Paraguay

The next leftist on the block

Measuring up Fernando Lugo’s plans for a misgoverned country

WHEN Alfredo Stroessner, South America’s last dictator, was pushed out of office by a coup in 1989 it seemed that Paraguay had achieved a velvet revolution. It turned out to be made of velour. State terror and torture ended, and five tonnes of secret-police files documenting their practice appeared. But the Colorado Party, the creole fascist outfit that was the instrument of Stroessner’s rule, remained in power. That will finally change on August 15th when Fernando Lugo, the victor of last April’s presidential election, takes office. Almost two decades after Stroessner’s fall, Paraguay’s transition to democracy may at least mean something.

But it will not be easy for Mr Lugo. He is a former missionary who embraced a school of theology that blended Marx with St Peter. He spent more than ten years as bishop of San Pedro, one of the poorest regions of Paraguay, peopled by Guaraní Indian peasant farmers and landless labourers. He backed invasions of large rural estates by radical movements, becoming known as the “bishop of the poor”.

He ran for president at the head of a coalition including the centrist Liberal Party and a dozen small far-left groups. Though he won handily, he got only 42% of the vote and he may not command a legislative majority. As a priest he was a radical, but as president he may have to be pragmatic. His choice of ministers was a balancing act, mixing centrists, leftists and reformers such as the finance minister, Dionisio Borda. He has said that he will not renew Paraguay’s expiring agreement with the IMF; he also wants to attract private capital to state companies.

Mr Lugo has promised to improve health and education. The trickiest issue he faces is land, which remains the main source of wealth. Stroessner handed out vast tracts of state land to his cronies. Even by Latin American standards land ownership remains highly unequal. According to one guess, 1% of the population owns 77% of the farmland.

To complicate matters further, in recent decades Brazilians have bought up many smallholdings and turned them into vast soya farms, which have become the mainstay of the economy and of government revenues. Land invasions have sometimes been met with violence: in the past three years, a dozen peasant leaders have been murdered by gunmen hired by landowners. Mr Lugo says he will carry out an agrarian census to find out who owns what. He has also called for patience, noting that the constitution guarantees private property but also the right of all Paraguayans to a piece of land.

Just where Mr Lugo will fit in the spectrum of Latin America’s leftist presidents is not yet clear. His foreign minister, Alejandro Hamed, has expressed sympathy for Venezuela’s Hugo Chávez. Mr Lugo himself has expressed admiration for Chile’s Michelle Bachelet, a more moderate socialist. Under Mr Lugo, Paraguay may open diplomatic relations with China, ending its current link with Taiwan.

But it is Mr Lugo’s relationship with Brazil that is likely to have the most impact on his presidency. The two countries share the Itaipu hydroelectric dam (still the world’s largest until China’s Three Gorges is completed). Paraguay uses less than a tenth of Itaipu’s electricity; under a treaty, it sells the rest of its half share of the power to its neighbour at a price which is well below spot prices in Brazil. Mr Lugo said that he wants to renegotiate the treaty, but he has recently sounded more conciliatory.

He will also have to deal with the still-powerful Colorados. Membership of the party has long been a condition for obtaining a job in the public sector. Many government workers have professed their loyalty to the new president, presumably in the hope of keeping their jobs. But the party’s leaders may make common cause with some of their past foes in smaller parties to try to thwart Mr Lugo.

Whatever the problems ahead, a successful handover of power will in itself be a novel achievement for Paraguay. So would sound and honest public administration. And there are some refreshing aspects to this priest-turned-politician. Unlike some of his peers elsewhere, he does not seem to see a new constitution as the road to earthly paradise, nor has he said he wants a second term before starting his first. He says that after five years in office he wants to return to working as a parish priest. Whether the Vatican, which only grudgingly accepted his resignation as a bishop, let alone the Paraguayan people, will allow him to is another matter.

Can America's Auto Makers Survive?

