Foreign affairs 2016 09-10

Keeping Europe Safe United Kingdom had recently joined this network, but after Brexit, it will have to negotiate a new agreement). Policymakers will now need to put in place arrangements to ensure continued cooperation on law enforcement once the United Kingdom withdraws from the eu. Close British-eu cooperation should not get in the way of creating a wider network of states, including the United Kingdom, to improve intelligence gathering on terrorist and criminal organizations within and outside Europe’s borders. But it will take good statesmanship on all sides to navigate the tough negotiations over the United Kingdom’s new relationship with the eu, while creating more powerful, mutually beneficial networks for intelligence sharing and security cooperation across Europe and beyond. European countries were slow to respond to the rise of isis. But they now have the opportunity to override old prejudices, reexamine their counterterrorism strategies, and invest in modern intelligence methods. Even those states that justifiably pride themselves on their police and their ability to access and analyze intelligence can learn from recent events. Above all, the goal should be to maintain normality—and to increase the ability to swiftly restore it when necessary. This will deprive terrorists of what they seek most: to stoke public fear and disrupt the everyday life of free and democratic societies. They must not be allowed to succeed.∂ September/October 2016 93

Return to Table of Contents The Return of Europe’s Nation-States The Upside to the EU’s Crisis Jakub Grygiel Europe currently finds itself in the throes of its worst political crisis since World War II. Across the continent, traditional political parties have lost their appeal as populist, Euroskeptical movements have attracted widespread support. Hopes for European unity seem to grow dimmer by the day. The euro crisis has exposed deep fault lines between Germany and debt-ridden southern European states, including Greece and Portugal. Germany and Italy have clashed on issues such as border controls and banking regulations. And on June 23, the United Kingdom became the first country in history to vote to leave the eu—a stunning blow to the bloc. At the same time as its internal politics have gone off the rails, Europe now faces new external dangers. In the east, a revanchist Russia— having invaded Ukraine and annexed Crimea—looms ominously. To Europe’s south, the collapse of numerous states has driven millions of migrants northward and created a breeding ground for Islamist terrorists. Recent attacks in Paris and Brussels have shown that these extremists can strike at the continent’s heart. Such mayhem has underscored the price of ignoring the geopoliti­ cal struggles that surround Europe. Yet the eu, crippled by the euro crisis and divisions over how to apportion refugees, no longer seems strong or united enough to address its domestic turmoil or the security threats on its borders. National leaders across the continent are already turning inward, concluding that the best way to protect their countries is through more sovereignty, not less. Many voters seem to agree. JAKUB GRYGIEL is a Senior Fellow at the Center for European Policy Analysis. 94 f o r e ig n af fai r s

As Europe’s history makes painfully clear, a return to aggressive nationalism could be dangerous, not just for the continent but also for the world. Yet a Europe of newly assertive nation-states would be preferable to the disjointed, ineffectual, and unpopular eu of today. There’s good reason to believe that European countries would do a better job of checking Russia, managing the migrant crisis, and com­ bating terrorism on their own than they have done under the aus­ pices of the eu. EVER-FARTHER UNION In the years after World War II, numerous European leaders made a convincing argument that only through unity could the continent es­ cape its bloody past and guarantee prosperity. Accordingly, in 1951, Belgium, France, Italy, Luxembourg, the Netherlands, and West Ger­ September/October 2016 95

Jakub Grygiel many created the European Coal and Steel Community. Over the next several decades, that organization morphed into the European Eco­ nomic Community and, eventually, the European Union, and its membership grew from six countries to 28. Along the way, as the fear of war receded, European leaders began to talk about integration not merely as a force for peace but also as a way to allow Europe to stand alongside China, Russia, and the United States as a great power. The eu’s boosters argued that the benefits of membership—an inte­ grated market, shared borders, and a transnational legal system—were self-evident. By this logic, expanding the A Europe of nation-states union eastward wouldn’t require force would be preferable to the or political coercion; it would simply disjointed, ineffectual EU take patience, since nonmember states would soon recognize the upsides of of today. membership and join as soon as they could. And for many years, this logic held, as central and eastern European countries raced to join the union after the collapse of the Soviet Union. Eight countries—the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and Slovenia—became members in 2004; Bulgaria and Romania followed in 2007. Then came the Ukraine crisis. In 2014, the Ukrainian people took to the streets and overthrew their corrupt president, Viktor Yanukovych, after he abruptly canceled a new economic dealwith the eu. Immediately afterward, Russia invaded and annexed Crimea, and it soon sent soldiers and artillery into eastern Ukraine, too. The eu’s leaders had hoped that economic inducements would inevitably increase the union’s membership and bring peace and prosperity to an ever-larger public. But that dream proved no match for Russia’s tanks and so-called little green men. Moscow’s gambit was not, on its own, enough to cripple the eu. But soon, another crisis hit, and this one nearly pushed the union to its breaking point. In 2015, more than a million refugees—nearly half of them fleeing the civil war in Syria—entered Europe, and since then, many more have followed. Early on, several countries, especially Germany and Sweden, proved especially welcoming, and leaders in those states angrily criticized those of their neighbors that tried to keep the migrants out. Last year, after Hungary built a razor-wire fence along its border with Croatia, German Chancellor Angela 96 f o r e i g n af fai r s

The Return of Europe’s Nation-States Merkel condemned the move as reminiscent of the Cold War, and French Foreign Minister Laurent Fabius said it did “not respect Eu­ rope’s common values.” But early this year, many of these same leaders changed their tune and began pressuring Europe’s border countries to increase their security measures. In January, several European govern­ ments warned Greece that if it did not find a way to stanch the flow of refugees, they would expel it from the Schengen area, a passport- free zone within the eu. Consciously or not, the European politicians advocating open borders have failed to prioritize their own citizens over foreigners. These leaders’ intentions may be noble, but if a state fails to limit its protection to a particular group of people—its nationals—its govern­ ment risks losing legitimacy. Indeed, the main measure of a country’s success is how well it can secure its people and borders from external threats, be they hostile neighbors, terrorism, or mass migration. On this score, the eu and its proponents are failing. And voters have noticed. The British people issued a strong rebuke to the bloc in June when they voted to leave the eu by a margin of 52 percent to 48 percent, ignoring warnings from the International Monetary Fund, the Bank of England, and the United Kingdom’s Treasury that doing so would wreak economic disaster. In France, according to a recent Pew survey, 61 percent of the population holds unfavorable views of the eu; in Greece, 71 percent of the population shares these views. Back when Europe faced no pressing security threats—as was the case for most of the last two decades—eu members could afford to pursue more high-minded objectives, such as dissolving borders within the union. Now that dangers have returned, however, and the eu has shown that it is incapable of dealing with them, Europe’s national leaders must fulfill their most basic duty: defending their own. BACK TO BASICS The eu’s architects created a head without a body: they built a unified political and administrative bureaucracy but not a united European nation. The eu aspired to transcend nation-states, but its fatal flaw has been its consistent failure to recognize the persistence of national differences and the importance of addressing threats on its frontiers. One consequence of this oversight has been the rise of political parties that aim to restore national autonomy, often by appealing to far-right, populist, and sometimes xenophobic sentiments. In 2014, September/October 2016 97

