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ECUADOR | Exports recover but outstripped by imports. Exports grew by 26% to US$17.37bn in 2010 on the previous year, according to the central bank. The increase owed largely to a 36% surge in oil prices, leading to a 38.5% increase in crude exports to US$9.65bn. Crude exports accounted for 56% of total exports, underlining the country's dependence on high prices. Exports of non-petroleum products grew by 13% to US$7.72bn: bananas, at US$2.03bn; shrimp, at US$829m; oil products, at US$721m; and fresh flowers, US$598m. Ecuador posted a trade deficit of US$1.49bn in 2010, up by more than 400% on 2009, as imports rose 34% to US$18.86bn.

Under-25s account for almost half of all thefts and robberies reported by Mexico city retailers — most cases are not gang-related.

Just under half of all crimes against property in Mexico city are committed by youths and minors, according to a survey by the association of retailers, the Cámara Nacional de Comercio en Pequeño (CNPC). In most cases, it found, they were acting on their own, not as part of a gang or any kind of organisation.

Of all the crimes reported by the CNPC members, theft was the most frequent, with 63.3% of all cases. Next in importance was armed robbery, with 22.4%. Assault, kidnapping and other crimes jointly accounted for the remaining 14.3%. Other surveys focusing on the perceptions of the general public tend to put armed robbery at the top of the list, and magnify the importance of kidnappings.

Of the thieves and robbers, 41% are in the 18-25 age group, and 7% are under 18. Next comes the 26-37 bracket, with 40%. One category of commercial establishment stands out as a target: pharmacies, where drugs, apart from money, are sought. They account for 16% of the total reporting theft or robbery.

`It has been said,' the CNPC says in its report, `that the increase in levels of insecurity and crime experienced over the past five years is the direct result of the economic crisis and unemployment. [Though these factors] constitute the fundamental cause, they cannot explain on their own the high concentration of criminals among the young, because unemployment is not exclusive to this age group.' There is, though, another age-linked correlation the retailers are well aware of: people under the age of 30 are estimated to make up 65% of the 1.2m working as street vendors.

MEXICO-US | Buck-passing over border violence. In response to recent Mexican criticism that the US was not doing its share of the effort to curb drug-related violence along the common border, the State Department said, 'US support for Mexico includes promoting improved intelligence-sharing against illicit drug activities, enhanced bilateral teamwork to fight money laundering, and encouraging the increase of eradication programmes targeting opium poppy and marijuana. The United States also works with Mexico to attack criminal drug organisations and disrupt their activities, improve interdiction efforts on both sides of the US-Mexico border, decrease the diversion of precursor chemicals towards illicit drug production, and improve the successful prosecutions of drug criminals.' In mid June Mexico's federal security minister, Ramón Martí­n Huerta, had said, 'The US talks every day and we face the challenge every day; we have our strategies and we have not stopped for a single day.' He added that what was needed from the US was more cooperation on their side of the border: 'When we apply pressure on this side, [the drug traffickers] jump over to the other side.'

MEXICO-US | Success on drugs front. The White House's Office of National Drug Control Policy (ONDCP) reported on 20 June that production of both marijuana and opium poppy in Mexico fell sharply in 2004. Marijuana cultivation fell by 23% to an estimated 5,800 hectares in 2004, down from 7,500ha in 2003. This, the agency said, was the result of Mexico's continuing intensive efforts against the marijuana crop, eradicating 30,836 hectares between 2003 and 2004. Consequently, the potential production of marijuana fell to an estimated 10,400 tonnes in 2004, from 13,400t the previous year. Opium poppy cultivation, said the ONDCP, declined by 27% in 2004, to an estimated 3,500ha, down from 4,800ha in 2003. Mexican government forces eradicated 15,925 hectares of opium poppy. This lowered the potential production of heroin to an estimated 9t in 2004, from an estimated 12t in 2003. According to the ONDCP, most of the Mexican-produced heroin and a substantial portion of the Mexican-produced marijuana supply the US drugs market.

MEXICO | Zapatistas cause brief flap. On 20 June a communiqué ostensibly issued by Zapatista leader 'Marcos' declared a 'red alert', ordering the concentration of all 'regular forces' of the Ejército Zapatista de Liberación Nacional (EZLN) and the dismantling of the 'good governance boards' set up in the autonomous Zapatista municipalities, and recommended that all NGOs, Mexican and foreign, 'abandon rebel territory'. The following day another communiqué hinted that the 'alert' had been declared because of a threat of government action aimed at decapitating the Zapatista movement. There were reports that in response the army moved about 1,000 troops from their barracks in Tuxtla Gutiérrez to Rancho Nuevo, a locality close to San Cristóbal de las Casas which was raided by the Zapatistas in 1994. Yet another communiqué disavowed any intention by the EZLN to take up arms. A theory floated by Mexican officialdom was that the first communiqué had been issued by a breakaway radical faction of the EZLN. In any case, in mid July a new communiqué announced that the alert was over and that the governments of the Zapatista municipalities would resume their activities. As the communiqué was issued, the army withdrew three of its camps sited on the fringe of Zapatista-held territory. This has left only five camps still established in the area of Chenalhó, where most military forces were concentrated following the Acteal massacre of 1997. Marcos later said that the threat against the Zapatistas, which could take the shape of the capture or assassination of its leaders, had not yet disappeared.

Argentina is belatedly joining the group of South American countries upgrading their military hardware after years of low defence spending. A string of calamities over the past year has added urgency to the renovation of obsolete equipment, overshadowing the government's plans - already underway - to restructure its defence establishment and update its 'strategic defence' outlook.

In March last year the airforce lost a Lear Jet and it's six-man crew, which were deployed on a humanitarian mission in Bolivia. This year, on 11 April the icebreaker Almirante Irí­zar caught fire, forcing the crew to abandon ship and resulting in the loss of two Sea King helicopters. On 1 May a Mirage M3 fell during an air display, killing its pilot.

Following the last accident, defence minister Nilda Garré revealed she had ordered a state audit on aircraft in the entire armed services, and she had done so following the Bolivian crash. One immediate result was the allocation of additional budget funds to renovate the fleet of 13 Hercules helicopters, of which only three were 'relatively available'. Garré said, 'We have very old aerial material, as a result of more than 20 years of disinvestment in the sector and a 50% budget reduction in that period.'

On 18 May Garré announced that Argentina had taken up a US offer of four Sea King helicopters -two of them are intended to replace those lost in the Almirante Irí­zar fire- and that more funds would be made available to the navy to increase the number of hours it spends at sea, and to develop a vehicle for the marine corps. Officials said the government was also looking at the possibility of buying Chinese helicopters for the army.

Only a couple of day earlier, during a visit to Buenos Aires of Chinese defence minister Cao Gangchuan, Argentina signed a bilateral military cooperation agreement billed as adding teeth to the 'strategic alliance' struck by the presidents of both countries in 2004. The defence agreement includes provisions for 'exchanges in equipment and logistics'. Minister Garré said that the Argentine army was looking into the possibility of buying a dual-use heavy truck from China. As regards the helicopters, Argentina is examining two options: a straightforward purchase or a local assembly under licence. In October last year the Argentine congress ratified a defence cooperation agreement President Kirchner had signed in 2004 with his Russian counterpart, Vladimir Putin. Following the ratification, Garré visited Russia. She later said that Argentina was interested in buying MI-17 helicopters, radar stations and air control software.

