After riding the global credit boom for the past decade, fate finally caught up with Jamaica. A prolonged process of deindustrialization and the shift to a services-based economic model led to a persistent series of current account and fiscal deficits that were financed by the debt markets. In two years, the country’s external debt to GDP ratio jumped to 105%, from 76% in 2008. At the same time, Jamaica’s central government debt, which includes all domestic obligations, reached 120% of GDP this year. Debt service was consuming 55% of the country’s fiscal revenues. The current account deficit is more than 10% of GDP, despite a sharp slowdown in economic activity. The Jamaican economy contracted 3.5% y/y in 2009. It was clear that the country’s economy was wrong footed and its debt load was unsustainable. This was the reason why Jamaican bond prices plunged during the end of last year. Still, there is a great deal of international support for the country. Jamaica is the third largest economy in the Caribbean, and closely aligned with the U.S. and Europe. Although the country was under a great deal of stress, the multilateral community was not going to allow it to collapse in disarray. Therefore, something was going to be done to get the country through a tough patch.

Overview

Between May 16th and July 4th, there will be elections to renew 12 governorships, 15 state legislatures via 309 seats, and 1,533 mayorships. The elections will be a testing ground for the country’s largest political forces as they try to reposition themselves ahead of the 2012 Presidential elections. For the PRI the upcoming elections are strategically important as these will define the party’s prospects to recapture the Presidency. For the PAN and the PRD the upcoming elections are vital as a matter of survival. Ahead of the elections, the most glaring issue is the intention of the PAN and the PRD to form alliances to face the PRI and curtail this party’s prospects in the ballot of several states.

The upcoming elections are highly relevant in a number of ways:

The elections will bring to the polls 40% of the country’s voters—that is 31.2 million out of 77.7 million who are registered to vote. Naturally, parties will concentrate their efforts on those states with the highest number of voters and economic development.

Nine of the 12 states that are participating in gubernatorial elections are currently governed by the PRI: Chihuahua, Durango, Hidalgo, Oaxaca, Puebla, Quintana Roo, Sinaloa, Tamaulipas, and Veracruz. But there are two governed by the PAN (Aguascalientes and Tlaxcala) and only one by the PRD (Zacatecas).

In a scenario where the PRI maintains the states that it currently governs and increases its number of seats in state legislatures as well as in some key municipalities, this would suffice to consolidate its political strength nationwide and greatly improve its prospects of winning the 2012 Presidential race.

The Big Picture

The PRI is currently the dominant political force at the state and local levels with leadership in 19 out of 32 states. In contrast, the PAN only holds seven gubernatorial chairs, while the PRD governs six states including the Federal District. The current distribution gives the PRI an important advantage over its adversaries.

Considering the results of past elections for governorships and state legislatures, the PRI seems poised to obtain great victories in the following states: Tamaulipas, Puebla, Durango, Chihuahua, Quintana Roo, and Hidalgo. The PAN is favored in Aguascalientes. Electoral preferences in other states are not so clearly defined at this point.

In 2009, parties had electoral races for six governorships of which the PRI won five by retaining Nuevo Leon, Colima, and Campeche, and by taking San Luis Potosi and Queretaro from the PAN. The PAN only won the governorship of Sonora which it took away from the PRI.

Short-term ramifications

Aside from the mid- to long-term implications of the upcoming elections, results will have significant ramifications in the short-term. As we advanced in our report “Five Key Political Risks,” a landslide victory of the PRI over the PAN would strip President Calderon of important political capital thereby impairing his ability to negotiate balanced deals with the PRI and operate effectively at the local level.

Unholy Alliance

The PAN and the PRD are currently discussing the possibility of running together to compete against the PRI in several states. As of now, alliances for a common gubernatorial candidate have only been approved in Durango, but it is very likely that similar alliances could be announced in the next few weeks for Puebla, Oaxaca, and Hidalgo.

Without entering into much detail regarding these alliances, as each one would require a separate analysis, this unexpected decision should be merely regarded as a political calculus to counter what otherwise would be a near certain defeat for both of these parties.

This decision by the national leadership of the PAN and the PRD has been subject of widespread criticism, and it has already created internal conflicts that relate to ideological considerations. Outside the parties, the bulk of criticism both from the media and academia revolves around the difficulty to unite the interests of a right wing, conservative party with those of a leftist, liberal party which is antagonistic in many cases. Nevertheless, these alliances have also caused a great deal of anxiety among some of the PRI leaders, who in response have threatened to block initiatives in Congress.

Upcoming Battles

The successful completion of electoral alliances between the PAN and the PRD almost certainly will increase competition in several states, but also rivalry between the governing party and the PRI at the national level. Given the PAN’s poor prospects and lack of options, it is likely that the party will once again confront the PRI over the latter’s corrupt past in hopes of differentiating itself. This strategy could potentially polarize the political environment and negatively affect deals in Congress between both parties at a crucial time to advance the reform agenda.

Cartels Meddling in Elections

Ahead of the elections, electoral officials have expressed fears that the country’s drug cartels will try to influence the elections via campaign resources, corruption, or even intimidation and extortion. Given the PRD’s recent experience in Michoacan, where one of its candidates who won a seat in federal Congress was accused of having ties with the cartel La Familia Michoacana, it is foreseeable that party committees as well as electoral authorities will place renewed emphasis on investigating prospective candidates.