Jakub Grygiel the uk Independence Party won the popular vote in an election for the European Parliament—the first time since 1906 that any party in the United Kingdom had bested Labour and the Conservatives in a nationwide vote. Last December Individual countries will in France, Marine Le Pen’s far-right provide the kind of safety National Front won the first round of that Brussels can’t. the country’s regional elections; then, in March in Germany, a right-wing Euro­skeptical party, Alternative for Germany, won almost 25 percent of the vote in Saxony-Anhalt. And in May, Norbert Hofer, a candidate from the far-right Freedom Party, narrowly lost Austria’s presidential election. (Austria’s Constitu­ tional Court later annulled that result, forcing a rerun of the elec­ tion that will be held in October.) Some of these parties have benefited from the enthusiastic support of Russia, as part of its campaign to buy influence in Europe. Until recently, Moscow could rely on European leaders who were friendly to Russia, including former German Chancellor Gerhard Schröder and former Italian Prime Minister Silvio Berlusconi. But now, as new parties take the place of established ones, the Kremlin needs fresh partners. It has given money to the National Front, and the U.S. Congress has asked James Clapper, the U.S. director of national intel­ ligence, to investigate the Kremlin’s ties to other fringe parties, including Greece’s Golden Dawn and Hungary’s Jobbik. Yet such parties would be surging even without Russian backing. Many Europeans are disenchanted with politicians who have supported eu integration, open borders, and the gradual dissolution of national sovereignty; they have a deep and lasting desire to reassert the supremacy of their nation-state. Of course, most of Europe’s Euroskeptical politicians don’t seek to disband the union entirely; in fact, many of them continue to see its creation as a historic victory for the West. They do, however, want greater national autonomy on social, economic, and foreign policy, especially in response to overreaching eu mandates on migration and the demand for controversial continent-wide laws on issues such as abortion and marriage. Many in the United Kingdom, for example, pushed for a British exit from the eu, or Brexit, out of frustration with the number of British laws that have come from Brussels rather than Westminster. 98 f o r e i g n af fai r s

The Return of Europe’s Nation-States The bet against sovereignty has failed. But sovereignty’s resurgence has conjured up many dark memories of the nationalism that twice brought the continent to the brink of annihilation. Many observers now worry that European politics are coming to resemble those of the 1930s, when populist leaders spewed hate to whip up support. Such fears are not wholly unfounded. The strident xenophobia of Austria’s Freedom Party recalls the early days of fascism. Anti-Semitism has risen across Europe, sprouting up in parties that span the ideological spectrum, from the United Kingdom’s Labour Party to Hungary’s Jobbik. And in Greece, some members of the radical left-wing party Syriza have advocated Greek withdrawal from nato, a prime example of a growing anti-Americanism that could undermine the foundation of European security. Yet affirming national sovereignty does not require virulent nation­ alism. The support for Brexit in the United Kingdom, for instance, was less an expression of hostility toward other European countries than it was an assertion of the United Kingdom’s right to self-govern. A return to nation-states entails not nationalism but patriotism, or what George Orwell called “devotion to a particular place and a particular way of life.” It’s also worth noting that one of the greatest threats Europe faced in the twentieth century was transnational in nature: communism, which divided the continent for 45 years and led to the deaths of millions. BEYOND THE EU A renationalization of Europe may be the continent’s best hope for security. The eu’s founders believed that the body would guarantee a stable and prosperous Europe—and for a while, it seemed to. But today, although the eu has generated wealth through its common market, it is increasingly a source of instability. The euro crisis has exposed the union’s inability to resolve conflicts among its members: German leaders have had little incentive to address Greek concerns, and vice versa. The eu also suffers from what the German Federal Constitutional Court has called a “structural democratic deficit.” Of its seven institutions, just one—the European Parliament—is directly elected by the people, and it cannot initiate legislation. Finally, the recent dominance of Germany within the eu has alienated smaller states, including Greece and Italy. Meanwhile, the eu has failed to keep Europe safe. Since 1949, Europe has relied on nato—and, in particular, the United States—to September/October 2016 99

Jakub Grygiel secure its borders. The anemic defense spending of most European countries has only increased their dependence on the United States’ physical presence in Europe. The eu is unlikely to create its own army, at least in the near future, as its members have different strategic priorities and little desire to cede military sovereignty to Brussels. Many of the eu’s backers still insist that in its absence, anarchy will engulf the continent. In 2011, the French minister for European affairs, Jean Leonetti, warned that the failure of the euro could lead Europe to “unravel.” In May, British Prime Minister David Cameron claimed that a British exit from the eu would raise the risk of war. But as the American theologian Reinhold Niebuhr wrote in the 1940s, “the fear of anarchy is less potent than the fear of a concrete foe.” Today, the identifiable enemies that have arisen around Europe, from Russia to the self-proclaimed Islamic State (also known as isis), seem far more worrying to most people than the potential chaos arising from the dissolution of the eu. Their hope is that individual countries will provide the kind of safety that Brussels can’t. SPECIAL RELATIONSHIPS From the United States’ perspective, the fraying of the eu presents a serious challenge—but not an insurmountable one. In the decades after World War II, Washington sought to contain the Soviet Union not just through nuclear deterrence and a sizable military presence in Europe but also by promoting European integration. A united continent, the thinking went, would pacify Europe, strengthen the economies of U.S. allies, and encourage them to cooperate with Washington to ward off the Soviet menace. Today, however, the United States needs a new strategy. Because the eu no longer seems up to the task of protecting its borders or competing geopolitically, more American pressure for Europe to integrate will simply alienate the growing number of Europeans who have turned their backs on the eu. Washington need not fear the dissolution of the eu. Fully sovereign European states may prove more adept than the union at warding off the various threats on its frontiers. When Russia invaded Ukraine, the eu had no answer besides sanctions and vague calls for more dialogue. The European states that border Russia have found little reassurance in the union, which explains why they have sought the help of nato and U.S. forces. Yet where the eu has failed, individual countries may fare better. Only patriotism has the kind of powerful and popular appeal 100 foreign affairs