Behind the scenes, the national defence council (which includes representatives of all ministries, the legislature and the armed forces) has begun work on an 'appreciation document' meant to define the country's main strategic problems. The government has already appointed General Daniel Camponovo to the new position of operational commander of the armed forces, entrusted with overseeing the practical implementation of this 'appreciation'.

Over the last five years Argentina's defence spending has risen in absolute terms from US$1.48bn to US$1.56bn, while in relative terms it has declined from 1.2% to 1% of GDP (see table below). The absolute level of defence spending places it in fifth place in Latin America (after Brazil, Chile, Colombia and Mexico). In the ranking of military power in South America produced annually by the Brazil-based electronic journal MilitaryPower, Argentina appears in fourth place in the region, after Brazil, Peru and Chile. In 2004-05 it was ranked third.

 

An investigation into a cocaine shipment seized in 2007 has revealed hitherto unreported contacts between a senior official from the government of President Rafael Correa and the ex number-two leader of the Fuerzas Armadas Revolucionarias de Colombia (Farc) almost up to the eve of the Colombian raid on his camp inside Ecuador in which he was killed. Its ramifications, which have already affected a regional human rights NGO, could prove damaging to Correa in the run-up to the 26 April general elections .
 
The case began with the seizure of more than four tonnes of cocaine in the coastal border department of Esmeraldas, which investigators linked to a ring of traffickers believed to be led by the brothers Edison, Diego and Jefferson Ostaiza. They also determined that the drugs had been delivered by the Colombian Farc guerrillas. Digging further, they unearthed a link between the Ostaiza brothers and former undersecretary of the interior, Ignacio Chauví­n. The latter has admitted knowing them but denied any involvement in drug trafficking. Investigators are looking into alleged involvement by Chauví­n in oil deals conducted by the Ostaiza brothers, and arrest warrants have been issued against a police officer and a lawyer of the Asociación Latinoamericana para los Derechos Humanos (Aldhu), a well-known human rights NGO.

When Chauví­n was also accused in the media of having held a number of secret meetings with the Farc's number-two, 'Raúl Reyes', the former undersecretary went into hiding. Correa condemned him publicly for not 'facing the music' and suggested that had Chauví­n known of Reyes's presence in Ecuador and failed to report it, he would have committed treason. Chauví­n turned himself in on 4 February and Correa apologised for having prejudged him. He said that the case against Chauví­n had so far been based on 'perceptions' and that it had not been proven that Chauví­n was involved in drug trafficking 'only that he was the friend of some guys who were involved in the drugs trade.'

On 8 February Chauví­n, who had previously denied ever having been in Colombia, stated that he had held seven meetings with Reyes between December 2007 and 27 February 2008, that these had taken place in Colombian territory, and that he had only passed through the Angostura district of Sucumbí­os (where Colombia raided Reyes' camp on 1 March) without making contact with the Farc leader. He said that in all the meetings he had only discussed the 'humanitarian exchange' of a group of Farc captives for jailed guerrilla fighters.

The government began to dissociate itself from Chauví­n's alleged mission. Ricardo Patiño, minister-coordinator for political affairs, said, 'I am sure that the government had no knowledge of the meetings [between Chauví­n and Reyes]. The President did not know of them nor did he authorise them.' The only thing that President Correa did authorise was the conversation held 'on a single occasion' by former interior minister (later internal and external security minister) Gustavo Larrea with Reyes to discuss the release of captives held by the Farc. Chauví­n, it must be noted, served under Larrea as an adviser at the interior ministry. The current minister for internal and external security, Miguel Carvajal, insisted that the only official authorised to make contact with the Farc was his predecessor Larrea, as part of 'an effort, publicly and internationally known, even by Colombia.' In fact, Larrea had initially denied any contact with Reyes.

Carvajal also hinted broadly that the government was unconvinced by Chauví­n's claim about the venues for his meetings with Reyes. He told a radio interviewer, 'Chauví­n's relations with the Farc's former number-two must be clarified: in what context they took place, and where they took place.'

Jorge Solórzano, the counternarcotics prosecutor handling the Chauví­n case, told the media that he had information that Chauví­n was the liaison between the Farc and the drug traffickers. He said he had photographs and intelligence reports proving that the Ostaiza brothers 'belong to a family of drug traffickers linked to the Colombian guerrillas, who provide the drugs for them to export from Ecuador.' He added, 'We know one concrete case of an official of the régime linked to the Colombian guerrillas. How many more are they? Now we understand many attitudes of this government towards Colombia.' Solórzano has accused the government of removing the police officers who had been conducting the Chauví­n case. This has been denied by the government, which says that only 'routine' transfers have taken place, and Chauví­n's lawyer has riposted by accusing Solórzano of 'reporting to the US Drug Enforcement Agency (DEA)'.

On 16 February, Correa signed a decree rescinding an agreement with Aldhu under which the NGO was exempt from taxation and its members enjoyed immunity from prosecution and the use of diplomatic passports. The precise motives for this decision were not made clear, but it was widely assumed that its connection with the Chauví­n case, and the consequent presumption of irregular contacts with the Farc, was the real reason. The next day the presidency issued a communiqué quoting Correa as reiterating that 'should it be true that Chauví­n met Raúl Reyes in Ecuadorean territory, we would consider it treason.'

The distancing from Chauví­n and the Farc was emphasised on 22 February by former minister Larrea, who described the Colombian guerrillas as 'a criminal organisation which, on occasion, resorts to terror'. Larrea reiterated that he had held only one meeting with Reyes, a detail which he only disclosed upon receiving authorisation from Correa. He refused to be drawn on where that meeting had taken place. Larrea's stance was somewhat undermined by the claim made by Manuel Silva, former head of the police's special investigations unit, that Larrea had been involved in helping the Colombian guerrilla fighter Nubia Calderón ('Esperanza'), leave the country last August. Calderón was wanted for questioning by the Ecuadorean judiciary. He said he had received this information from José Luis Cortázar, until recently a high internal official at the presidency— who also implicated the secretary of Aldhu, Juan de Dios Parra, in the manoeuvre to secure asylum for Calderón via the Nicaraguan embassy. Few were surprised when chief public prosecutor Washington Pesántez announced that 'Doctor Larrea will be summoned opportunely to testify what kind of connections he has with Ignacio Chauví­n.'

Parra denied both any involvement and even knowledge of who Calderón was. On 20 February the newspaper El Comercio published photographs showing three people wearing vests with the Aldhu logo: Parra, Chauví­n and Fredi Castillo, identified as 'a man of the Farc' currently under arrest for his alleged links with the Ostaiza brothers.

The street gangs in El Salvador and Guatemala have moved on in the past month from using violence against their victims to attacking law enforcement agencies; targets have included the police, prison officers and a court, and the weapons used have included assault rifles, grenades and a car bomb. These developments appear to echo the actions of the favela-based drug gangs in Brazil more than those of Mexico's drug cartels. They do however, revive the fears aired back in 2005 about street gangs evolving into a new form of 'urban insurgency' [SSR-05-05].

On 4 September a 40mm grenade was fired against a court building in central San Salvador. It failed to detonate and only caused minor material damage. Police sources ventured that the attack might have been carried out by members of street gangs reacting to the approval by congress, three days earlier, of a tough new anti-gang law (see also pages 3-6).

Though there was no hard evidence of this at the time, a second incident strengthened this assumption. On 9 September, at the height of the 72-hour period in which intimidation and violent acts by the maras had severely disrupted public transport in the capital, a grenade was fired at a police checkpoint, This one did detonate, but claimed no casualties. In these episodes the police arrested 30 street gang members who were charged with offences including acts of terrorism, aggravated damage, criminal conspiracy, attempted homicide and illegal possession and bearing of firearms.

