete industrial supremacy over its competitor. It produces nearly half of the world’s steel, ten times India’s output, while Chinese infrastructure receives three times the investment that India’s does.

There is mounting apprehension in India about the other Asian giant’s rise but also a huge disparity between the upper middle class’ recognition of what needs to be done to boost India’s competitiveness on the one hand and the everyday struggles of the nation’s poor on the other. The World Bank last year estimated that 32 percent of India’s population lives in poverty. Two-thirds of its people depend on rural employment for a living.

The agricultural economy nevertheless faces considerable challenges which the government has largely failed to address. There aren’t good roads to allow farmers to take their products to market but there is ample regulation of foodstuffs to discourage expansion.

Irrigation systems are poorly maintained when fossil aquifers are rapidly depleting. India’s food production is stagnating yet the country is projected to add almost half a billion people before 2050. Climate change further raises the specter of diminished river flows if Himalayan glaciers melt.

There is no question that India cannot afford a “Hindu rate of growth” anymore. If it is to meet the challenges of the twenty-first century, it must work to stamp out corruption, lift the regulatory burden that stifles innovation and growth and invest in its road and water infrastructure instead, else it may not be able to feed its people in the long term.

German chancellor Angela Merkel at the World Economic Forum in Davos, Switzerland, January 25 (Remy Steinegger)

German chancellor Angela Merkel on Wednesday deflected calls for expansion of Europe’s sovereign bailout fund and insisted that further economic integration in the eurozone was necessary to restore market confidence.

At the World Economic Forum in Davos, Switzerland, the chancellor said the currency union “must be ready to dare more Europe.”

We will have to get used to the fact that the European Commission, which already has lots of competences, will become more and more like a government.

Germany and other strong economies in the north of the continent want to empower the Commission to penalize member states that disregard European debt and deficit limits. France, Italy and other nations in the south would rather keep this authority in the hands of political leaders.

The German leader said she didn’t believe that a bigger European rescue fund for profligate nations could solve the crisis. She acknowledged that despite last year’s expansion of the European Financial Stability Facility, when the vehicle’s effective lending capacity was increased to €440 billion, there is pressure to expand it again. “Now they say it should be twice as big,” she lamented.

Some say, “it should even be three times as big, then we’d really believe you.” And I always ask myself how long is that credible and when is that no longer credible?

What Germany doesn’t want, she added, “is a situation in which we promise something we can’t back up in the end.”

Germany may be considered the strongest economy in the eurozone but it, too, has to borrow to finance public spending while its debt has grown to a size that is equivalent to more than 80 percent of gross domestic product.

According to the 1997 Stability and Growth Pact, which applies to countries both in and outside of the single currency union, government debts should not exceed 60 percent of GDP while deficits are to remain under 3 percent of GDP. Few countries have managed to meet these targets in recent years.

Whatever the size of Europe’s rescue fund, there will likely continue to be doubt about Germany’s willingness to prevent countries like Greece from defaulting.

Within Finland, Germany and the Netherlands, which are the only eurozone countries whose creditworthiness is still rated AAA by all major credit rating agencies, there is mounting opposition to financing the deficit spending of others.

Merkel’s rejection of a bigger “firewall” to stem Europe’s spiraling debt crisis came days after the managing director of the International Monetary Fund had warned that “across the board, across the continent, without differentiation, budgetary cuts will only add to recessionary pressures.”

Christine Lagarde, the former French finance minister, fears that strict and immediate fiscal consolidation will undermine the fragile global recovery. Merkel’s priority is to reduce deficits in the short term and improve competitiveness in the periphery of the eurozone in the long run.

President Barack Obama shakes House speaker John Boehner's hand before delivering the State of the Union address, January 25, 2011

President Barack Obama touted a message of economic nationalism in his State of the Union address on Tuesday night, promising to rebuild American manufacturing and suggesting that it’s only because of other countries’ unfair trade practices that the United States suffer.

“Our workers are the most productive on Earth,” said the president, “and if the playing field is level, I promise you, America will always win.”