The Return of Europe’s Nation-States that can mobilize Europe’s citizens to rearm against their threatening neighbors. People are far more willing to fight for their country—for their history, their soil, their common religious identity—than they are for an abstract regional body created by fiat. A 2015 Pew poll found that in the case of a Russian attack, more than half of French, Germans, and Italians would not want to come to the defense of a nato—and thus likely an eu—ally. The return of nation-states need not lead Europe to revert to an anarchic jumble of quarreling governments. Increased autonomy won’t stop Europe’s states from trading or negotiating with one another. Just as supranationalism does not guarantee harmony, sovereignty does not require hostility among nations. In a Europe of revived nation-states, countries will continue to form alliances based on common interests and security concerns. Recognizing the weakness of the eu, some states have already done so. The Czech Republic, Hungary, Poland, and Slovakia, for example— normally a disjointed group—have joined forces to oppose eu plans that would force them to accept thousands of refugees. The United States, for its part, needs a better partner in Europe than the eu. As the union dissolves, nato’s function in maintaining stability and deterring external threats will increase—strengthening Washington’s role on the continent. Without the eu, many European countries, threatened by Russia and overwhelmed by mass migration, will likely invest more heavily in nato, the only security alliance backed up by force and thus capable of protecting its members. It’s time for U.S. leaders and Europe’s political class to recognize that a return to nation-states in Europe does not have to end in tragedy. On the contrary, Europe will be able to meet its most pressing security challenges only when it abandons the fantasy of continental unity and embraces its geopolitical pluralism.∂ September/October 2016 101

BLLoautgiilindstiAnicgms ePrlaictfao’srm TRMHEEVEXEISCATOLRIE’NSNGMGUTSHCLE in partnership with The much awaited Telecoms and to replace the existing Benito Juarez Broadcasting Reform was followed by the InternationalAirport which was announced announcement of significant budget cuts to the by Mexican President Peña, who allocated 2013-18 National Infrastructure Program in $9.2bn for its construction in September early 2015.Today Mexican infrastructure projects 2014. It is one of the world’s biggest airport are benefiting from public-private partnerships infrastructure projects and is expected to (PPPs) as the Aztec nation finds formulas to fund be the biggest airport in Latin America. its ambitious infrastructure conduit in line with What stage is it at today? market ailments. Gerardo Ruiz Esparza, Mexico’s Minister of Communications and Transport, Air activity had been growing in Mexico shares with us how this administration is further more than the economy. While GDP growth connecting Mexico to the world. was 3.5 % between 2009 and 2013, the annual growth of passengers reached 5.4% during President Peña’s speech projected that same period. In line with the OCDE the Mexico as the Logistics Platform of Latin New International Airport responds to a need America. Strides taken to this end and that goes back 20 years – to expand the airport’s impact achieved. capacity proportionately to the country’s growth. From the start our priority has been to Since the airport’s growth reached its transform Mexico into a leading logistics platform maximum operational capacity, passengers and with high added value as part of the National trade have been connecting via other airports Infrastructure Plan 2013-18 aimed at providing postponing the opportunity for Mexico City the infrastructure and modern logistic platforms to become Latin America’s leading passenger that will unclench added value activities and and cargo hub. promote balanced regional development. As a result and to overcome this, President To achieve that we have built and modernized Peña publicly announced the construction of more roads, rural and feeder roads as well as the new airport on September 3rd 2014. When drawdowns and bridges that will reinforce the completed and in full development it will boast trunk road network to the longitudinal runners six runways and will transport approximately that link the North to the South, the Pacific 120 million passengers yearly – quadruplicating Ocean to the Gulf of Mexico. Additionally we its current capacity. The go-ahead decision was are developing infrastructure that will be linked based on technical studies carried out by experts to the other transport networks such as rail, from renowned world organizations such as ports and airports that will provide value to the the MITRE Corporation, the International Air supply chain and will purvey global markets with Transport Association (IATA) and the Civil multimodal logistic platforms. Aviation Organization (OACI). In mass transport systems we have boosted We have already moved from planning and projects that aim to improve transfer times design to execution. Therefore today the most to reduce time/person and environmental important project of this administration is costs, e.g. passenger trains which are efficient meeting is going to plan. So far the project has environmental alternatives and they facilitate concluded leveling and cleaning of 1143 hectares; transfers between cities.We are also modernizing the removal of 2 million cubic meters of waste and expanding maritime terminals so they offer material; the construction of 48 kilometers the required conditions to enable ports to be of internal ways and the construction of the more competitive in line with fomenting tourism perimeter bard to be finalized before the end and foreign trade. of 2016. By the end of June 292.7 million dollars have been invested. The Mexico City New International Airport (NAICM) is a new greenfield Additionally six of the 21 bidding packages were airport being built in the city of Mexico, announced including runways 2 & 3, the foundation Sponsored Section

of the Terminal building and the Control Tower. We expect the benefits of these works to Environmentally, the process for the catapult a golden era in passenger and cargo rail, in turn generating innovative train proposals certification of the Leadership in Energy and across the nation raising quality of life and Environmental Design (LEED) was developed and complimenting existing connectivity in line with a commissioning company was hired to ensure the President’s announcement that Mexico will the criteria for the ecological sustainability of the once again count on trains to connect its cities. building is met. Does Mexico qualify as the Regional The Ministry of Environment is conducting Logistics and Innovation Platform of Latin reforestation activities in approximately 2,000 America? hectares and is contemplating the construction of a metropolitan forest of 670 hectares. The relevance of the National Infrastructure Plan from its inception was to transform the Works on Texcoco’s Lake Hydraulic System country into a value added global logistics platform (Hydraulic Master Plan) will represent an profiting from our competitive advantages such investment of US$1.157 billion out of which as: geographic location – between the US, the 28 works have been already contracted for largest market in the world and Europe and Asia- more than US$491 million. Twenty out of 28 of ; more that 11,000 km coastline, demographic these works have concluded and represent bonus and specialized workforce, participation US$125 million. in 11 commercial treaties with 46 countries, in addition to the recent adherence to the Trans Next steps include further leveling of the Pacific Partnership (TPP) integrated by 12 ground and storm drain. Further bids of 16 nations. Important international recognitions projects are expected for this year. confirm that we are on the right track - in only three and a half years competitiveness conditions Will the international community have improved and set the foundations for a view the Mexico City - Toluca train as prosperous, inclusive country. a springboard for future passenger rail development? For instance: the aeronautic industry has been driven towards growth. Proof of it is the sustained During the first half of the 20th century increase in the number of transported passengers the passenger train was a symbol of modernity, year-on-year by 12%. Our participation in progress and future. Railways that connected world aviation has been further strengthened several parts of the city had a considerable through the new Aerial Transport Agreement expansion and by 1964 there was a network of with the US providing better services, promoting 23,000 kilometers. But their development was regional development through more routes, neglected in recent decades and rail use declined flight frequencies and better prices. Additionally to become obsolete despite being a friendly and bilateral agreements of aerial transport have efficient mean of transport. This administration been signed with Saudi Arabia and Kuwait. seized the advantages rail transport provides We have achieved more agreements than ever as modern, safe, fast and price accessible with before reaching 302 new national and 259 the objective to create a new paradigm in mass international routes. urban mobilization. Within the Communications and Transport Sectorial Program 2013-2018 it In port development we have increased our was recognized that trains provide a substantial capacity by 40 percent and by 2018 we will have advantage by using efficient and clean energy duplicated it. With regards to rail cargo we have sources helping reduce emissions causing climate attracted more than double the investment. Given change. its importance for the logistic development of Mexico we have prioritized port infrastructure Following this criteria, current projects modernization in addition to the implementation underway are: of better technology for an updated rail system. Road infrastructure is the nation’s main mean 1) The Interurban Mexico City - Toluca train: of transport for which we are constructing a modern, efficient and safe rail service to and modernizing eight trunk axes, building connect the Toluca Valley with the Northern 52 new highways and 80 federal roadways having part of Mexico City in approximately 39 minutes delivered already 17,000 km of highways, roads reducing actual time by 50%. and rural ways. 2) Guadalajara Light Rail: aims to efficiently link the municipalities of Guadalajara, Zapopan and Tlaquepaque with 18 stations, in 33 minutes allowing a reduction of 40 minutes. Sponsored Section