A grenade had been previously fired, on 14 June, against a police station in San Salvador, injuring three officers. At the time the authorities speculated that the attackers might have been members of a gang engaged in extorting money from street vendors. The gangs have also been involved in acts that have been classified as terrorist, such as the firebomb attack against a bus full of passengers, which killed 17 people, and the raking of another with automatic weapons, killing another three. Both of these incidents had taken place on 20 June. Grenades were also used against a restaurant, in May (injuring four people) and early August (injuring another three), apparently in connection with an extortion attempt.

In Guatemala City's Zone 16 on 31 August a grenade was fired against a police station, causing considerable damage but claiming no victims. When a police patrol went out in pursuit it came under automatic weapon fire that killed one officer. However, police were able to overpower and arrest five of the attackers, four of them minors, who were armed with AK-47 assault rifles.  The previous night another police station and a police patrol had come under fire, without suffering casualties. On 30 September a car bomb was found and deactivated outside the headquarters of the prison service.

These incidents were interpreted as reprisals for the authorities' decision to transfer 26 jailed street gang leaders, considered dangerous, to a top security prison outside the capital. Since the beginning of the year, eight law enforcement officers (police and prison guards) had been killed in armed attacks; in 2009 ten prison service officials were murdered.

Brazil's interest in Iran's economy is mainly as an export market for its commodities, notably sugar and beef. The trade imbalance is stark, with Iranian exports to Brazil standing at just US$54m in 2008-2009.

However, after Presidents Ahmadinejad and Lula met in November 2009, plans were announced for an expansion in economic cooperation between the two countries in all fields, focused on industry, trade, energy and technology, with a target for a US$25bn annual trade volume goal for the next five years.  

Iran is looking to Brazil's state-owned oil company, Petroleo Brasileiro (Petrobras), to extend its footprint in Iranian hydrocarbon projects. Yet Petrobras is increasingly leery of Iran, and recent news flow from the state oil company suggests that Iran has slipped down its list of overseas priorities.

In late 2009 Brazilian press reports suggested Petrobras might abandon its operations in Iran, after a largely fruitless five years of drilling in the offshore Tusan block in the Persian Gulf. The company has already begun the process to rescind its concession rights. Petrobras sources informed reporters that the decision was “technical" and not the result of continuing political pressures from US authorities - despite reports that US pension funds had targeted Petrobras over its Iranian investments.

Petrobras International director Jorge Zelada said in an interview with a news agency in July 2009 that the Tusan block was geologically unappealing. "Our expectation is for a sub-commercial reserve," said Zelada. "It is a small reserve ... we have not yet finished the report, but the expectation is that it does not have commercial possibilities."

Petrobras' other Iranian concession in the Iranian Caspian Sea looks equally uninviting. Plans were announced only in early 2009 to invest US$250m in initial drilling to develop the Caspian acreage followed the signing of a landmark “risk contract" - analogous to a traditional production sharing deals, rather than the buyback service contracts that Iran normally offers   - with National Iranian Oil Company. In July, it announced it would not proceed on a second Caspian bloc, because it contained gas rather than oil. “There is no Petrobras exploration activity in the Caspian Sea. There was an opportunity that Petrobras reviewed and decided not to continue with," he said.

The Iranians' attempts to tap Petrobras' deepwater expertise in the geologically difficult Caspian play now looks doomed to end in failure. In July 2009, it was reported that Iran's state-run Khazar Oil Company was to develop the oil and gas plays in the area on its own. This appears to spell the end of Petrobras' interest in the Caspian, and possibly in Iran, for the foreseeable future.

The consensus amongst Mexican political commentators is that President Vicente Fox is a lame duck for the rest of his mandate, which lasts until the end of November 2006. It is true that he is unlikely to make much progress with the reforms he wanted to introduce: to the tax system and to the way the energy industry is organised and regulated (ie allowing the private sector to do more). There is a chance, however, that there may be some far-reaching reforms to the constitution which may make life easier for Fox's successors.

The result of the most recent state election, in Veracruz, is a horrible illustration of what may happen at the federal level in 2006. The winner in a near-three-way race, Fidel Herrera, won just under 35% of the vote. He was less than one percentage point ahead of the runner up and only six percentage points ahead of the third-placed candidate. The turnout was over 60%, the highest for any of the state elections this year. 

If this sort of result is repeated in the presidential election in 2006, the country could be ungovernable. The mix of first past-the-post and proportional seats for congressional elections, both at the state and federal level, means that the winner of the executive election has no chance of commanding a majority. Arguably, the system gives a disproportionate reward to the party that comes third: it is this party that will decide which legislation will prosper. Some thoughtful politicians are fearful about what this could mean for the country for another six years. Fox saw his position in congress erode as his administration wore on. There are two possible ways of changing this. The first is to introduce a second round into the presidential election. Fox himself was the first Mexican president to have been elected by a minority of voters: 43%. Felipe Calderón Hinojosa, the only declared candidate for the Partido Acción Nacional's presidential nomination, suggested the idea of a second round on 7 September. He did not say that he supported the idea, only that perhaps it should be considered. 

One question, as Calderón said, was whether there should be a second round in congressional (or municipal) elections as well. One possible solution would be to make the division between proportional and first-past-the post seats more explicit: the first-past-the-post seats would go to a second round, if no candidate obtained a majority in the first round. Proportional representation would be awarded according to parties' scores in the first round. The second issue is re-election. Political commentators have long said that three year terms for the lower chamber of congress are too short: members have to leave just as they are understanding how things work. The government has already floated the idea of allowing mayors to be re-elected. All the political parties have an interest in making the political system more effective: it is possible that Fox could preside over some far-reaching, and essential, reforms here.

Wal-Mart de México is the country's biggest retailer. It has also become politically controversial. Since the 2 July presidential election, supporters of the defeated candidate in the presidential election, Andrés Manuel Lopez Obrador, have picketed branches of the supermarket chain across the country. They want to draw attention to the company's role in the elections. López Obrador and his supporters claim that Wal-Mart's local shareholder, Manuel Arango, and the company itself, supported the winner, Felipe Calderón Hinjosa, from the righting Partido Acción Nacional.

Wal-Mart has 837 stores and restaurants in Mexico. This makes Mexico the company's most significant foreign operation. The nearest rivals are Britain (where it owns Asda and its 323 stores) and Brazil (where it has 294 stores). Wal-Mart de México accounts for about half Mexico's retail sales through companies. The informal sector and markets are also significant players in the retail market. 

In August Wal-Mart de México's total sales were up by 16% at M$15.65bn and its like-for-like sales were up by 5%. This is significantly faster than sales growth reported by members of Asociación Nacional de Tiendas de Autoservicio y Departamentales, which Wal-Mart left several years ago. What is more, Wal-Mart de México is still expanding fast. In 2005, it opened 95 new stores, the most new openings it has achieved since it arrived in Mexico. The previous peak was 70 in 1994. The company claims that it reinvested M$8.1bn in expanding its Mexican operations. This accounts for 4.5% of the total foreign direct investment in Mexico. 

Wal-Mart itself is huge: in the second quarter (ended July 31 2006) the company's total worldwide sales were US$84.5bn and its net income was US$2.98bn. What is significant is that Wal-Mart's international operations are providing the bulk of the sales growth: in the second quarter, these were up by 32% at US$14.1bn. Wal-Mart's 3,256 stores in the US saw their sales rise by just 7% and Sam's Club sales were up by 5%. Comparable sales, which excludes new store openings, were even more anaemic, up 1.7% in the US as a whole. In terms of net income, the international segment, of which the Mexican element represents around 70%, is far more important. In the second quarter, international's operating profits came to US$1.75bn, up 16% year-on-year. In 2005, Wal-Mart de México's net profits were up by 17% at M$9.47bn on net sales up 14% at M$164.4bn. 

