Peter L. Berger's Blog, page 556

Ukraine’s Cabinet Reshuffle

In a development that dismayed many reformists, last week’s local elections in Ukraine saw oligarch-backed candidates win the mayorships of most of Ukraine’s major cities, beating out the candidates allied with President Petro Poroshenko’s reformist bloc. The turnout was not as high as reformists would have liked, and anecdotal evidence seemed to suggest that voters were frustrated by a perceived lack of progress on various promised reform packages, and were worn down by the stalled conflict in the country’s east.

The country’s prime minister, Arseniy Yatsenyuk, is personally bearing a lot of the blame for unsatisfactory progress on the reforms. His approval rating is below 2 percent, and, as a result, his party chose not to even contest any of the seats in last week’s elections. Now, feeling the heat from within his own party and beset by allegations of corruption himself, he has chosen to reshuffle his cabinet, sacking the energy, healthcare, and education ministers, and appointing a new deputy prime minister for European integration.Politico ran a good interview with Yatsenyuk which is worth reading in full. A taste:

Like his predecessors, Yatsenyuk is now forced to enter his office through a hidden entrance to avoid a protest camp out front, his approval rating stuttering at a miserable two percent.

“When I was sworn in to the office of prime minister I knew this was a kamikaze mission, I had to clean the house,” he said.“I had to pass three austerity packages, to impose market pricing in the energy sector, to impose new taxes, to entirely modernize Ukrainian social security system. I was obliged to do the most unpopular things in the history of this country.”

Another interesting political dynamic, which faithful TAI readers will remember was emerging earlier this summer, relates to Poroshenko’s appointment of former Georgian president Mikheil Saakashvili as governor of Odessa—a move seen by many as giving the rockstar reformer a proving ground before he takes on Yatsenyuk himself for the prime ministership. Yatsenyuk sounds rattled:

The former Georgian president has accused Yatsenyuk of pandering to the interests of oligarchs, particularly those of energy and aviation tycoon Ihor Kolomoisky. The prime minister’s response was to lash out at Saakashvili.

“This is the showcase of Misha,” an exasperated Yatsenyuk said in the interview, using the diminutive form of the Georgian’s first name and referencing charges brought against the former president in his home country.“If Misha was so successful in Georgia, tell me why he can’t go back there. What’s up with the reforms of the judicial system in Georgia?”While many Ukrainians regard Ukraine’s billionaire businessmen as criminals, Yatsenyuk says his dealings with oligarchs are necessary to get key business leaders on board with Ukraine’s reforms.“I’ve met with all of the oligarchs — hundreds of thousands of people work at their companies — they have a number of assets in energy and industry. I have to explain to them — look guys, rules have changed, now you have to play by the rules.”

Getting the kind of thoroughgoing reform that Ukraine needs would be a challenge in any democratic polity. Though there is consensus on some best practices, the problem is so large and thorny that legitimate disagreement about methods is bound to arise, and, in a democracy, that often leads to some political instability. And given the other burdens facing Ukraine, political instability is not exactly a welcome development.

How Some Shale Producers Are Boosting Output

This shouldn’t keep happening. Shale companies shouldn’t be able to keep upping production at today’s prices, but that’s exactly what they’re doing. Reuters reports:

Shares of Oasis, Devon and Pioneer rose more than 2 percent after their respective forecasts were announced…[CEO Scott Sheffield] said Pioneer, which is adding rigs, expects to grow production 11 percent this year, up from a previous view of 10 percent. The company also confirmed it would grow 15 percent per year through 2018 thanks in part to cost cuts and tweaked technology. […]

At Oasis, executives now expect the company to produce 49,700 to 50,100 boepd, up from a previous estimate of 49,000 to 50,000 boepd…And at Devon, Chief Executive Dave Hager raised the company’s full-year production growth outlook for the second time this year.

When oil prices were hovering consistently above $100 per barrel as recently as the summer of 2014, the profit margins for hydraulically fracturing U.S. shale formations were wide and the concerns for the nascent industry largely logistical, rather than economic. As oil prices fell, many presumed America’s fracking output would as well, as companies were forced to cut back their relatively high-cost production as it no longer became profitable.