By PAUL INGRASSIA

The late Sen. Daniel Patrick Moynihan used the term "defining deviancy down" to describe the acceptance of behavior that was once deemed intolerable. Now Detroit's car companies are defining disaster down.

In 1991, General Motors posted a then-amazing, full-year loss of $4.45 billion, and 10 months later CEO Robert Stempel was out. Last week, GM reported a $15.5 billion loss for just one quarter, and GM's board this week reaffirmed its support for CEO Rick Wagoner. GM's loss easily eclipsed the quarterly loss of $8.7 billion announced by Ford just a week earlier. As for Chrysler, pick a number. The company is owned by private-equity firm Cerberus Capital Management, and thus its results aren't public.

Whether all, or even any, of the three companies can survive has become a legitimate question. In truth, no one knows for sure. But other questions can be addressed with more certainty:

- Should Detroit have seen this disaster coming? Yes. Gasoline prices have been climbing steadily for more than three years now. The Bush-Bernanke debasement of the dollar didn't do Detroit any favors, because the dollar's collapse has contributed mightily to the soaring price of crude oil.

But the Detroit Three stuck with a business model based on leasing SUVs for way too long. The two things wrong with that model were, well, leasing and SUVs.

The residual values on which SUV lease payments are based turned out to be enormously inflated. With gas around $4 a gallon, the auto makers can't resell leased SUVs, after they are returned by customers, for anywhere near the price that the companies had assumed. Big write-downs to reflect this "impairment" contributed to the recent multibillion-dollar quarterly losses at Ford and GM, prompting the Detroit Three to curtail or cease their leasing programs. Japanese and European car companies are suffering leasing losses too, but they are much less dependent on SUV leases than Detroit.

All this said, let's acknowledge that it's human nature to resist changing behavior that has been successful, as SUVs were for two decades. If Detroit is Exhibit A, then Exhibit B surely must be the newspaper and magazine industry. It has been equally clear for most of this decade that the business models of print publications, which are based on selling advertising, were becoming as obsolete as big SUVs, because advertising is shifting to the Internet.

Not many journalists saw this sea change coming, much less acted on it, in their own business. The stock of McClatchy, one of the nation's largest newspaper chains, has plunged from nearly $75 a share to around $4 a share in the last three years, a 94% collapse that exceeds even the 89% nosedive in GM's stock since the beginning of this decade. The prices of other newspaper stocks have performed much the same.

- Which one of the Detroit Three has the best chance of survival? My assessment is Ford. Certainly the company's serial abuse of its Lincoln brand contrasts sharply, and most unfavorably, with GM's progress in reviving Cadillac. And Ford, like GM, must revamp its product lineup quickly to emphasize smaller cars instead of trucks and SUVs. But Ford's plan to transfer to the U.S. the fuel-efficient cars it has developed overseas makes sense.

Meanwhile, GM has enormous structural challenges that Ford doesn't face. The tab to assist the bankruptcy restructuring of Delphi, GM's automotive components spinoff, continues to rise. GM added another $2.8 billion in Delphi-related charges in the second quarter, on top of $7.5 billion in Delphi charges taken already.

Meanwhile, GM'S financial services company, GMAC, continues to rack up huge losses -- $1.86 billion in the latest quarter -- from its foray into residential mortgages a few years back. The only silver lining here for GM is that GMAC is now 51% owned by the unfortunate Cerberus, so only about half of the losses hit GM's books.

Ford has moved more quickly to shed its money-losing minor brands, Jaguar and Land Rover. But GM only recently -- and belatedly -- announced plans to explore selling Hummer. And it has a confusing plethora of eight domestic brands, a relic from its glory days. While the company has some very good cars, trying to market everything means effectively marketing nothing.

Meanwhile, GM is burning through $1 billion of cash each month, prompting the company's current scramble to raise $15 billion by cutting more costs, selling assets or attracting new investment. This capital has to be raised within months.

As for much-weakened Chrysler, the only questions are who will buy it, when and how.