The playing field isn’t level and hasn’t been level in decades. America has, in part, itself to blame yet the president defended the most blatant of government interventions of recent years when he touted the success of the 2008 bailouts of Chrysler and General Motors.

The Detroit automakers are flourishing anew and the president said their revival could be mirrored in other cities. “It can happen in Cleveland and Pittsburgh and Raleigh,” he said, referring to cities in Rust Belt states that used to employ tens of thousands in factories but have seen many jobs outsourced to Asia and Mexico over the course of the last two decades.

“We can’t bring every job back that’s left our shore,” he admitted but with labor costs rising in China, the United States “have a huge opportunity, at this moment, to bring manufacturing back. But we have to seize it,” the president said.

We should start with our tax code. Right now, companies get tax breaks for moving jobs and profits overseas. Meanwhile, companies that choose to stay in America get hit with one of the highest tax rates in the world. It makes no sense, and everyone knows it. So let’s change it.

The president didn’t advocate a lower corporate tax rate which, at 35 percent, is among the highest in the developed world, second only to Japan’s. Rather, he would raise taxes on businesses that want to outsource jobs. “That money should be used to cover moving expenses for companies [...] that decide to bring jobs home.”

Multinational companies that are able to avoid paying a high tax rate by “moving jobs and profits overseas” should pay a basic minimum tax, said the president. Manufacturing companies should get a tax cut instead.

It is time to stop rewarding businesses that ship jobs overseas and start rewarding companies that create jobs right here in America.

If that isn’t the government picking winners and losers and deciding what the “playing field” should look like, what is?

The president doesn’t merely want to reward companies that follow his orders; he wants to help them with small business loans, programs that retrain workers and trade sanctions “when our competitors don’t play by the rules.” That’s China which (also) subsidizes its domestic industries and manipulates the value of its currency to keep exports cheap.

To crack down on “unfair” Chinese trade practices, the president announced the creation of a Trade Enforcement Unit to carry out “more inspections to prevent counterfeit or unsafe goods from crossing our borders.”

When it’s American companies that have an unfair advantage in the form of bailouts or subsidies or tax breaks, or when it’s American companies that “steal” other countries’ jobs by moving production back home, the president welcomed it though, promising to “go anywhere in the world to open new markets for American products.” He even took credit for trade agreements that were negotiated by his predecessor and took him more than two years to enact.

Tuesday’s State of the Union wasn’t a message of free trade. It wasn’t a message of America adjusting to the challenges of globalization nor of a country preparing to lead the world economy in the twenty-first century. It was a message of economic nationalism where the success of one nation necessarily comes at the expense of another and where government intervenes with trade barriers and bureaucratic obstructionism to protect domestic manufacturers from competition overseas. That’s not how America wins the future.

President Nicolas Sarkozy of France, Christine Lagarde, managing director of the International Monetary Fund and Chancellor Angela Merkel of Germany talk in Brussels, July 2011 (Reuters)

International pressure on Germany to surrender its commitment to austerity is mounting. The International Monetary Fund warned this week that if there isn’t a more interventionist economic policy in Europe, its debt crisis could undermine growth globally.

According to the Fund’s managing director, Christine Lagarde, “Resorting to across the board, across the continent, without differentiation, budgetary cuts will only add to recessionary pressures.”

The leaders of France and Italy agree that Europe needs less budget cuts and a bigger bailout fund—i.e., more German money—as well as joint bond issuance to stave off the specter of the currency union’s collapse.

“With the right set of measures, the worst can definitively be avoided and the recovery can be put back on track,” the IMF’s chief economist said on Tuesday. “These measures can be taken, need to be taken, and need to be taken urgently.”

What are those measures? “Sustaining adjustment, containing deleveraging and providing more liquidity and monetary accommodation,” according to the organization’s latest World Economic Outlook report. In layman’s terms, that’s fiscal stimulus, bank bailouts and printing money.

None of those is particularly popular in Germany nor in the other northern European Union member states, including Finland and the Netherlands, which, probably not coincidentally, are also the only eurozone countries whose creditworthiness is still rated AAA by all three major American rating agencies.