That hasn’t happened, or at least it hasn’t happened in the way most analysts projected it would. Shale’s bubble hasn’t burst—the boom hasn’t gone bust—but instead has slightly tapered off in the bearish market. Companies have experimented with a number of new techniques and technologies in order to squeeze more oil out for less money invested, and those innovative efforts are paying dividends as shale’s breakeven cost—the oil price producers need to turn a profit—continues to drop.Saudi-led OPEC hasn’t cut production to send prices back up in large part out of hope that U.S. shale output would naturally flag. Every month that fracking firms defy that expectation is another month of pain for the world’s petrostates, and another reason not to bet against American innovation.

In Yemen, the Worst May Be Yet to Come

Saudi Arabia may be headed into even more trouble in Yemen. Reuters reports:

Even in retaking areas where local people supported the coalition, inexperience has shown: security lapses allowed jihadist suicide bombers to hit three major coalition targets in Aden, and billeting troops too close together led to high casualties when a missile hit a base near Marib.

At that airbase, the floor of a large white tent, used as a field hospital after the missile strike killed more than 60 Gulf soldiers, was still littered with medical debris including latex gloves and blood-stained plasma bags weeks after the blast.[..]The coalition has not pushed far into highland areas where the Houthis enjoy greatest support, and where the terrain favors those holding it.Artillery fire could be heard in Marib from the hills to the west, areas vital to the recapture of the capital Sanaa. Yemen’s rugged highland terrain still provides cover for constant Houthi attacks on Saudi frontier positions and distant blasts were also audible to Reuters on separate trips to the border.

As we have noted since this summer, when and if the Saudis move into Houthi territory, the bloodbath will be enormous. Most of these casualties will be Yemeni civilians, but many may be Saudis, if they can’t close on the truce they keep promising is right around the corner—but never seems to come. And with a small population, high standard of living, and historically conservative foreign policy, the Saudi public may not be willing to take much. Even—or perhaps especially—in a totalitarian monarchy, that can spell trouble.

The Saudis have only undertaken this risky course because of the retreat of American leadership in the region—we need to keep a careful eye on Yemen, and Riyadh, to make sure the follow-on effects of our pull-back do not grow even worse.

How Much Does the China-Taiwan Summit Matter?

Ahead of elections that are predicted to oust the pro-Chinese Kuomintang government in Taiwan, the current Taiwanese President Ma Ying-jeou, who steps down next year due to term limits, announced that he will be meeting Chinese President Xi Jinping on Saturday, the first time leaders from the two countries will meet since the end of the Chinese civil war in 1949. Reuters has the details:

The meeting in Singapore coincides with rising anti-China sentiment in Taiwan ahead of the presidential and parliamentary polls in January which the pro-China Kuomintang (KMT) is likely to lose to the opposition Democratic Progressive Party (DPP), which traditionally favors independence from China.

Taiwan President Ma Ying-jeou, who steps down next year due to term limits, has made improving economic links with China a key policy since he took office in 2008. He has signed landmark business and tourism deals, though there has been no progress in resolving their political differences.

President Ma’s office insisted that the meeting not include any joint statements, and that no agreements be signed. Nevertheless, members from the opposition Democratic Progressive Party cried foul at the move, claiming its timing was suspect. “I believe people across the country, like me, felt very surprised…to let the people know in such a hasty and chaotic manner is damaging to Taiwan’s democracy”, DPP presidential candidate Tsai Ing-wen said.

We don’t know what China is thinking, but we wonder if it’s hoping to extend to Taiwan the friendlier attitude it has shown to Japan and South Korea. On Taiwan’s part, this looks like a clever political ploy by the ruling party to change the fundamental dynamic of Taiwan’s defining relationship at the last minute and upend the elections. We also wonder whether Taiwan’s decision to endorse, albeit in its capacity as the “true” government of China, the nine-dash line last May was part of the package.But no matter what’s going on, the meeting between Ma and and Xi matters far less than what happens after the upcoming elections take place. We’ll be watching.

A Turning Point for $15 Minimum?

The movement to raise the minimum wage to an unprecedented $15 per hour has racked up an impressive string of victories in liberal cities over the past few years—first in Seattle, then San Francisco, then Los Angeles, then New York. And in August, the Democratic Party made a national $15 minimum a part of its official platform.