In Mexico, Wal-Mart's big recent strategic move has been to apply for a banking licence. This is likely to mean that the company will start to sell more big ticket items to its customers. Currently, local analysts reckon, 50% of Wal-Mart de México's sales are food. If the company gets a licence its earnings are likely to receive a major boost because it will be able to charge hefty interest rates. Other Mexican retailers with banking and credit operations, such as Elektra, a white goods retailer, which has Banco Azteca and Comercial Mexicana, which has Prestacomer, charge between 50% and 60% interest a year. 

Wal-Mart de México's three key operations in Mexico are Bodega Aurrera, which accounts for 31% of the company's total sales; Sam's Club, which accounts for 28%, and Wal-Mart Supercenter which accounts for 27%. Aurrera sells food and household products at cheap prices; Sam's Club offers discounts on volume purchases of similar products, and Supercenters are hypermarkets selling food, clothes and bigger ticket items.

The death in a plane crash of the interior minister, Juan Camilo Mouriño, on 4 November looks increasingly like an accident and not an assassination. The latest theory for the cause of the crash is that the Learjet on which Mouriño was travelling caught in turbulence caused by a bigger Boeing 767 jet just in front of it.

The key question then is how far ahead was the 767: some reports claim that the Learjet was less than three miles behind, though Mexico City's air traffic controllers are adamant that there were four miles between the two aircraft. On 12 November 2001 an Airbus crashed in New York after its pilots apparently overreacted to turbulence caused by a Boeing 747 which was only 90 seconds in front of it.

Accident investigators have found both the black box and the Cockpit Voice Recorder (CVR), which the communications and transport minister, Luis Téllez, had not been sure that the plane had been carrying. Both the CVR and the blackbox (which records flight data) have been sent to the US for analysis.

On 12 November, the US ambassador to Mexico, Tony Garza, said that he had been in contact several times with the US team of analysts and so far they had discovered no evidence of sabotage. Now the team will run simulations to try and work out what happened. Téllez, who is responsible for the investigation, has said that it could take 11 months to establish the cause of the crash.

Téllez is determined to publish as much information as he can about the crash. This is a marked change from previous administrations. Téllez's initiative is clearly designed to demonstrate that the government is hiding nothing (even if this means admitting mistakes) and that the rumours that the plane crash was a terrorist attack are wrong.

Téllez can take a lot of credit for puncturing the wild rumours that Mouriño was assassinated. Initially the muddle of information produced by the disaster gave the appearance that the government may have be trying to cover something up. For example, originally the authorities stated that there were eight people on the interior ministry's Learjet which crashed into an upmarket area of Mexico City, Las Lomas de Chapultepec, at about 6.45pm (local time) on 4 November. President Felipe Calderón Hinojosa also mentioned that number in his encomium of Mouriño. A day later, the authorities, in the form of the Procuradurí­a General de Justicia del Distrito Federal (PGJDF), Miguel Angel Mancera, said, correctly that there were nine people on board.

The government also now said that the earlier reports of an on-board emergency were wrong. The communications minister, Luis Téllez, accused the source of this report, Angel Iturbe, an air traffic controller, of lying. Téllez then produced the transcripts of the communications between the plane and its controllers, to demonstrate that everything was normal until the plane started its final approach to Mexico City's international airport and was in normal radio contact with air controllers right up until moments before the crash, when the aircraft disappeared from radar screens and radio communication was broken. The aircraft appears to have been between 300 and 500 metres above the ground when it disappeared from the radar screens.

President Felipe Calderón himself was agnostic about the cause of the crash during the ceremony of homage to those killed, on the Campo Marte, in Mexico City, on 6 November. He said that he was determined that the truth about the crash and its cause should be established.

On 12 February the Partido Revolucionario Institucional (PRI) mayor of Ensenada, in Baja California Norte, ordered the closure of the regasification plant, Energí­a Costa Azul de Ensenada. His attempt to close the plant was thwarted by the state government and the federal government.

Luckily, there was no confrontation between federal and municipal police at the plant, because the municipal police withdrew. Enrique Pelayo, the mayor of Ensenada, has however started a legal action to get the plant closed.

The plant, which is the product of US$1.2bn in foreign investment by Sempra in San Diego, California, takes liquefied natural gas shipments from Asia and Peru and reconverts them into gas, some of which is used in Mexico but most of which is pumped across the border into the US. Lack of electricity in the north of the Mexico has been a handicap for industry for years. The Sempra plant, which began operating in 2008, went some way to dealing with that problem.

The row is politically important for two reasons. First, Pelayo is a newly elected and ambitious mayor (he took office at the end of November 2010) and believes that he has a mandate to shake things up. He claims that the Sempra plant does not have proper authorisation from the municipality to operate. Sempra, and the federal government, argue that the plant does not need authorisation from the municipality and that the two permits it does need, for land use and current operations, are in order and up to date. Sempra said that it had not yet presented these documents, simply because Pelayo and the municipality had yet to ask for them.

Pelayo retorted that the city council had asked him to investigate the company's environmental and municipal permits. He argues that there is no environmental impact study on the local environment nor is there planning permission for the pipelines leading to and from the plant. He further argued that the plant does not have its own dedicated security equipment. He said that this omission contravenes city requirements. A federal court will now settle the issue of the permits.

The second reason the dispute is important is that Sempra has reacted by cancelling a proposed US$3.5bn regasification plant at La Rumorosa, Baja California. This project would have produced 1bn cubic feet of gas a day. The company said that it had been forced to take the decision amid a lack of judicial certainty that it would actually be allowed to run the plant once it had made the investment. The company had already begun acquiring the land needed for the project.

It is worth noting that the Costa Azul plant is still operating under the guardianship of the federal police and the army. Both the (federal) Secretarí­a del Ambiente (Semarnat) and the Comisión Reguladora de Energí­a (CRE) insisted that the plant has all the requisite permissions to operate. The CRE also pointed out that gas storage is constitutionally regulated at the federal rather than at municipal level. The Comisión Federal de Electricidad has commented that if the plant is closed, blackouts and brownouts along the coast of Baja California and in Tijuana, Ensenada and Mexicali are inevitable.

The crisis in Ensenada is worrying major energy companies. Shell's sale of its regasification project in Altamira, Tamaulipas, is now in limbo because of what has happened in Ensenada.

Sempra executives have told the Mexican press two things. The first is that Pelayo will drop his legal action if US$16m (some say US$60m) is paid into certain accounts. Sempra alleges that Pelayo is being egged on or backed in the dispute by the family which previously owned the land on which the plant sits.

The second, more worrying, point is that these same executives say that Sempra has equally big investments in Peru and Chile but in neither South American country has it faced such a threat to its business.

Baja California is reeling from other problems. One is the endemic drug violence along the northern border. Another is the determination of the federal vehicle registration agency, Siave, to clamp down on the smuggling of used vehicles across the border into Mexico. This has led to long queues of vehicles at major crossing points, deterring cross border jaunts by Californians. Baja's tourism industry has also been affected by anti-money laundering rules, which have deterred US citizens from travelling to Mexico with cash.

• Vehicle exports in January set a new record of US$5.04bn, up 22% on January 2010. Overall manufactured exports in January were up 25%.
  