In these countries, there is mounting public opposition to “transfer union,” the notion that the peripheral euro countries should be bailed out, permanently, by the stronger core.

Where Europe’s weaker economies would rather avoid painful economic reforms and inflate their way out of debt, in the north, there is a belief that only improved competitiveness and balanced budgets will allow the continent to grow out of the crisis.

Such high levels of debt as were amassed in the years preceding the downturn may require a contraction and bank deleveraging to restore business confidence. If austerity is to succeed, banks which loaned endlessly to bankrupt countries like Greece and Italy will have to write off part of their outstanding loans and especially public sector workers in Europe’s periphery would need to accept further pay and pension cuts.

Neither is willing to take their losses. The notion that they won’t have to is perpetuated by political leaders and the IMF when they insist that a recession isn’t necessary to level the investment distortions that were caused by artificially low interest rates and the assumption that if a eurozone country were ever to teeter on the brink of default, Germany would bail it out.

Throughout the crisis, Germany has been extremely reluctant to save the highly indebted nations in the south from default. Perhaps the only reason it has is because German banks, too, are exposed to Greek debt. The coming weeks could prove a test for German resolve if Greece once again faces bankruptcy while markedly little progress toward fiscal consolidations has been made. The question is how much longer Germany is willing to pay before it can’t anymore?

A cow under Dutch skies, June 17, 2007 (Willem Heerbaart)

Russia on Tuesday threatened a ban of Western European beef and livestock imports after a virus that was previously known to affect goats and sheep was also discovered in cattle this week.

The Schmallenberg virus, named after the German town where it was first diagnosed last year, has been found in newborn Belgian, Dutch and German calves, lambs and kids. The disease is transmitted by means of insect vectors and has been detected in fourteen Belgian, fifty-two Dutch and twenty German farms.

Mexico and Russia banned imports of sheep and goat meat as well as live animals from the three countries last week. Russia says it could ban cattle imports too if it isn’t satisfied that the virus will be contained. It is also considering a pan-European import ban which the European Commission insists is unnecessary because livestock in other countries isn’t known to have been infected.

It is the second time in less than a year that a trade ban pits the Russians against the EU. Last summer, Moscow prohibited European vegetable imports after a deadly outbreak of E. coli in France and Germany. The Dutch at the time managed to negotiate an exemption for their agricultural sales.

Russian beef imports from the European Union more than doubled last year as the euro weakened against the ruble while currencies in South America, where Argentina and Brazil are major exporters, strengthened. Russia is the largest meat importer in the world.

Prime Minister David Cameron speaks at a Conservative Party conference in Cardiff, March 6, 2011

British prime minister David Cameron set out a vision of a “socially responsible and genuinely popular capitalism” on Thursday. In a London speech, he argued that Britain wouldn’t build a better economy by turning its back on the free market. “We’ll do it by making sure that the market is fair as well as free,” he said.

Cameron’s address came mere days after opposition leader Ed Miliband advocated more aggressive consumer protection in an interview with The Daily Telegraph. He said, “People’s living standards are squeezed as never before” as a result of the government’s austerity policies.

Miliband’s Labour Party has somewhat distanced itself from the Third Way centrism of former prime minister Tony Blair but argues that it still champions the interests of the middle class.

In a policy speech last year, Miliband lambasted “predatory” business practices and “wealth strippers” which he claimed were ripping ordinary people off. They were “squeezed by runaway rewards at the top,” he lamented, while British society was “too often rewarding not the right people with the right values but the wrong people with the wrong values.”

The statements were generally interpreted as a return to past Labour strategy when it was in opposition to the “nasty” Tory party of Margaret Thatcher and her adherents who believed in smaller government and free enterprise.

Cameron on Thursday argued that the government was implementing “less but better regulation” and said “of course there is a role for government, for regulation and intervention” but “the real solution” to Britain’s economic woes “is more enterprise, competition and innovation.”

We are the party that understands how to make capitalism work; the party that has constantly defended our open economy against the economics of socialism.