Last night, however, voters in Portland, Maine—the largest city in the Pine Tree State and a liberal stronghold—handed the $15 minimum movement the most stinging rebuke it has suffered since it surfaced as a serious political issue last year. The Portland Press Herald reports:

Portland voters rejected a proposal Tuesday to dramatically increase the minimum wage in the city.

The referendum to raise the wage to $15 an hour, double the statewide minimum of $7.50, was defeated by nearly 58 percent to 42 percent. […]Opponents of the increase, primarily small businesses, organized quickly after the Portland Green Independent Committee submitted signatures in July to put the referendum before voters.A political action committee called “Too Far, Too Fast” was set up and raised more than $120,000 to oppose the referendum. Boosted by a $50,000 donation from the Portland Regional Chamber of Commerce, the group organized news conferences featuring business owners who said the higher wages would force them to cut staff sharply or close down altogether. […]“Too Far, Too Fast” ran television ads in October, and a week ago spent $15,000 to air radio ads during the last few days of the campaign. Many of the opponents of the $15 an hour wage said they supported the city’s new $10.10 minimum, suggesting that voters could oppose the $15-an-hour alternative while still feeling as though something was being done to boost low-income wages.

The results out of Portland suggest that the $15 minimum is still controversial and beatable, even in left-leaning cities. This is a cause for optimism, because as we’ve said before, the case against this kind of radical policy is overwhelming: A $15 minimum is likely to raise prices and destroy businesses, block low-skilled Americans from entering the workforce, facilitate union malfeasance, and devastate America’s fragile manufacturing industry.

The Portland vote could be an outlier in a long march toward ever-steeper minimum wages imposed from coast to coast. But it could also be a sign that maybe—just maybe—sanity may be setting in.

ASEAN Countries Rebuke China?

The signing ceremony for the “Kuala Lumpur Joint Declaration” was dropped from the ASEAN defense forum’s program after Chinese delegates began pressuring participants to remove any reference to tensions in the South China Sea from the joint statement, the New York Times reports:

The Chinese Ministry of Defense confirmed that the meeting of the Association of Southeast Asian Nations, or Asean, had failed to conclude a joint declaration, and it blamed “the individual country (countries) out of the region.” In a statement on its website, the ministry implied, but did not name, the United States as the main reason for the breakdown in the discussions.

The ministry did not mention the South China Sea or China’s insistence that the statement not include any mention of the strategic waterway.

Diplomats from countries in the region said that China had pushed for even a factual statement of the South China Sea to be absent from the joint declaration scheduled for the end of the gathering Wednesday afternoon.

The meeting was split between countries that agreed with China and those that strongly disagreed, including Australia, Japan and the United States, two senior diplomats involved in the talks said.

A U.S. representative saw the move as an explicit rebuke to China: “Understandably a number of ASEAN countries‎ felt that [pressure] was inappropriate. It reflects the divide China’s reclamation and militarization in the South China Sea has caused in the region”, he said. “This was an ASEAN decision but in our view no statement is better than one that avoids the important issue of China’s reclamation and militarization in the South China Sea.” Chinese officials, for their part, tried to shift the blame, saying that “certain countries” (read: Japan and the United States) had “tried to forcefully stuff in content to the joint declaration”, leading to the collapse in talks.

It is hard to know exactly what happened in Kuala Lumpur. But it is clear that this development frustrates China and pleases the United States. As such, it may be a sign that new U.S. policy in the region—for instance, last week’s freedom of navigation exercises—has started to bear fruit.

The Future Looks Bleak for Biofuels

The next generation of biofuels is floundering, and one of the biggest players in the industry says the promise of these new technologies won’t be realized if oil prices don’t start rebounding. The FT reports:

Advanced biofuel made from agricultural waste — the so called Holy Grail of the alternative energy industry — will not be competitive with conventional fuel until the oil is back to $70-$80 per barrel, DuPont has said. […]

The admission from the US chemicals group, which last week formally opened the world’s largest cellulosic ethanol plant, underscores the challenge facing makers of “second-generation” biofuels. After a decade pursuing an elusive production process, companies are finding their business models threatened by the changing economics of the industry — as well as the politics of the US.