Domestic politics in El Salvador are almost certain to remain polarised for the next three years. On 7 November, the leftwing opposition party, Frente Farabundo Martí­ para la Liberación Nacional (FMLN) held internal elections for the position of secretary general. The upshot was that the orthodox faction saw their man, Medardo González, triumph over the reformist current, represented by Oscar Ortiz, the mayor of Santa Tecla. Slightly over 50% of the FMLN's 90,000 members turned out to vote.

González will now set the agenda in advance of the next presidential elections. His victory shows that the party orthodoxy retains an iron grip on the FMLN despite the fact that the candidate it backed for the presidency, Schafik Hándal, suffered a resounding defeat at the hands of the ruling rightwing Alianza Republicana Nacionalista (Arena) in the elections eight months ago.  

González's triumph means that Hándal's defeat on 21 March has not presaged a changing of the guard. Indeed, Hándal might run again for the presidency. It also means that President Tony Saca will find it much harder to strike up a working relationship with the FMLN.

A 52-year old former guerrilla leader during the civil war, González continues the tradition of ultra-orthodox party leaders with strong links to the country's violent past. He took 54% of the vote as against 46% for Ortiz. González served as campaign coordinator for Schafik Hándal in the run-up to the elections in March.  

An ominous warning was sent out to reformist 'dissenters' on 2 November when the FMLN party leadership expelled party deputy, Miguel Navarrete, for voting with Arena in congress on a fiscal-reform package. After his election, González repeated the need for the FMLN to unite: 'We must channel all of our energy into strengthening and uniting our party to defeat the right, which is doing so much damage to the country,' he said.  

Uniting the party will not be easy. Quite apart from the 'damage' that President Saca might or might not be doing to El Salvador, if recent polls are anything to go by then it is the divisive figure of Hándal that is inflicting 'damage' on the FMLN. According to a survey carried out by LPG Datos for the national daily La Prensa Gráfica to coincide with the FMLN internal elections, the veteran hardliner is the biggest cause of friction between the reformist and orthodox factions in the party, which otherwise are separated by little.  

The results of the survey show that some 82% of reformists would reject Hándal's candidacy for the presidency, while 62% of the orthodox faction would support him again. The survey took a cross section of FMLN members who voted in the elections. It revealed that 36% of respondents consider themselves to be socialists; 21% define themselves as communists, and a further 20% as social democrats.

The main reason for the success of the FMLN's rightwing adversary, Arena, at a national level is its ability to embrace change: there are plenty of party reactionaries but they work behind the scenes. The problem for the FMLN is that, although the orthodox faction remains popular with party members (as the elections results show), its continued presence at the helm tends to reduce its appeal in the eyes of the rest of the population that might otherwise be drawn to the party.

ECONOMIC OVERVIEW: EL SALVADOR

The weakening of crude oil prices is prompting cuts in domestic fuel prices. Super petrol now costs US$2.33 a gallon while diesel costs US$2.03 a gallon. Both the coffee and sugar harvests have got off to slow starts. The volume of coffee exported in October, the first month of the coffee year, was down by 20% (year-on-year), though the value was up by 4% at US$3.4m. In the 2003/04 coffee year exports came to 1.78m (46kg) bags worth US$121m. The sugar crop is likely to be 575,000 t, much the same as in 2003/04. Sugar is the country's biggest single export, earning around US$350m a year. Outlook Remittances in the first 10 months of the year were up by 21% at US$2.07bn, the central bank reported. The central bank expects remittances to come to US$2.5bn this year. It said that 340,000 households receive remittances, which average US$243 a month. Most people use the money to live: less than 10% goes on capital investments, such as education or property. Inflation: The consumer price index increased 0.42% in October. Twelve-month inflation stood at 5.46% in October.

Portia Simpson-Miller won the leadership election of the ruling People's National Party (PNP) on 25 February, beating her closest rival by just over 6% of the vote. In April she will become Jamaica's seventh prime minister, and the first female to hold the post, when the present incumbent PJ Patterson retires before the start of the next legislative year on 1 April.

The contest

Simpson-Miller, the local government and sports minister, won 1,775 votes (46.6%) in the election. Behind her was Dr Peter Phillips, the national security minister, with 1,538 votes (40.4%). Two other contenders, Finance Minister Omar Davies and the former housing and water minister, Karl Blythe, mustered 7.4% and 5.4% respectively.

In a bitter leadership campaign, the more populist choice of Simpson-Miller prevailed over Phillips, who commands the most support among MPs and with whom there is a suspicion that Simpson-Miller is a bit of an intellectual lightweight who will come off worse in exchanges with the leader of the opposition Jamaica Labour Party (JLP), Bruce Golding.

Simpson-Miller tried to be magnanimous in victory calling for "unity and if there are wounds to be healed, it's time for healing". Her opponents joined her call of unity, though Phillips was most hesitant in his congratulations.

Simpson-Miller will face the first test of her capabilities in little over a month when the 2006/2007 budget debate is held. General elections are due in early 2007. Golding, however, has laid himself open to charges of weakness and inconsistency following his departure from, and subsequent return to, the JLP.

Profile of the new leader

Nicknamed "Sista P", Simpson-Miller, now 60, began her political career in the PNP as a Kingston councillor in 1974. Within four years she had become vice-president of the party and in 1983 became its spokeswoman on women's affairs, pensions, social security and consumer affairs.

She was elected MP for South West St Andrew in 1989 and was promptly appointed to her first ministerial post; labour, welfare & sports, that same year. She remains highly popular in her constituency and, even prior to the leadership contest, was a well-known public figure.

In 1992, when prime minister Michael Manley resigned, she made her first bid for the presidency of the PNP, but was soundly defeated by PJ Patterson.

She has remained a minister throughout the successive PNP administrations, her portfolio changing with the times: in 1993 she shed sports; in 1995 welfare gave way to social security; in 2000 she shed labour and social security to take on tourism, and in 2002 she dropped tourism and took on local government.

Simpson-Miller's administrative record is far from flawless; corruption and fraud allegations surfacing from the national solid waste management authority earlier this year, a body falling under her control, brought accusations of ministerial incompetence.

President Oscar Berger is the least popular head of state in Latin America, according to a survey carried out by the Mexican pollster Consulta Mitofsky in April. Berger's approval rating was a paltry 20%. When he was elected, on a tide of optimism, in November 2003, Berger enjoyed popularity in excess of 80%. The erosion of some of his support can be attributed to the fact that his term in office is coming to a close, but the main reason for the low figure is his failure to address the three principal concerns held by the Guatemalan public: security, unemployment and poverty. 

The public is likely to be much more sceptical of the contenders in September's presidential elections. The presidential campaign was officially declared open by the supreme electoral tribunal (TSE) on 2 May. The clear frontrunner, Alvaro Colom, of the left-of-centre Unidad Nacional de la Esperanza (UNE) has pledged to correct Berger's mistakes. Colom was narrowly defeated by Berger in the second round of the elections in 2003. His main rival this time around, Retired General Otto Pérez Molina, of the right-wing Partido Patriota (PP), is focusing his attention on improving security which, if it can be accomplished, would have the concomitant effect, he argues, of boosting employment. 

Unfazed by the relative failure of high-profile "mano dura"(firm hand) campaigns against organised crime in El Salvador and Honduras, Pérez Molina is promising to launch his own "mano dura" security initiative. His tough rhetoric and military background (he is a graduate of the School of the Americas and a former chief of military intelligence) has prompted concern among human rights groups that he will turn a process begun by President Berger - a steady militarisation of the Policí­a Nacional Civil (PNC) - into a more profound militarisation of society. 