Financing infrastructure – What measures 2. Two road sections: from the states is the government putting in place to of Queretaro to San Luis Potosí and from safeguard infrastructure investments and Coatzacoalcos in Veracruz to Villahermosa in provide transparency and legal certainty to Tabasco. investors? 3. Development of shared network which Firstly a responsible spending policy has been will provide coverage to more than double implemented for the Ministry’s entire program. the number of Mexicans using 4G by using In a bid to ensure transparency, for the first time, an innovative PPP scheme for the design, the Ministry of Communications and Transport installation, deployment, operation, maintenance, has electronic proof of all of the processes on upgrade and commercialization of the its major requests for bids that allows anyone wholesaler’s telecoms services. An investment to check, through the internet web site, all the of approximately US$10 billion over a 10 year different procedures, from the initial bid request period is expected through a PPP. to the final contract issued. Bidding processes are streamlined with the participation of public PPPs have proven to be an ideal mechanism notaries to provide testimonies of the content of to ensure financing for different essential proposals submitted by the companies. infrastructure projects within an adverse economic scenario. We have conducted 9,695 bidding processes and granted contracts to more than 5,055 Given the huge economic potential of companies and there has not been a single legal the Trans- Pacific Partnership, what plans nonconformity and all the projects have been are there to develop a port infrastructure contracted by public biddings under the principle on Mexico’s Pacific coast,along with arterial of a “Social Witness”, appointed by the Public roads to transport goods to the Atlantic? Function Secretary. Prestigious international specialized entities have been invited to certify The Trans-Pacific Partnership is an exciting the legality, the law observance and the technical project because of the potential spread in the validity of the bidding process. maritime trade flows between Mexican, Asian and American Ports in the Pacific Ocean. It The Secretariat and the Organization for will open a fresh window to 200 million new Economic Cooperation and Development potential clients. Mexican companies will enter (OECD) signed an agreement in 2015 to new markets and will consolidate their presence promote the integrity, transparency and public in Latin America and North America. biddings good practices, for the construction of the Mexico City’s New International Airport. Mexico’s monopolized telecommunications Additionally a legal protocol was signed with sector desperately needed to be liberalized the National Construction Chamber to further with provider Telmex charging some of the promote this between builders and civil servants. highest tariffs in the world. How has the Telecommunications Reform benefitted Mexico’s Public Private Partnerships users? (PPPs) seem to be blossoming to fund infrastructure projects such as rail,road and Providing benefits for the end-user was port operations. Private sector investment the top priority for the Telecommunications is expected to reach as much as US$11.1bn Reform. It delivered direct and immediate savings (MXN200bn) in the country’s ongoing to Mexican families of up to 23%, due to the projects. Will PPPs compensate for a lack elimination of charges in telecommunication of resources due to recent budget cuts? services. Since January 2015 costs for domestic long distance calls on wireline and wireless Objectives within the Sectorial telephones were eliminated representing annual Communications & Transport Program savings for users US$1 billion. 2013-2018 established the promotion of the PPP schemes to attract larger private Together with price reduction, consumers sector participation. Works being financed will also experience improvements in in this way include: telecommunication services. Regarding mobile telephony, for instance, connection in all Mexican 1. The design, construction, operation, territory is guaranteed regardless of the service exploitation, conservation and maintenance provider. Additionally, prepaid service users are of the Viaduct La Raza – Indios Verdes- Santa now be able to consult their balance. Regarding Clara in Mexico City. internet, there was an increase from 42 million users to 62 million users; subscriptions to Sponsored Section

mobile bandwidth increased from 21 to 54 per The Program Connected Mexico further aims 100 inhabitants considerably reducing the digital to reduce the digital gap by connecting schools, gap. By the end of 2015 the transition to Digital hospitals, libraries, community centers and other Terrestrial TV was completed and the analog public places free-of-charge via broadband. To blackout took place. More than 10 million digital date more than 100,000 establishments and TVs were granted to homes with scarce resources public areas have been connected benefitting – benefitting one in three homes nationwide. millions of people in urban and rural areas of Now families spend less in electricity and have difficult access. Furthermore the digital inclusion access to double the number of digital channels. network Puntos Mexico Conectado has been launched and consists of 32 centers across the On the broadcasting sector, the Reform has country to educate and train people in I.T. Today set ground rules for the “must carry and must the network counts with 221,000 members. offer” procedure that allows broadcasters to retransmit payTV signals with no cost for viewers, Finally, the Federal Institute of while pay TV providers are allowed to transmit Telecommunications was created, a broadcasted signals on their systems with no body committed to efficiently develop charge for the consumer, thus allowing access to telecommunications and broadcasting for user the same contents for all TV viewers. and audience benefit. The above-mentioned benefits did not come How would you characterize the about by chance; they were the result of better response from foreign telecoms/internet competition conditions originated by the Reform. providers to the reform so far? This fact is acknowledged by the Organization for Economic Cooperation and Development As one of the first major steps to enhance (OECD). In its 2015 OECD Economic Survey of effective competition in the industry, the new Mexico it praises Mexican regulation for being in regulation allows foreign direct investment up accordance with competition, and it even places to a 100 per cent ceiling in telecommunications the Mexican regulation index from number 93 and satellite sectors, while in the broadcasting to number 4 in the World Economic Forum area is capped at 49 per cent. As envisioned connectivity accessibility. this has attracted private investment in telecom infrastructure to grow 35% in 2015 compared According to the sign of the times and to 2014, while accounting for more than aligned with its strategic intent of boosting US$8.72 billion over the past three years. FDI telecommunications as development and digital in the telecom sector has also grown significantly inclusion tools, the Federal administration is after the reform and now it represents responsible of bringing this to fruition by fostering 10% of the total.. infrastructure development, creating conditions for accessibility and connectivity, and promoting For example, in January 2014, Eutelsat, leading the use of the Information and Communications global provider of satellite communications, Technologies (ITC). It is also in charge of purchased Satmex, Mexican satellite services providing suitable conditions for the development provider in an operation worth more than 800 of digital skills among the population. With million dollars. AT&T followed with the purchase this, it is intended that at least 70 per cent of of Iusacell, a Mexican carrier with more than households and 85 per cent of micro, small 4 million subscribers and NII Holdings, and medium sized companies can benefit from Nextel Mexico. Both operations involved nearly high-speed internet access at world class US$4 billion. standards and affordable pricing. The new competition environment and the These connectivity goals will be reached by more flexible regulation within the sector also embracing an ambitious infrastructure plan that prompted the entrance of new players to the guarantees greater coverage for more Mexicans. Mexican mobile market. Mobile Virtual Network To meet the challenge, actions are being taken to Operators (MVNO’s) with global presence, like expand and strengthen the backbone broadband Virgin Mobile and Tuenti, from Telefónica, have fiber optic network owned by the Federal Electricity started operations in the Mexican market by Commission (CFE, by its initials in Spanish), and offering low cost service packages to pre-paid deploy a Shared Wholesaler Network that will mobile users. provide services for both, Mobile Virtual Network Operators (MVNO’s) and concessionaires. Full report: https://www.foreignaffairs.com/country-focus Information: [email protected] Sponsored Section