- Should the federal government bail out Detroit? No. The recent commitments of taxpayer dollars to lubricate the sale of Bear Stearns and keep Freddie Mac and Fannie Mae afloat are bad enough -- especially because Freddie and Fannie are being allowed to keep their bumbling boards and management teams intact. But at least it could be argued that a collapse of those companies would pose a broad risk to the entire U.S. financial system. The risk that Americans would be consigned to driving Hondas or Hyundais seems less threatening.

One suspects, though, that if Barack Obama wins the White House, a Detroit bailout plan will get serious consideration. If so, the Chrysler bailout plan of a quarter-century ago provides a useful model. In return for guaranteeing loans to Chrysler by banks and private lenders, the government -- i.e., taxpayers -- got low-priced warrants to buy Chrysler stock.

As events unfolded, Chrysler recovered, no loan-guarantee payments were made, and the government made some $400 million on the warrants. In other words, we taxpayers were rewarded for taking a risk.

Detroit's fight for survival doesn't threaten economic doomsday for America, but it's incredibly sad nonetheless. The three companies, and General Motors especially, once symbolized the bedrock strength of American capitalism. If they can restructure and recover, as must be fervently hoped, they will symbolize the potential for renewal.

Meanwhile, Motor City residents must be regretting the message on a T-shirt popular in their town for years -- "Detroit. Where the Weak are Killed and Eaten." Let's hope it wasn't a prophecy about General Motors, Ford and Chrysler.

Mr. Ingrassia, a former Dow Jones executive and Detroit bureau chief for this newspaper, is writing a book on America's car culture.

The Beijing Games

FROM TODAY'S WALL STREET JOURNAL ASIA
August 8, 2008

As the Beijing Olympics begin, people of goodwill wish for an auspicious opening ceremony and successful Games. Hosting the Olympics is an honor for any country, but for China it is also an opportunity to showcase the economic progress that was unimaginable only 30 years ago.

The ruling Communist Party, which was responsible for so much of the country's suffering in the last century, can take credit for continuing the market reforms begun under Deng Xiaoping. Yet it is the ordinary people of China who ran with that economic freedom, and whose hard work and entrepreneurship are responsible for much of what the world will admire over the coming days.

OLYMPICS OPINION

Leslie Hook blogs from Beijing, with commentary from Journal editorialists and the editors of the Far Eastern Economic Review.

The Chinese people are understandably taking a measure of national pride in hosting the Games, happy that the Middle Kingdom is once again at the center of global affairs after so many lost decades. Olympic sporting patriotism is a useful outlet for Chinese nationalism -- certainly preferable to the crude jingoism too often promoted by the government against Japanese "aggression" or Taiwanese "secessionists."

On the other hand, there is no sign that the Olympic spirit has infused China's leadership with a desire for political reform, let alone democracy, as some outsiders claimed it might when Beijing was awarded the Games in 2001. As the Tibet crackdown in March demonstrated, President Hu Jintao and Premier Wen Jiabao's first instincts are still to squash dissent.

Communist authorities have also reneged on their promise of media freedom during the Games, jailed human-rights activists, ejected migrants from the capital and made travel visas so difficult to obtain that even businesspeople had trouble getting into the country. The Web site of our sister publication, the Far Eastern Economic Review, remains inaccessible in Beijing. Even officials in Hong Kong, where freedoms are ostensibly protected, are censoring speech in Olympic venues. China has also channeled the old regimes of Eastern Europe in the way that it has groomed athletes -- many in special camp regimes almost from birth -- to raise its medal count.

It is this Chinese dichotomy -- a reforming but still authoritarian China -- that has created difficulties for foreign leaders as they've approached the Games. How to respect China as host of an international event while not allowing China's regime to exploit the Games as a propaganda coup? European leaders have mostly chosen to attend the athletic events while boycotting the opening ceremonies as a symbolic (and largely meaningless) gesture of disapproval.