• Organised crime
  Guatemala's main umbrella business organisation, Cacif, is expressing concern that organised crime could influence September's presidential elections. "Organised crime is trying to participate in all of the political parties; it wants candidates for the (332) mayoralties, all the way up to the presidency", the president of Cacif, Carlos Zúñiga, said. He is not the first to raise such fears, which were echoed by US Deputy Assistant Secretary of State for International Narcotics and Law Enforcement Affairs, Christy McCampbell, who said she feared "a possible incursion of drug-traffickers in Guatemalan politics and the upcoming elections".
  
  

The Caribbean Community (Caricom) summit which took place in Antigua in early July, highlighted the multiple challenges to Caribbean economies, ranging from rising fuel and food prices to the knock-on consequences of the sub-prime crisis in the US.

Jamaica's prime minister Bruce Golding told the summit: “We are caught in the vortex of the worst global cyclone the world has experienced in my lifetime, and the leaders of the world with all their resources, might, and power appear to be helplessly disoriented."

Host prime minister Spencer Baldwin added: “Of particular interest to this summit, Caribbean economies are now facing a 17% cutback in airline services from our tourism supply centres in the lower United States together with increases in airfares and new airline charges.   This makes for bleak perspectives for the region's tourism driven economies."

The Economic Commission for Latin America and the Caribbean (Eclac) produced a report in April that looked at the implications of the US sub-prime mortgage crisis for the Caribbean and sought to identify the Caribbean countries most vulnerable. Overall the Caribbean recorded economic growth of 3.9% in 2007, down from 5.8% in 2006.  

The main growth drivers have been the commodity boom (particularly significant for Trinidad & Tobago and Jamaica) and tourism-related construction.

Eclac has calculated a “correlation coefficient" between US and Caribbean growth rates for 1971-2007. The countries with the closest positive correlations were St Lucia (40.9%), Trinidad & Tobago (34.6%), St Vincent & the Grenadines (34.1%), Suriname (33.4%), Jamaica (31.2%), Antigua & Barbuda (30.1%), Grenada (29.7%), The Bahamas (29.0%), Barbados (28.6%), Anguilla (28.2%), and St Kitts & Nevis (22.8%). The positive correlation for Dominica was only 11.9%, while three countries had negative correlations: Belize (-6.0%), Montserrat (-6.0%), and Guyana (-12.8%).
Eclac identifies five likely “transmitters" of US economic difficulties to the Caribbean, namely trade, tourism, remittances, finance, and foreign direct investment (FDI).  

The table below shows the relative importance for 15 Caribbean countries of goods exports to the US, commodities exports, tourism, tourism from the US, and remittances. In terms of trade, the US accounts for 15% of world trade, with 51% of goods exports from Caricom countries going to the US in 2006. As well as the likelihood of reduced volumes of exports, a drop in world commodity prices is also possible, as US growth stalls or goes into reverse.      

The Caribbean countries for which commodities form the highest percentage of total exports are Barbados (30.0% - oil and sugar), The Bahamas (25.7% - non crude oil), Belize (33.2% - oil, sugar, banana and plantain), Guyana (38.8% - aluminium ore, sugar, rice), Jamaica (75.0% - non crude oil, aluminium oxide/hydroxide, aluminium ore, sugar), Suriname (62.1% - oil, aluminium oxide/hydroxide, rice, banana and plantain), Trinidad & Tobago (66.8% - oil), Dominica (20.7% - banana and plantain), St Lucia (20.7% - banana and plantain), St Vincent & the Grenadines (35.2% - banana and plantain).

Tourism contributes over 20% of GDP in some countries, and the percentage of stay-over tourists originating from the US is as high as 86.2% in The Bahamas and 72.1% in Jamaica. In total 5.7m US tourists visited the Caribbean countries in 2006, 19.2% of the total outbound travellers from the US.

The Organisation of Eastern Caribbean States (OECS) countries have a notably high proportion of their GDP coming from tourism, although they also tend to be less dependent on the US market. The table shows that the countries that will be most affected by a downturn in US-originated tourism are: The Bahamas (17.3% of GDP from tourism, 86.2% of stay-over tourists originating from the US), Anguilla (23.6% and 65%), and Antigua & Barbuda (21.7% and 27.6%). St Lucia is also vulnerable, with 15.8% of its GDP coming from tourism and 36.5% of its stay-over guests originating from the US. Although 72.1% of Jamaica's stay-over guests come from the US, tourism accounts for only 9.4% of GDP.

However, while Jamaica might be less exposed to a tourist downturn than some, remittances form a much higher proportion of GDP than for most. Along with Guyana (18.8% of GDP), Jamaica (15.4%) is the only other country where the proportion of GDP represented by remittances is in double digits. The impact of a downturn in remittances would have a significant but less intense impact in Barbados (4.2% of GDP), Belize (6.7%), Anguilla (4.2%), and Grenada (7.1%).

Curiously, however, Eclac makes the point that during the last US recession remittances to the Caribbean actually increased from US$1,703m in 2000 to US$1,845.2m in 2001, which contradicted most predictions and suggests the need for caution when forecasting the exact consequences of the present economic difficulties in the US.

Rebuke to Venezuela Aside from economic preoccupations, the Caricom summit gave rebuke to Venezuela over its unresolved territorial dispute with Guyana, despite the fact that Caricom members Antigua & Barbuda, Bahamas, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, St Kitts & Nevis, St Vincent & the Grenadines, and Suriname are all also beneficiaries of Venezuela's Petrocaribe initiative for oil supplies on preferential terms.

St Lucia is also mooting the possibility of joining. But despite this, the Caricom summit expressed “unequivocal support for the safeguarding of Guyana's territorial integrity and sovereignty and its right to develop its resources in the entirety of its territory.

	% of goods exports to the US (2002-2006)	Commodities as % of goods exports (2002-2006)	Tourism as % of GDP (2002-2006)	% of stayover tourists from US (2002-2006)	Remittances as % of GDP (2001-2005)
Barbados	20.0	30.0	13.6	23.9	4.2
Bahamas	31.8	25.7	17.3	86.2	2.1
Belize	34.6	33.2	11.0	58.5	6.7
Guyana	20.2	38.8	2.2	50.3	18.8
Jamaica	26.9	75.0	9.4	72.1	15.4
OECS
Anguilla	-	-	23.6	65.0	4.2
Antigua	-	-	21.7	27.6	1.9
Dominica	5.6	20.7	8.9	22.5	1.5
Grenada	12.9	-	8.8	24.6	7.1
Montserrat	-	-	-	21.3	1.6
St Lucia	19.2	25.4	15.8	36.5	0.5
St Kitts	62.1	-	10.3	49.5	1.0
St Vincent	6.8	35.2	10.6	28.7	1.0

Source: Eclac

 

The country's export revenues fell 9% year-on-year in the first nine months of 2009 to US$1.13bn, according to the Centro de Trámites de las Exportaciones (Cetrex). Export volumes, according to Cetrex, were up by almost 1% year-on-year at 1.1m t.The main reason for the fall in revenues was lower prices for coffee, gold, peanuts , seafood, beans and oil products. Cetrex also noted that fewer crops were planted this year than in 2008. In 2008 the country exported goods worth US$1.54bn. This was 24% up on the figure for 2007 and the best export result for 30 years. The government expects marginal (between zero and 0.5%) real annual GDP growth in 2009. In 2008 real GDP rose 3.2%.  For 2010, the government is forecasting growth of 1%. This looks conservative given the relative strength of exports in 2009.