Return to Table of Contents How to Fix Brazil Breaking an Addiction to Bad Government Eduardo Mello and Matias Spektor Brazil has rarely had it so bad. The country’s economy has col­ lapsed: since 2013, its unemployment rate has nearly doubled, to more than 11 percent, and last year its gdp shrank by 3.8 per­ cent, the largest contraction in a quarter century. Petrobras, Brazil’s semipublic oil giant, has lost around 85 percent of its value since 2008, thanks to declining commodity prices and its role in a massive corruption scandal. The Zika virus has infected thousands of Brazilians, exposing the frailty of the country’s health system. And despite the billions of dollars Brasília poured into the 2014 World Cup and this year’s Olympic Games, those events have done little to improve the national mood or upgrade the country’s urban infrastructure. Meanwhile, many of Brazil’s long-standing problems have proved stubbornly persistent: half of all Brazilians still lack access to basic sanitation, 35 million of them lack access to clean water, and in 2014, the country suffered nearly 60,000 homicides. But Brazil’s biggest problems today are political. Things first came to a boil in the summer of 2013, when the police clashed with students protesting bus and subway fare hikes in São Paulo. Within days, some 1.5 million people took to the streets of Brazil’s big cities to protest a wider set of problems, including the government’s wasteful spending (to the tune of some $3.6 billion) on the construction and refurbishment of a dozen stadiums for the World Cup. In the months that followed, when Brazilian President Dilma Rousseff appeared on television to soothe the unrest, Brazilians across the country drowned out her voice by rattling pots and pans from their balconies. In October 2014, after EDUARDO MELLO is a Ph.D. candidate at the London School of Economics. Follow him on Twitter @ejamello. MATIAS SPEKTOR is Associate Professor of International Relations at Fundação Getulio Vargas, in Brazil. Follow him on Twitter @MatiasSpektor. 102 f o r e i g n af fai r s

How to Fix Brazil promising to increase public spending and bring down unemployment, Rousseff managed to win reelection by a thin margin. But she quickly backtracked on her major pledges, announcing a plan to cut state spend­ ing and rein in inflation. The public’s anger mounted. The deathblow to Rousseff’s government came from another source, however: a corruption investigation that had been brewing even as she campaigned for reelection. In March 2014, Brazilian prosecutors exposed a scheme under which business leaders and government officials had been colluding to generate kickbacks worth some $2 billion since 2004—one of the largest corruption scandals in history. Operation Car Wash, as the investigation has come to be known, found that private companies had been sending politicians cash through intermediaries at Petrobras in exchange for juicy contracts with the oil giant, the board of which Rousseff had led before becoming president. As new revelations involving high-ranking officials hit the Brazilian media over the course of 2015, Rousseff ’s reputation suffered irreparable damage; in August of that year, her approval rating sank to eight percent—a historic low. Even Luiz Inácio Lula da Silva (known as Lula), Rousseff ’s once wildly popular predecessor, was drawn into the vortex: in March 2016, prosecutors began investigating his ownership of an undeclared property in the beachside city of Guarujá that had been renovated by a construction firm implicated in the Petrobras scheme, among other possible offenses. In May, as the congressional coalition led by Rousseff ’s Workers’ Party crumbled, legislators voted to suspend her from office and began impeachment proceedings on the charge that she had manip­ ulated the budget to hide a gaping deficit. (No one has suggested that she personally profited from the graft at Petrobras.) Her vice president, Michel Temer—a savvy operator who cut his teeth in the Chamber of Deputies (the lower house of the National Congress, Brazil’s legislature)— took over as acting president, despite the fact that he, too, was the target of an investigation. Just a week before Temer stepped in on May 12, Eduardo Cunha, a lawmaker in Temer’s Brazilian Democratic Movement Party (pmdb), was removed from his duties as the Speaker of the Chamber of Deputies on charges of obstructing justice, lying to prosecutors, and hiding millions of dollars in a Swiss bank account. (Cunha formally resigned from the speakership in early July but kept his seat in Congress.) Temer soon lost three members of his cabinet to Operation Car Wash; in the coming months, as the judiciary’s September/October 2016 103