Final Thoughts

A number of critics of the Mexican political system often refer to an incomplete democratic transition whereby the power of the Mexican Presidency has been reduced while governors have acquired near feudal powers along with great discretion in the use of resources. At the same time, given the strong correlation between states dominated by a particular party and electoral victories at the federal level, state elections have become all the more important.

Thus winning a state election not only implies budgetary resources and logistical advantages, but also improves the outlook for a party to do well in the upcoming Presidential and federal Congressional elections in 2012.

Most of us have seen the heart-wrenching images of indescribable suffering, some of which has sadly affected people I knew and that are now gone.  One can only pray that God receive them in His glory and give strength to their families and friends.  At the same time you marvel at the courage, resilience and solidarity shown by the Haitian people, and also by many foreigners affected by the disaster that were working in the country.  The support from a lot of people outside and inside Haiti to the victims of the tragedy has been very generous, and we all should be thankful for this display of human kindness.

Even precluding a setback in the United States, recovery of the world economy will be very unbalanced between the large emerging economies and the convalescent developed economies.

Although words fail us, the burden of relief, reconstruction, and development in Haiti is one that must be borne by all.  Effective plans need to be in place quickly, before the rains come bringing with them the threat of deeper catastrophe. 

As Chile’s President Michelle Bachelet prepares to hand over power to her newly elected successor, she remains extraordinarily popular.  It is worth reflecting on the fiscal aspects of her term in office, as Chile has important lessons for other countries struggling with fundamental long-term budget questions, which includes a lot of countries right now.

The term of Brazil's President, Luiz Inácio Lula da Silva, concludes this year. During President Lula's tenure, Brazil enjoyed stable monetary policy and strong economic growth. However, President Lula is likewise known for growing the size of Brazil's government, for example, by adding over 300k government jobs. This translates into a 4.8% increase in the government payroll when adjusted for working-age population growth.

This is a criticism of Lula's administration - growing the size of the government (here, as measured by its payroll), and stifling some prospects for long-run economic growth.

Accordingly, let's see how previous U.S. Presidents grew the U.S. government payroll: is there a party trend? The general idea is, that the Democratic Party seeks a larger role for government as a mechanism to increase economic welfare than does the Republican Party (generally). A priori, I expect to see more robust government payroll growth during Democratic administrations.

The chart illustrates the level change in the total government payroll by Presidency since 1953 (the data are not seasonally adjusted and reported here). There is no noticeable correlation between party and the government payroll, although LBJ and Clinton, Democrats, did grow government jobs by the widest margin, 2.6m and 2.3m, respectively.

State and local government jobs are included in the measure of "government", while a better link to party affiliation is the federal payroll. Furthermore, the population - and thus total payroll - grew as well. So, in focusing solely on the federal payroll in percentage gains (in order to remove effects of term length), and adjusting for population growth, there appears to be a stronger correlation between the current administration's party affiliation and government jobs growth.

The top 3 federal job-creators were LBJ, JFK, and Obama, Democrats, while 4 out of the top 5 top federal job-slashers were Nixon, Bush, Bush, and Ford, Republicans. Interestingly, Clinton ranks first in cutting the federal payroll; it fell by almost 10% when the population grew by roughly the same amount - in adjusted terms, that's -18% fewer federal jobs.

This analysis, of course, does not account for recessions, budgets, or external factors that would differentiate payroll growth across periods. However, there is a correlation, as in Brazil, between party affiliation and the growth of the federal payroll.

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This report explores a series of political risk scenarios based on various possibilities and the confluence of negative factors. The scenarios are outlined in the order of likelihood with the first one being more probable and the last one highly unlikely, although none of these risks should be dismissed.

Historians attribute Rome’s extensive network of roads to be one of the main factors behind its growth and stability. With 400,000 kilometers of roads, including more than 80,000 kilometers of paved highways, Rome was well connected with its most faraway provinces and vassals. The Incas also used a system of roads to integrate its vast Andean empire—with more than 25,000 kilometers of paved thoroughfares. Military leaders were always enamoured of them as conduits to move men and equipment. Indeed, President Dwight Eisenhower pushed for the creation of the U.S. Interstate Highway System after seeing how effectively the autobahns moved German soldiers and tanks. Indeed, the original name of the legislation package was the National Interstate and Defense Highways Act of 1956. In spite of its defense features, such as providing long straightaways to allow the Air Force to use them as backup airstrips, the highway system helped mobilize the country’s massive resources. The automobile industry in Detroit lobbied hard for the legislation, and it helped wean the public off mass transportation. Nevertheless, it provided North American companies with the economies of scale needed to take on the global marketplace.

From the economic point of view, 2010 should be a good year for Argentina’s economy. The agricultural sector will show a strong recovery, the industrial production is also growing, reflecting the performance of its neighbor, the Brazilian economy. Tax revenues will climb faster and debt services are lower than the last year. Nevertheless, we expect a year of continuous political conflicts that may generate uncertainty, some volatility in financial markets and may hurt the favorable economic environment. The conflict between the president of the Central Bank and the Federal Government is the first one but may not be the last one.