Inflation: In September, inflation was 0.35%, much the same as in August. In the first nine months of 2009, the accumulated rate was 0.19%. The rate for the past 12 months was 0.01%, well down on 13.8% in 2008. The government is hoping that inflation in 2009 will be between 5% and 7%. This looks far too high.

If it had waited another two days, the Costa Rican administration of President Laura Chinchilla could have submitted its fiscal reform bill to the national assembly (AN) on the eighth anniversary of the fiscal reform proposed by the administration of Abel Pacheco (2002-2006). But then again, that was an anniversary few wanted to remember; the 19 January 2003 fiscal reform proposal which aimed to raise tax take by 2.5% of GDP, just like Chinchilla's bill, presented to the AN on 17 January, fell flat on its face. In the past 25 years, none of the 15 fiscal reforms approved (1985-2009) have accomplished the aforementioned goal. Many local analysts already dismiss Chinchilla's proposal as a failure in the making. 

Costa Rica's fiscal deficit in 2010 was 5.3% of GDP (US$1.97bn) according to preliminary figures from the finance ministry - a 73% increase on 2009; in 2006 it stood at 1.5% of GDP. The primary deficit (after deducting interest payments) was US$1.18bn - up 178% on 2009. The finance ministry released a statement predicting that the fiscal deficit would reach 10% of GDP by 2016, some US$4bn, unless the reform was approved soon. But with the bill being debated only twice a week (Monday and Tuesday) for two hours, expediency doesn't seem to be a priority for the legislators.

The proposal includes increasing value added tax (VAT) from 13% to 14%, and extending it to education (see sidebar) and private healthcare to raise an estimated additional US$900m as well as cutting public spending in a gesture to the right-wing Movimiento Libertario (ML). The ML's insistence on belt tightening could be interpreted as the direct result of being in opposition to the previous administration of President Oscar Arias (2006-2010), the government with the highest average spending level of the past 25 years (12.45% of GDP per year). Thus, the fiscal reform discussion has centred on a polarised view of spending which considers it either an indispensible investment or an irresponsible outflow. To be fair and taking into account that most of Arias's spending increase was to finance more police on the streets and better salaries for teachers, many local commentators considered it a justified and necessary investment.

The opposition Partido Unidad Social Cristiana (PUSC) has also submitted an alternative proposal, arguing that the fiscal reform presented by the government is unnecessary. According to the PUSC, the Chinchilla administration should transfer surpluses from the decentralised state companies such as the Instituto Costarricense de Electricidad (ICE), the Instituto Nacional de Seguros (INS) and the Instituto Nacional de Aprendizaje (INA), which in 2010 reached ¢2bn (US$3.87m), before increasing the tax burden which according to them would have a disproportionate effect on the middle class.

Other critics of the reform want to see the government toughen sanctions against evasion rather than increase taxes. For example, of the 398 tax evasion cases investigated by the public ministry between 2000 and 2009, there were only two convictions. Furthermore, in 1991, income tax evasion equated to 2.5% of GDP, while in 2007 it reached 4%; for many, the answer lies with stronger enforcement measures, stricter penalties for evaders, a more efficient distribution of state resources and belt tightening rather than increased taxation. 

Inflation: In January, the consumer price index (IPC) increased 0.68% on December 2010. Year-on-year, inflation was 4.84%, lower than the previous year when it reached 5.34%. Food and drinks registered the highest increase, followed by rent and other housing costs. For 2011, the central bank forecasts inflation of between 4% and 6%.

• Education VAT

t has now emerged that the VAT on education will not be 14% as previously rumoured but 10%. However, the additional tax burden will only be applied to upper-middle and higher income households spending more than ¢110,000 (US$2,130) in tuition fees per month -or ¢440,000 per term (quarter). Those paying less than ¢110,000 per month will be exempt from the new levy.

Argentina's President Néstor Kirchner reiterated for the umpteenth time on 22 September that the government will not improve its offer to bondholders. This wouldn't be particularly remarkable, were it not for the fact that it came at a moment when many people, including the Argentine government itself - was confident a deal was soon to be done.

Before dismissing residual demands for Argentina to improve its offer to honour just 25% of the US$88bn defaulted commercial debt, Kirchner had said that a deal would be done 'nice and soon'. An article in the UK's Financial Times newspaper suggested the same but said the government would still have to improve its offer to honour just over 30% of the value in order to bring the bondholders onside. Even this, the newspaper said, 'would be a huge victory for Kirchner and his economic team, and would win them a place in the record books for obtaining about twice the debt relief managed by any comparable country'.

There is no sign that the government is going to make this relatively minor concession, however. The Global Committee of Argentina Bondholders (GCAB), the largest group of its kind, offered to return to the table on 13 September, saying that 'If we sit down, we can probably work out something'. `There are so many ways to bridge the gap[…]we're disappointed that Argentina won't do it,' Hans Humes, co-chairman of the GCAB, declared. Economy Minister Roberto Lavagna replied merely that 'They waited too long for a conciliatory message'.

ECONOMIC OVERVIEW: ARGENTINA

The economy has been slowing down. In the second quarter the economy grew by only 0.5% quarter-on-quarter. This was the slowest rate of growth since the first quarter of 2002 when the economy was collapsing after the ending of convertibility in late 2001. The government was relieved by the feeble second quarter growth: it had been expecting the economy to contract thanks to the energy crisis which peaked in April 2004. A better-than-expected performance from industry saved the quarter: industrial output was up by 6.9% year-on-year, thanks to a 13.2% rise in manufacturing and a 32.4% jump in construction. Overall in the first half of the year, the economy grew by 9.0% year-on-year. Despite the solid performance by industry in the second quarter, year-on-year, there was drop in investment, exports and domestic consumption. What has saved the economy has been the strength of domestic demand. Outlook The problem is that for 2005, the government is forecasting, optimistically, that exports and investment will pick up while the domestic economy will falter. The problem with these assumptions is that the government has some influence over domestic consumption, but less over demand for the country's (largely commodity) exports or whether foreign investors choose Argentina for their projects. The budget assumptions for 2005 are: growth of 4%, a stable exchange rate (Arg$3.05 to the dollar) and inflation of 7.9%. The main increase in public spending will be on debt servicing. The exchange rate forecast for 2005 of Arg$3.05 to the dollar may prove to be optimistic: for this year the government forecast an average exchange rate of Arg$2.84, but the actual average has been Arg$2.95. GDP: Government forecast 6.5% growth for 2004. Inflation: 4.9% (12 months to August).

Two opinion polls published on 24 May show Lula well ahead of his main rival, the former governor of São Paulo, Geraldo Alckmin. Support for other candidates is largely irrelevant. According to DataFolha, Lula has 45% support to Alckmin's 22%. In the Sensus poll Lula wins 40.5% of the votes while Alckmin is on 18.5% support. It is important to point out that in Brazil voting is compulsory, but electors can show their dissatisfaction by spoiling their ballots or by leaving them blank. In the former case votes are annulled, in the latter they go to the candidate with the largest number of votes. This could add a further 5% or 8% to Lula's bid.

The results reveal that Lula has succeeded in shrugging off the corruption scandals that have rocked his administration. Despite the opposition's efforts to keep the scandals fresh in the minds of voters, Lula's cynical comment that all parties are equally corrupt seems to have had a much more persuasive effect. Also, he derived considerable assistance from new corruption allegations against congressmen from almost every party. According to the federal police some 60 of them approved the release of "emergency resources" for the purchase of medical and educational material without prior tendering, supposedly in exchange for kickbacks. 