Eduardo Mello and Matias Spektor investigation of pmdb operatives moves forward, he might end up facing charges himself. All these revelations seem to suggest that Brazil’s current crisis is the product of widespread criminal behavior by its leading politicians. But the real source of the trouble goes deeper. The chaos roiling the country is the product not of individual malfeasance but of flawed political engineering. At the heart of Brazil’s problems with corrup­ tion and inefficiency lie the rules that govern the relationship between the country’s executive and legislative branches, which encourage ex­ actly the kind of graft that the Petrobras scandal has revealed. To re­ turn their country to political solvency, Brazilians must take on a mighty task: they must make sweeping electoral and political reforms to eliminate the incentives that lead so many officials to break the law in the first place. A GREASY WHEEL In many presidential systems, including the United States’, clashes between the chief executive and the legislature are common. Brazil’s 1988 constitution addresses that problem by granting the president extraordinary powers to break gridlock. Brazilian presidents can issue provisional legislation by decree (although all laws must eventually be approved by Congress), dislodge pending legislation from congres­ sional committees, force Congress to vote on urgent measures, and veto bills in part or in whole. Those powers have long helped Brazil’s presidents avoid deadlock and pass many needed reforms. It would be a mistake, however, to assume that Brazilian presidents are all-powerful. To the contrary: their ability to avoid gridlock comes at a high price. Because Brazil’s Congress has more than two dozen political parties, it’s nearly impossible for a single one to win a majority. That forces Brazil’s presidents to form coalitions in order to govern effectively. And that’s where the problems start. Brazil’s political parties lack coherent ideological agendas; instead, they are loosely knit alliances whose members have no qualms about forming or dissolving coalitions at any time. As a result, members of Congress constantly renegotiate their political loyalties, based largely on the parochial interests of the con­ stituencies they represent. Making matters worse, Brazil’s electoral rules allow candidates to switch parties relatively easily, undermining any chance of ideological 104 foreign affairs

UESLEI MARCELINO / REUTERS How to Fix Brazil Game over: Dilma Rousseff after being suspended by the Senate, Brasília, June 2016 unity within coalitions. And candidates are elected to Congress based not on the number of votes they receive individually but on the total number their party pulls in. That creates an incentive for politicians to change allegiances on a regular basis: jumping ship for a party led by a popular candidate can often boost less popular aspirants to office (or keep them there). Brazilian politicians thus tend to ride on the coattails of powerful allies instead of focusing on party loyalty, ideological consistency, or the details of policy. All of that makes it hard for most voters to know what ideas individual candidates—or parties—stand for. As a result, Brazilians tend to pick their leaders based on their personal appeal rather than the quality of their platforms. These problems are all intensified by the fact that once Brazilian lawmakers take office, few rules enforce loyalty. Not only can they switch parties; legislators can also vote as they wish, even if it means voting against their own party or the presidential administration their party ostensibly supports. Few pay a price for breaking ranks in this fashion. Members of Congress seldom get booted out of their party— and parties seldom get kicked out of their coalition—for disobeying party whips. Since those whips can’t control their own members of Congress, presidents must bargain with lawmakers on an individual basis in order to pass legislation. The need to win over so many individual allies—who all have their own interests and constituencies September/October 2016 105

Eduardo Mello and Matias Spektor to please—has led Brazilian presidents to pump vast amounts of pork, patronage, and protection into the system. This year, for example, the federal government granted tax subsidies to well-connected families in the state of Goiás to help them pay to hire local musicians to play at their relatives’ weddings. And in recent years, the Brazilian press has reported on the construction of several roads and bridges that seem to lead to nowhere. In many democracies, of course, logrolling is neither rare nor necessarily bad. But in Brazil, the practice has proved deeply counter­ productive. For one thing, it has led to inefficient government spending. In 2015, tax revenues accounted for some 35 percent of gdp—more than they do in a number of wealthier nations, including South Korea and Switzerland. Yet despite this income, the country’s public goods are in dire shape. Take education: in an Brazil’s inefficiencies assessment of 65 countries completed by stem directly from its the Organization for Economic Coop­ eration and Development in 2012 (the dysfunctional political most recent year for which such data process. are available), Brazilian high school students ranked near the bottom in mathematics and reading—below their peers in Kazakhstan and Thailand. Or consider infrastructure: since spending money on expensive public goods doesn’t bring in many votes, the Brazilian government tends to favor investing in cheap roads designed for private cars rather than costly public transportation systems. As a result, Rio de Janeiro, a metropolis of 12 million people, has fewer miles of subway track than Lisbon, which is home to just 530,000. Such inefficiencies stem directly from Brazil’s dysfunctional political process. Legislators and the president alike regularly raise taxes not so they can invest in better public services but so they can replenish the war chests they use to please the special interest groups that help them stay in power. With government spending benefiting thin slices of the electorate rather than the majority of Brazilians, the discrepancy between revenue and the quality and extent of public services is enormous. To be sure, many governments experience tugs of war between narrow interests and the public good, but the extent to which the electoral rules in Brazil favor the former over the latter has made the situation there particularly egregious. 106 f o r e ig n af fai r s

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How to Fix Brazil And yet, bad as they are, these inefficiencies pale in comparison to the other big problem engendered by Brazil’s flawed political rules: endemic corruption. In many cases, the pork and patronage doled out by presidents prove insufficient to win Congress’ support; presidents therefore often sweeten the pot by allowing legislators to appoint their allies to plum jobs in Brazil’s powerful state-owned companies and regulatory agencies. Once in these posts, the new officials gain a say over which companies will receive lucrative government contracts. And many of them have proved all too happy to make those decisions based on bribes, which they then share with their patrons in Congress. Operation Car Wash has exposed just how widespread this kind of corruption has become. According to prosecutors, numerous Petrobras executives were political cronies who saw their main job as charging illegal fees on dealswith private-sector contractors—and then channeling those fees to their backers in government (after pocketing a portion for themselves). As for the contractors in question, they included many of Brazil’s mightiest corporations, including the construction giant Odebrecht and the multinational conglomerate Andrade Gutierrez. Estimates released by the attorney general’s office suggest that since 1997, the companies involved in the graft secured some $20 billion in subsidized credit from the Brazilian Development Bank, which is underwritten by taxpayers. To ensure continued access to this gold mine, the companies lavished gifts and other favors on cooperative politicians and contributed large sums, both on and off the books, to their reelection campaigns. Corruption was the rule, and Congress had strong incentives to ensure that public spending remained high and poorly regulated. THE BETTER OLD DAYS The state of Brazilian politics has not always seemed so bleak. From 1995 to 2010, two social democratic presidents, Fernando Henrique Cardoso and Lula, managed to cut inflation, grow the economy, and lift millions of people out of poverty. But even though both leaders brought about a good deal of reform, neither set out to transform Brazilian politics. Rather than tackle the system’s structural problems, Cardoso and Lula cleverly worked around them, enacting policies that benefited most Brazilians while allowing the wheels of the patronage system to turn undisturbed. For a time, this tactic worked well, since both Cardoso and Lula were careful to insulate their pet economic and social policies from pressure from interest groups and their representatives in Congress. September/October 2016 107