David Cameron’s case for capitalism is less convincing than Thatcher’s and is informed more by pragmatism than ideology. He argues that the government has to cut because it faces a debt crisis. Labour points out that the spending policies haven’t contributed to higher growth.

Indeed they haven’t. The British chancellor announced last November that growth in 2012 will be weaker than the government previously anticipated. Whereas 2.5 percent expansion was projected in March 2011, the figure will probably come in under 1 percent this year.

Borrowing, therefore, will be higher—more than £120 billion this fiscal year and next which is nearly 5 percent of gross domestic product. Public spending, despite the “heartless” cuts Labour so condemns, has only increased under the coalition government.

Britain’s debt is roughly 62 percent of GDP or nearly £1 trillion but that doesn’t include the state’s huge pension liabilities. When factored in, according to the Treasury, the actual debt equals 173 percent of GDP

Last year, accountants at PricewaterhouseCoopers estimated that “Britain would have to make across the board budget cuts of 5 percent a year to come close to cutting the deficit in half by 2014.” They even assumed a slight economic upturn that’s unlikely to materialize due to Britain’s high energy costs and the spiraling debt crisis in Europe.

Cameron, for all his praise of the free market, isn’t making tremendous progressing in getting the government out of the way of job creators. The state still consumes more than half of economic output in Britain while the “cuts” (which aren’t real cuts but decreases in spending projections) barely meet the requirements set by private sector accountants to achieve a balanced budget.

Port facilities near Rio de Janeiro, Brazil, March 2, 2008 (Jim Skea)

Growing demand for oil and other natural resources in Asia is fueling an export boom in Latin America where even Venezuela, otherwise hostile to freer trade, is witnessing economic expansion thanks to globalization.

The region’s foremost oil exporter has averaged 4.6 percent economic growth since 2005 compared to 4 percent in Chile, the world’s leader in copper and economically the freest nation in South America.

Even in Argentina, where business confidence is fading and enterprise increasingly squeezed between regulations and populist spending measures, growth averaged 7 percent during the same period as record soy and other farm exports helped offset Buenos Aires’ inflationary monetary policy and persecution of international energy companies and investors.

Commodity demand will likely slacken in 2012 as a result of economic woes elsewhere, meaning countries as Chile, Colombia, Peru and Uruguay, which are generally open to foreign business and investment, will do better than Venezuela and even Brazil which is struggling to escape the legacy of decades of corruption and nepotism.

The overall pace of Brazil’s regulatory reform has slowed but President Dilma Rousseff is leading an effort to root out corruption at great political peril to her ruling Workers’ Party. In her battle for transparency, political allies have abandoned Rousseff’s administration and her aloof leadership style threatens to alienate local machines and left wing voters.

2012 may be Rousseff’s test year. If she manages to ramrod her transparency agenda through Congress and continues the free trade policies of her predecessor, Brazil could eventually outperform the region in economic growth.

In the long term, the largest and most powerful country in South America is well positioned for a future of enduring prosperity. Commodity exports, despite their expected downturn this year, are critical to Brazil’s success.

Asian demand for corn is expected to increase by roughly 25 percent this decade which will be a huge boon to exporters in the Americas, including Argentina, Brazil and the United States which between them constitute almost a third of global corn production.

International beef, pork and soybean trade will probably expand by similar factors, again benefiting Latin American producers. Brazil currently provides 40 percent of global beef and 15 percent of pork exports and it dominates the sugar market, accounting for 60 percent of the market. With the elimination of sugar tariffs in the United States earlier this year, which were designed to protect the ethanol industry there, Brazil will be able to export north as well.

The country’s ability to turn this export advantage into a broader economic success that sees industries and services flourish hinges on Rousseff’s willingness to reform.

Brazil has seen some progress but starting or closing a business remains costly and time consuming while organizing new investment is inhibited by regulations that make it especially difficult for foreign companies to compete. Tariffs and antidumping measures are barriers to trade and excessive labor laws stifle employment and expansion. There’s a risk of “Dutch disease” if growth is taken for granted and politicians refuse to challenge vested interests to improve market conditions. The president appears committed to the task but is her party?