When we speak of the dangers of biofuels and the boondoggle that is our misguided policy attempt to mandate their production, we’re specifically referring to ethanol distilled from corn. This is the most common variety of U.S. biofuel, and far and away the one with the highest quotas—last year corn ethanol made up nearly 80 percent of the biofuels mandated by the Renewable Fuel Standard (RFS).

But advanced biofuels actually do have promise. Unlike their corn cousin, they can be grown in marginal land, so their production doesn’t displace food crops (and therefore send global food prices up, starving the world’s poor). They’re also actually good for the environment and global greenhouse gas emissions, a test corn ethanol fails to pass.The biofuel industry will hope that government support will make up for the fact that its product can’t compete in today’s fuel market. But rather than funneling government dollars into propping even worthwhile biofuels up, we’d be better served funding the research and development of technologies that would enable ethanol producers to compete on their own merit. Instead, what we have is a woefully inefficient, expensive, and environmentally unfriendly biofuel boondoggle. The sooner we address our RFS problem, the better.

The European Digital Gap, Quantified

Is Europe ready for the 21st-century digital economy? The gap between European and American tech development has been clear for a while now, as we can see in issues from Brussel’s war on Google to the corporatism that stifles innovation across the EU. Now, a new article in Harvard Business Review quantifies some of Europe’s problems:

Europe, according to a June 2015 report by McKinsey Global Institute, spends 2% of its GDP on R&D, about the same as China’s 1.98%, but well behind United States’ 2.8%. More significantly, Europe’s private sector R&D spending at 1.3% of GDP, compares poorly with that of the U.S. (1.8%), Japan (2.6%), and South Korea (2.7%). Europe’s gap is concentrated heavily in electronics, software, and internet services. In their tracking of “unicorns,” or venture-backed companies valued at $1 billion or more, the Wall Street Journal and Dow Jones VetureSource find that as of July 2015, a mere 8% are Europe-based, compared to 25% from Asia, and 67% from the United States.

A major reason for this deficit is insufficient investment. Traditionally, Europe’s growth has been financed to a significant extent by the banking sector, and there has historically been a continent-wide leeriness towards the provision of risk capital by other financial types. Venture funding for European digital groups in 2014 remained a fifth ($7.75 billion) of that of the United States ($ 37.9 billion). Another area where the absence of a vibrant VC and corporate investment culture hurts promising startups in Europe is that, because realizing gains from an IPO on European exchanges is still difficult, a primary exit for entrepreneurs is to sell to U.S.-based corporations – prominent examples being Skype, founded in Estonia, acquired by eBay in 2005 for $2.6 billion, and Swedish Mojang AB, the maker of the “Minecraft” video game, acquired by Microsoft for $ 2.5 billion in 2014.

The “unicorns” problem should be familiar to readers of TAI; we covered it in June. But this HBR article is a must-read for anyone who wants to understand that and other European tech issues in greater depth—a story that’s much more important than media coverage would suggest.

As the article’s authors, Tufts Professors Bhaskar Chakravorti and Ravi Shankar Charturvedi, point out, Europe’s digital struggles are a result of both legal and cultural issues. Culturally, the authors’ data shows that young Europeans are much more afraid to fail than their global counterparts. Not surprisingly, this makes entrepreneurship difficult. And, legally, Europe is still a hodgepodge of regulations on matters digital. Despite the EU’s raison d’etre as a customs union, its digital marketplace still has not been harmonized. Even matters secondarily related to tech—such as shipping from one country to another, which is vital to online retail—are more complicated and more expensive than they should be.And in a combination of both cultural and legal issues, Europeans have reacted to American tech success not by seeking to emulate the structures that built it, but by using regulatory might to tear down new companies. As Chakravorti and Charturvedi point out, this isn’t just a project of well-connected, old-guard industrial elites but rather reflects popular sentiment: In France, American tech companies are known derisively as Les Gafa (Google, Apple, Facebook, Amazon). Moreover, Europe’s beggar-thy-neighbor regulatory policies are turned not just against American competition, but also against any European Googles, Apples, Facebooks, or Amazons that might emerge. Google can take a few hits from Brussels, but a struggling European start-up usually can’t.All of this adds up to a worrisome tech gap, and one that increasingly exists not just between Europe and the U.S., but between Europe and the rest of the world:

Of the 50 countries we studied in our Digital Evolution Index, 23 were European (not counting Turkey). Of these, only three, Switzerland, Ireland, and Estonia, made it to a commendable “Stand Out” category – which means that their high levels of digital development are attractive to global businesses and investors and that their digital ecosystems are positioned to nurture start ups and internet businesses that can compete globally.