Eduardo Mello and Matias Spektor In order to deal with Brazil’s corrupt and inefficient public health- care system, for example, Cardoso expanded the parallel Family Health Strategy, sending doctors into poor neighborhoods to provide preventive care and reduce the pressure on Brazil’s public hospitals. For his part, Lula launched Bolsa Família, a conditional The chaos roiling Brazil is cash-transfer program that cut poverty in the product of flawed Brazil by 28 percent and cost a mere 0.8 political engineering. percent of the country’s gdp. The program was so cheap, and its benefits so obvious, that it eventually won widespread public support— even from Brazil’s conservatives, who initially opposed it. Both Cardoso and Lula also protected Brazil’s Central Bank and Finance Ministry from political pressure, giving them a free hand to pursue policies that helped the economy stabilize and then grow. Cardoso and Lula weathered their fair share of corruption scandals, but their public-oriented policies and the strong economic growth the country enjoyed during their tenures convinced voters to look the other way. At their peak, these presidents were popular enough that lawmakers found it hard to openly oppose them or to extract fat concessions from them in exchange for their support. But Lula and Cardoso also benefited from the fact that when they entered office, Brazil was, by many measures, in far worse shape than it is today. That meant there was a lot of low-hanging fruit to be picked, and both leaders could bring about major improvements by making relatively small changes to the existing system. As things improved and Brazilians became more demanding of their politicians, new gains proved harder and harder to engineer—as Rousseff learned the hard way when she became president in 2011. Having never held elected office before, Rousseff had a difficult time navigating the give-and-take of Brazilian coalition building. She also had to weather the difficult aftermath of the global financial crisis and preside over an economy that was shrinking, due in part to falling commodity prices. Wedded to mercantilist and interventionist economic theories, Rousseff tried to stimulate Brazil’s sagging economy by increasing public spending. But this turned out to be a bad bet, since the flood of cash encouraged members of Congress to chase more pork and kickbacks. The combustible mix of rising unemployment, public frustration, and growing scandal that resulted would eventually seal her fate. 108 foreign affairs

How to Fix Brazil DON’T HATE THE PLAYER . . . Unlikely as it may seem, Brazil’s current troubles might just have a silver lining: business as usual has become so costly that many Brazilians have finally accepted that the system has to change. Operation Car Wash has laid bare the misdeeds of the country’s political class, and for the first time, dozens of politicians and business leaders have gone to jail. In the past, officials were able to shrug off corruption investigations by relying on a lenient justice system, a weak congressional ethics committee, and a public that seemed inured to graft. That is no longer possible.The judges, investigators, and prosecutors running Operation Car Wash represent a new generation of civil servants, with new values, and they are using a new set of rules and tactics, including the threat of serious sentences and the carrot of leniency deals, to break the silence that politicians and businesspeople have maintained for decades. Just as important, according to public opinion research by the polling group Datafolha, most Brazilians now believe that corruption is their country’s biggest problem. And whereas the protests in 2013 were mostly about irrational government spending, more recently, Brazilians have taken to the streets specifically to protest official corruption. For all his shortcomings, Temer seems to understand the need for change. He is pushing for Brazil’s first-ever cap on public spending, a measure that would limit government expenditures to current levels for the next 20 years, thereby forcing interest groups to compete for a fixed amount of resources instead of pushing for tax hikes or bigger deficits. He has introduced measures that will allow the government to reward efficient bureaucrats across the vast expanse of the Brazilian state. And crucially, he has raised the possibility of constitutional reforms that would reduce the number of political parties and restrict their ability to merge their electoral lists. Both measures would make it easier to get things done in Congress without graft. Getting Brazil back on track, however, will take even more sweep­ ing reforms. In short, lawmakers must rewrite the rules of the game so that elected officials stop working only for their backers and start focusing on good governance for the majority of the population. Ac­ ademics, policymakers, and pundits have offered a number of ideas for how they might do so. One radical proposal would have Brazil drop its presidential system in favor of a parliamentary one akin to the United Kingdom’s. By fusing Congress and the executive, that September/October 2016 109

Eduardo Mello and Matias Spektor change would make legislators directly responsible for the success or failure of the government, and since lawmakers would be threatened with fresh elections if they challenged the government’s major deci­ sions, such a reform might reduce corrupt dealmaking and encourage the development of stronger political parties. Other experts have ar­ gued for a semi-presidential system, in which a prime minister ac­ countable to the legislature conducts day-to-day politics and a president retains the power to dissolve parliament and call new elec­ tions. Shifting to such a system could make lawmakers more account­ able for the results of policy decisions while preserving the president’s status as a national figurehead. Yet another proposal would keep Bra­ zil’s current presidential system intact but reduce the number of exist­ ing parties to between six and eight and push them to commit to coherent policy platforms, in part by abandoning the open-list pro­ portional representation that defines today’s electoral system. It is too early to say which of these proposals would be most effective. What is certain, however, is that Brazil’s political system will remain dysfunctional until the country’s president and legislators can work together effectively—in the name of party platforms, not clientelistic bargains. To get there, Brazil must reduce the number of parties in Congress and empower them to discipline their own members. Operation Car Wash, Rousseff ’s impeachment, and the overall economic decline have created an opportunity for Brazil to pursue just this kind of reform. Now the country’s politicians must seize the rare opening these cascading crises have afforded them.∂ 110 foreign affairs

Return to Table of Contents America’s Brewing Debt Crisis What Dodd-Frank Didn’t Fix Robert Litan Almost as soon as the financial crisis struck in late 2007, policy­ makers began working to prevent another one. The roots of the crisis, they contended, lay in reckless lending and excess debt. Banks had made massive loans to “subprime” borrowers, who had little ability to repay them, and the banks funded these investments with borrowed money. When the U.S. housing bubble burst, millions of Americans defaulted on their mortgages, and the overleveraged banks collapsed. The government had to bail them out, and U.S. taxpayers picked up the bill. In July 2010, U.S. President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act. Reformers hoped that the act—known as Dodd-Frank, after its Democratic co-sponsors, Senator Chris Dodd of Connecticut and Congressman Barney Frank of Massachusetts—would make another financial crisis less likely. And to some extent, Dodd-Frank has succeeded. During the crisis, too many financial institutions lacked enough capital to withstand losses on their loans. But now, thanks in part to the act, banks have to fund themselves with more capital and less debt, which equips them to absorb more losses in a future downturn. And banks have largely stopped making subprime loans, since Dodd-Frank rules require those who give loans and securitize them to bear some losses in the event they sour. Nevertheless, during the 2016 presidential campaign, Dodd-Frank has come under attack from both sides of the aisle. In the Democratic primary, Senator Bernie Sanders of Vermont argued that its reforms ROBERT LITAN is an Adjunct Senior Fellow at the Council on Foreign Relations and a partner at Korein Tillery. September/October 2016 111