President Bush strikes us as having the better idea in attending those ceremonies and the Games, while also speaking candidly about our differences. Mr. Bush will attend church services in China, drawing attention to the lack of religious freedom that remains in that country. And last week Mr. Bush met with five prominent Chinese dissidents in the White House residence, and with Bob Fu, an activist for China's underground Christian movement.

The U.S. media barely noticed, but China certainly did. A Foreign Ministry spokesman accused the U.S. of "rudely" interfering in "China's internal affairs" and sending a "seriously wrong message to hostile anti-China forces." President Hu later remarked to a foreign press gaggle -- his first such appearance -- that "I don't think that politicizing the Olympic Games will do anything good."

The Beijing Olympics were always going to be as much about the behavior of China's regime as they were about the athletics. China itself reinforced this political overlay in 2001, when it agreed to a variety of conditions for hosting the Games, including "complete freedom" for foreign media and progress on human rights.

While they cheer on their athletes over the coming days, most Chinese citizens will understandably not be focused on such things. But as they mingle with and hear from foreigners, many inevitably will feel themselves to be part of a bigger world. As their horizons widen, this month and beyond, more are sure to discover for themselves what the Party doesn't want them to know: that true global respect will come only when China shows itself to be a more responsible citizen abroad, and its government respects human freedoms at home.

Japan, Unstimulated

FROM TODAY'S WALL STREET JOURNAL ASIA
August 8, 2008

The government of Japanese Prime Minister Yasuo Fukuda is in a funk, and so is the Japanese economy. So this week, Mr. Fukuda announced that his government will soon release a new "stimulus" package. So far, however, there's no indication that it will include the kinds of structural reforms that would actually stimulate something.

The government is talking about a package of targeted subsidies and tax credits to ease the blow of high energy and food prices. This is intended to give the impression that Tokyo is "doing something" while not upsetting the fiscal balance too much as the cabinet tries to eliminate the deficit by 2011-12. The detailed plan should be released soon.

Mr. Fukuda is, at least, right about the immediate problems: Energy and food prices have risen as much in Japan as elsewhere, straining household budgets. But sustained economic growth is the best long-term defense against these ills, and shuffling money from public to private coffers won't stimulate productivity because it won't fundamentally change investment incentives. Japan needs a round of truly stimulative tax cuts, even if that means postponing the balanced-budget goal until the resulting stronger economy starts filling government coffers again. Its 40% corporate rate, the highest in the OECD, is simply uncompetitive compared to regional players like Hong Kong (16.5%) and Singapore (18%).

Japan could also do with other structural reforms, such as ending market-distorting agricultural subsidies; cutting red tape on the consumer finance companies that extend credit to small businesses; and changing a Draconian building code that strangles the construction industry. That's just a partial list.

Given these challenges, Japan desperately needs a strong reformer at the helm. The second-quarter GDP growth number to be released next week is expected to be negative. Consumer sentiment is flagging just as growth in exports to a troubled U.S. economy is also slowing. Yet Mr. Fukuda seems unwilling to chart a bold course. Last week, he accepted a deeply divided policy team as the price for shoring up support from various factions within his ruling Liberal Democratic Party. The economy minister, Kaoru Yosano -- who's drafting the stimulus plan -- wants to raise the consumption tax. Others favor cutting government waste to balance the budget. That appears to leave Mr. Fukuda waffling in the middle.

This could get worse before it gets better. With an election due within the year, both Mr. Fukuda's party and the opposition Democratic Party of Japan will increasingly be turning their eyes to the polling. Both sides will be tempted to avoid boat-rocking policy changes.

But recent history suggests that if either Mr. Fukuda or the opposition wants to seize the electoral initiative, a coherent and sweeping reform plan would be a good place to start. Voters certainly responded positively to former Prime Minister Junichiro Koizumi, who rose to power preaching radical reform when the Japanese economy was a mess. If Mr. Fukuda wants to retain his office, he'll ditch the nibble-around-the-edges, and predictably unproductive, "stimulus" approach, and think bigger.