Fifteen European countries have been losing momentum since 2008 in terms of their state of digital evolution – this is what we mean by a digital recession – with the Netherlands coming in dead last in our momentum rankings. European countries occupy the nine bottom spots in our list of 50. Plus, the digitally receding countries include large economies like Germany, the UK, and France, as well as Finland and Sweden, Scandinavian tech powerhouses that were the early leaders of mobile telephony. Across the rest of Europe, the state of digital evolution has been mediocre and the pace of improvement, tepid.

This is of serious concern for the U.S. Our European allies are key pillars of the world order we have spent half a century building, and, as Walter Russell Mead recently wrote in testimony submitted to the Senate Armed Services Committee, one of the challenges faces going forward in the next few decades is that:

Many of Europe’s leading economies—which is to say, many of the top-ten economies of the world by GDP—are stagnating, and have been for some time.[.. P]rospects for European adaptation to the 21st century tech economy are dimmer than one would like. Entrenched interests are using the force of government to repress innovation, start-ups are thin on the ground, and major new tech companies—“European Googles”—are nowhere to be seen.

We need to explain clearly to our allies how we have built and sustained tech growth, legally and culturally, and encourage them to do the same. It’s increasingly clear that the world is going to be filled with challenges and rivals going forward; we need our friends to be prosperous, confident, and ready to confront them alongside us.

Republican Victories Highlight 2016 Stakes

Last night was a banner night for conservatives, who defeated a number of measures in liberal strongholds, including a transgender bathroom ordinance in Houston, a $15 minimum wage ordinance in Portland, Maine, and a proposed law restricting AirBnB rentals in San Francisco. But the most consequential GOP victory came in Kentucky—a deep red state in presidential elections that has nonetheless had Democratic governors for 40 out of the last 44 years—where the conservative-populist insurgent Matt Bevin won the statehouse for Republicans by an almost nine point margin.

The Republican victory in Kentucky underscores the extent to which the ranks of elected Democrats outside of 1600 Pennsylvania Avenue have been thinned since 2010. It’s important not to overstate President Obama’s responsibility for these losses—the party that holds the White House has historically suffered setbacks in off-year elections. Yet, there are reasons for Democrats to be worried, over the long term, about the extent of the clobbering in state and local elections they have endured over the past six years.The Democrats have constructed a political coalition heavily reliant on young people, minorities, and urbanites. As Democrats are fond of repeating, these voters have helped deliver the popular vote in presidential elections to the Democrats in five out of the last six cycles. But this coalition is not nearly as well suited to elections for Congress and state legislatures, because these voters are “inefficiently distributed” (that is, packed around urban areas)—or to off-year elections in general either, because they are less likely to show up when a presidential candidate isn’t on the ballot.This creates an interesting dynamic. Because the Democrats’ ranks have been eviscerated at lower levels of office, the stakes for winning the White House couldn’t be higher. As we we wrote last month, “if the party loses the White House 2016, it will have almost nothing left.” The prospect of losing everything creates an incentive for Democrats to double down even further on their presidential coalition (see, for example, Hillary Clinton’s full-throated endorsement of the Houston transgender ordinance). But this strategy—of appealing more and more strongly to the national base rather than reaching out to new segments voters—makes them even less competitive in off-year and state-level elections.So long as the Democrats can continue to hold the presidency, and so long as the powers of the presidency continues to grow, this may be a solid electoral strategy. But it’s a risky bet. If a Republican is elected president, the vulnerabilities of the current Democratic coalition will be exposed. A strong national coalition is useless if it doesn’t give you the tools to wield actual power.

Turkey’s Elections, the Syrian Crisis, and the US

In a stunning turn of events in Turkey, the Justice and Development Party (AKP) managed to confound its critics and win a convincing victory at the polls. These elections were a gamble by President Recep Tayyip Erdogan, who maneuvered to block the formation of a coalition government following the inconclusive June elections so as to get another shot at winning a majority.