PSDB-PFL alliance

The rightwing Partido do Frente Liberal (PFL) has finally picked a senator, José Jorge, to run as the vice-presidential candidate on Alckmin's ticket. Yet the violent riots in São Paulo (see page 3) and the resulting poor opinion poll performance put the prospective coalition between the PFL and Alckmin's Partido da Social Democracia Brasileira (PSDB) into turmoil. The alliance was supposed to be sealed on 29 May, but the official ceremony had to be postponed so the two parties can sort out their - very public - differences. 

The PFL's leaders were already worried about Alckmin's anonymity at a national level. Yet by mid-April they seemed to have decided to throw their weight behind his candidacy. They made alliance-negotiations very difficult, obliging a reluctant PSDB to withdraw candidates from local elections where the two parties are contenders, thus boosting the PFL's chances of winning seats in congress. The arm-wrestling for candidacies, however, created bitter resentment between the ostensible allies.

The prospective coalition was further shaken by the wave of violence in São Paulo. Alckmin left his post as governor to his surrogate, Cláudio Lembo, from the PFL. When the riots exploded, though, Alckmin preferred to keep a low profile, prompting key figures from the PFL to criticise his lack of support. The PSDB "caciques" who were already fuming at the PFL's intransigence decided it was time to reprimand the PFL, reminding its leaders who the junior partner is in the coalition. The dressing down did not play well in the PFL. 

In spite of the difficulties, the PSDB knows that José Jorge is an essential addition to Alckmin's bid. Like Lula, José Jorge hails from the north-eastern state of Pernambuco and his main job will be to promote Alckmin in the impoverished but populous region. Indeed, José Jorge's nomination has boosted Alckmin's support in the region to 10.1%, but support for Lula remains extraordinarily high at 58.6%. From the PFL's perspective, maintaining the alliance is essential not only to keep the PSDB away from competition in some states but it is also the only chance - however slim - to "see Lula out".

The PT's all-embracing alliance policy: PMDB on board?

Meanwhile, President Lula da Silva has yet to formalise his candidacy for the ruling Partido dos Trabalhadores (PT). This, however, is already taken for granted. The doubt that remains is with what party the PT will form a coalition. Crucially, Lula is waiting for the Partido do Movimento Democrático Brasileiro (PMDB) to reach a final decision on whether or not it will support his candidacy.

The PT's new leaders are convinced about the necessity of maintaining the old leadership's pragmatic approach to alliances in order to ensure not only Lula's victory but also the "governability" (i.e. support in congress) that a second term requires. This approach means forging alliances with any party of whatever ideological coloration, a controversial and divisive approach. The party's leftwing vocally censured the repetition of the "immoral alliances" of the current term, calling for an explicit ban on coalitions with parties from the right. The problem is that Brazil's main leftwing parties ceased to support the government long ago. 

Nonetheless the PT knows that Brazil's politico-electoral rules make it imperative for Lula to have a running-mate from another party. There are two names in mind: his current vice-president, José Alencar, who left his former rightwing party at the outset of the corruption scandals to join an evangelical party; and Ciro Gomes, the former national integration minister. Gomes is the PT's preferred choice, but his reputation was badly tarnished after he was expelled from his previous party, the leftwing Partido Popular Socialista, for deciding to stay in the government despite the corruption scandals.

Lula, however, still hopes to seal an alliance with the PMDB. The party has long ceased to have any clear political programme, but is still a powerful electoral machine: it is currently the largest party in both houses of congress and it will most likely continue to be so. The drawback is that the PMDB is irrevocably divided into two factions, one favouring an alliance with the government, the other utterly against it. 

Good news came for Lula after the PMDB voted not to put forward a candidate for the presidential race. The evangelical maverick Anthony Garotinho encountered intense resistance to his nomination. Yet Garotinho is very popular with the poor and, according to opinion polls, would be Lula's only obstacle to victory in the first round with support hovering around 10%. No decision is ever final with the PMDB, however. Proponents of an independent candidacy put forward the name of Senator Pedro Simon to challenge the - narrow - vote in yet another convention on 11 June. Garotinho seems to have given up his dream and made public his "total support" for Simon, who stands on some 4% support.

President Néstor Kirchner's attempt to postpone the dispute over the pulp mill with Uruguay (see page 3) until after the 28 October elections has prompted an insight into the respective views on foreign policy from the presidential candidates. 

Candidate for the Coalición Cí­vica, Elisa Carrió (who most polls place second) said on 19 September that her first move as president would be to improve ties with Uruguay. Her other priorities include ensuring that contracts signed with Chile over gas supply are honoured and helping Bolivia overcome its divisions. 

While pledging his commitment to improving relations with Uruguay, presidential candidate for Una Nación Avanzada (UNA), Roberto Lavagna, took the opportunity, in an interview with Brazilian newspaper, Folha de São Paulo, on 17 September, to accuse the Kirchner administration of "limiting" Argentina's foreign relations to only Venezuela and Spain (through oil company, Repsol-YPF). He described Kirchner's friendship with Venezuelan president Hugo Chávez as one of the government's "biggest mistakes". He added that while espousing a pro-Latin America discourse, Chávez was "dividing the continent_with Mexico, Brazil, Chile and Uruguay on the one side and Venezuela, Bolivia and Argentina on the other" and assured that if he won the elections, he would prioritize relations with neighbours in the Mercosur camp such as Brazil, Chile, Uruguay and Paraguay. Lavagna also said that there was an "enormous contradiction" between the accusations against Iran regarding the AMIA bombing and the close relations maintained with Venezuela, given its ties with Iran.

Cristina Fernández, meanwhile, continued to boost her international profile with a trip to Germany. As well as meeting German Chancellor, Angela Merkel, she also met the German economy minister, Michael Glos, with whom she discussed the Paris Club debt and reiterated the government's intentions to negotiate the debt without the intervention of the International Monetary Fund (IMF).

Cristina's peripatetic world tour will continue with trips to the US, Chile and Brazil before the elections -evidence of the active foreign policy she is likely to pursue. While upholding close ties with Chávez , who said on 20 September that the "Rí­o de la Plata is singing her victory", she is also expected to maintain good relations with the US. The US establishment is said to look favourably on her likely presidency and this week she is accompanying her husband on a trip there. Moreover, on 28 September, she will be received by head of the Federal Reserve Bank of New York, Timothy Geithner, along with the presidents of American Express, Goldman Sach, JP Morgan-Chase, Citicorp and multi-nationals such as Unilever and Exxon. 

Such meetings, in which Cristina is not received as a candidate but a future president, suggest that the US financial establishment takes it for granted that she will win. The meeting with Geithner is also said to be an opportunity for the US financiers to express concerns over the Argentine economy, with problems most recently evinced in questions over inflation. The head of the Central Bank, Martí­n Redrado said on 13 September that he was "profoundly concerned" over inflation. The revival of questions over the state statistics institute Indec, which has previously come under fire for manipulating the inflation figures, resulted in the resignation of the official in charge of producing monthly price data, Beatriz Paglieri, on 22 September. 

Malvinas
The Argentine government has reacted angrily to plans by Britain to submit a bid to the UN proving that thousands of extra square miles of the ocean floor surrounding the Falklands are geographically part of the islands. The claim is based on international legislation stating that a nation's legitimately-held territory can extend up to 350 miles from its coast if it can verify that it is part of the shoreline's underlying continental shelf.