The most important contribution to Erdogan’s victory came from an unexpected source: the main Kurdish insurgent group, the Kurdistan Workers’ Party (PKK), with which Turkey has been at war. In an unprecedented strategic blunder, the PKK abandoned its unilateral ceasefire after the June elections. The resulting violence helped the AKP to make its case that it stood for stability, something Turks value more than anything else.The significant increase in the AKP’s share of votes from 41 to 49 percent will undoubtedly make the new Turkish government, and Erdogan in particular, far more self confident in both domestic and international affairs.While the United States has always shown a tendency to work with the status quo, especially when it comes to an ally such as Turkey, a member of NATO, it now faces three challenges. The first, and least significant, challenge is the anti-American tone of Erdogan, his party, and especially the Erdogan-controlled press, representing approximately 70 percent of all outlets, whether print, television, online, or social media. Insinuating American plots and partisanship in favor of the opposition even forced the U.S. Ambassador to come out forcefully to deny the allegations.The second challenge is the increasingly authoritarian bent of the government, including the arbitrary confiscation of opposition television channels and newspapers and the prosecution of individuals from all walks of life for criticizing the President. If such campaigns continue, or even escalate, after these elections, it will make for uncomfortable conversations between U.S. and Turkish officials, potentially casting a shadow on other bilateral issues.However, the third and most contentious challenge will be Syria. U.S. and Turkish goals in Syria are out of sync. Turkey prioritizes the defeat of the Bashar al-Assad regime in Damascus and the containment, if not reversal, of Syrian Kurdish gains made by the Democratic Union Party (PYD). The latter has emerged as the single-most effective fighting force against the Islamic State (IS). By contrast, the United States is fixated first and foremost on the elimination of IS. The Assad regime has become a secondary issue.It is over the PYD that the Turks and Americans are likely to have their greatest disagreements. The PYD has established a close relationship with the United States and as a result has succeeded in pushing IS back from some locations it captured in the summer of 2014. In the absence of any other forces on the ground, the U.S.-PYD relationship has deepened. This has alarmed the Turks, who see the PYD as nothing but an extension of the PKK.In June of this year, the United States finally managed to get permission from Ankara to access to four airbases in southern Turkey for anti-IS operations; Turkish acquiescence came only because Turks were alarmed at the deepening U.S.-PYD relationship, which they worried was a back door to a U.S.-PKK collaboration. This is not an unreasonable fear, despite the fact that the United States considers the PKK a terrorist organization, given that many of the PYD cadres fighting in Syria are in fact Turkish PKK members. Moreover, the Turks also worry that Syrian Kurds, thanks to their cooperation with the United States, will end up with their own autonomous region in Syria once Assad is gone. This would provide Turkish Kurds with another model after their brethren in northern Iraq, who have already established their own semi-recognized government, the Kurdistan Regional Government.The bases are critical to U.S. plans for the re-conquest of IS’s capital Raqqa with the help of the PYD and a number of smaller local militias. Washington’s decision to introduce fifty Special Forces troops into Syria this past week could not have happened without access to those bases, which are now undoubtedly home to U.S. search and rescue teams. Moreover, the United States also plans to bring in A-10 ground attack fighter aircraft that can lay down devastating cover fire in close combat situations.Will a rejuvenated AKP government and Erdogan interfere with U.S. plans by trying to spoil PYD ambitions? Last week the Turkish government claimed that its planes had bombed PYD positions in Syria. This has not been confirmed on the ground and in all likelihood was just a pre-election boast. Nevertheless, even its mere suggestion constitutes a major precedent for future similar actions.To date, though nominally a member of the anti-IS coalition, Ankara has not made that organization a priority, despite a string of devastating bombings attributed to IS that mainly targeted Turkish Kurds. Ankara and IS have been careful not to provoke each other; IS has a significant infrastructure within Turkey that it does not want to risk, and the Turks have seen the power of IS to kill and create havoc.It is easy to see how an emboldened Erdogan may want to extract new concessions from Washington; on the other hand, this is also an opportunity for the Turks to come in from the cold and begin to shape a new a grand bargain over both Syria and Iraq. We will soon find out.