Robert Litan did not go far enough. He called for the government to break up the largest U.S. banks and reinstate Glass-Steagall, the 1933 act that separated commercial from investment banking, until Congress repealed it in 1999. Republicans, meanwhile, including the presidential candidate Donald Trump, believe Dodd-Frank went too far, and Republican legislators have sought to repeal it at every opportunity, arguing that its regula­ tions are crippling U.S. banks and stifling growth. Both criticisms distract from the real problem with the act, which is that it left some key problems unaddressed. In dealing with reckless lending and excess leverage, it misses one of the most important causes of the crisis: “runnable liabilities,” or short-term debt that the govern­ ment does not insure. The U.S. financial sector holds trillions of dollars of such debt, including uninsured bank deposits and the short-term liabilities of other financial institutions, such as overnight loans. What makes this kind of debt so dangerous is that during a crisis, short-term lenders, unlike long-term ones, can demand their money back imme­ diately, leaving borrowers unable to pay all their creditors quickly. The financial sector stops lending money, credit dries up for consumers and businesses, and the economy grinds to a halt. This is what happened in 2007 and 2008, when massive runs on short-term debt spread panic throughout the financial sector and helped trigger the Great Recession. Although short-term debt poses one of the greatest threats to the financial stability of the United States, Dodd-Frank has done little to mitigate it. Fortunately, several experts have proposed ambitious ways of dealing with the problem, including expanding federal insurance of bank deposits, allowing the Federal Reserve to lend money to more firms in the case of a panic, and banning unregulated financial institu­ tions from issuing runnable liabilities. These are good ideas, and if Congress passed any of them into law, the odds of a future financial crisis would be significantly lowered. AFTER DODD-FRANK The Dodd-Frank Act set out to solve one of the central problems with the U.S. financial system: that some banks, such as Citigroup and J.P. Morgan, were “too big to fail.” When those banks were faced with collapse, the government had to come to the rescue, or else risk allow­ ing the whole economy to go down with them. Dodd-Frank was supposed to solve this problem in two ways. First, the act raised the minimum capital requirements for all banks and 112 foreign affairs

America’s Brewing Debt Crisis imposed especially strict requirements for those with $50 billion or more in assets—the “systemically important financial institutions” (sifis). Dodd-Frank also requires banks to hold more liquid assets, money they can use to pay back depositors during a sudden panic. And the act gives a new body, the Financial Stability Oversight Council (fsoc), the authority to designate certain large financial institutions as sifis, which the Fed can then regulate more stringently. Second, Dodd-Frank gave Washington new powers to preemptively shut down large, complex banks and other financial institutions, making bailouts unnecessary.The act gave the Federal Deposit Insurance Corporation (fdic) powers to close sifis without taxpayers’ bearing the cost; instead, shareholders, creditors, and managers would lose out without causing wider damage to the financial system. Banks must now prepare “living wills,” plans that detail how regulators can shut them down in case of emergency. The act also took aim at financial derivatives, which many politicians blamed for the crisis. Derivatives are contracts whose payout depends on the performance of another asset, such as oil or a foreign currency. One particular type of derivative, credit default swaps, which allow buyers to insure against the failure of a company to pay back its loans, has been especially controversial. The insurance giant aig issued far too many of these contracts without insisting on enough collateral, and when the mortgage market collapsed, aig collapsed as well, prompting a massive rescue by the Federal Reserve. What’s more, before the crisis, the market for derivatives was opaque: instead of trading derivatives on formal, transparent exchanges, individual firms bought and sold them privately with little oversight. Dodd-Frank requires many derivatives to be settled through central clearing-houses, where regulators can more easily monitor them. BORN TO RUN These measures to rein in subprime loans and excessive leverage have no doubt strengthened the U.S. financial system. But the problem is that these factors, although they contributed to the Great Recession, did not lie at the heart of the financial panic; runs on short-term debt did. In 1933, after roughly 9,000 banks collapsed as savers rushed to withdraw their money during the Great Depression, Congress created the fdic to insure deposits up to a certain amount (initially $2,500, but by 2007, the number had reached $100,000). The move helped September/October 2016 113

Robert Litan prevent bank runs, since people no longer worried that they might lose all their savings if their bank collapsed. Then, in 2008, as the financial crisis spread panic throughout the economy, Congress raised the amount of the deposits that the fdic would insure from $100,000 to $250,000, covering roughly half of the $12 trillion that the country now holds in bank deposits. Bank runs have thus become even less likely, although not impossible. But for other financial institutions, for which the government has not stepped in to provide insurance, the risk of runs remains high. “Shadow banks” are financial institutions that are similar to banks, in that they also issue very short-term Massive runs on short-term liabilities, but are not regulated as such. debt helped trigger the These include investment banks, money- market mutual funds (a low-risk, low- Great Recession. yield investment option), and various financial firms. These shadow banks and other issuers of short-term debt collectively account for roughly $16 trillion in short-term debt (dwarfing the $6 trillion of insured bank deposits), and no equivalent of the fdic exists to prevent the holders of these instruments from running on the institutions that carry this debt. Meanwhile, even in banks, deposits above $250,000 are still at risk of a run, as are Eurodollar deposits (dollar-denominated accounts in foreign banks), which the fdic does not protect. In the years leading up to the financial crisis, shadow banks relied increasingly on runnable debt. Until the mid-1990s, such debt was equivalent to around 40 percent of U.S. gdp, but by 2008, the figure had reached 80 percent. This debt carried lower interest rates than longer-term debt and was thus a cheaper source of funding. It took a number of forms, including commercial paper, a kind of short-term debt issued by corporations; money-market mutual funds; and repurchase agreements, or repos, a type of short-term loan that allows a borrower to sell a bond and promise to buy it back within a few days. In a crisis, lenders could run on all these financial instruments. In 2008, they did. The investment banks Bear Stearns and Lehman Brothers experienced runs on their short-term debt. Investors also began to flee money-market mutual funds, which started to collapse; the Treasury Department had to step in and issue an unprecedented blanket guarantee of all of them. And federal regulators, afraid that there would be a run on bank deposits above $250,000, merged failing 114 f o r e i g n af fai r s

F R A N K L I N D. RO OS EV E LT L I BR ARY America’s Brewing Debt Crisis Cash back? Depositors crowding a bank, Cleveland, Ohio, 1933 banks with stronger ones and temporarily guaranteed all accounts. All of this happened in just six months, and mostly in September 2008. PROBLEM SOLVED? Today, runnable debt remains a major problem. Dodd-Frank focused on reforming the banks, but shadow banks remain out of the regulators’ reach. The act did create the fsoc to eliminate debt bubbles before they burst. But the fsoc will not spot every emerging bubble. After all, almost every economist missed the signs of the last financial crisis. The fsoc also barely mitigates the risk of a run on uninsured deposits. Its power to designate certain banks as “systemically important” may indirectly address the problem, by signaling that the government would be more likely to bail out these institutions than others. So might a Dodd-Frank provision that enables the fdic to borrow from the Treasury to pay short-term creditors who might otherwise pull their money out of a failing financial institution. But a fair amount of uncertainty remains; it isn’t clear how willing a future government will be to take such action, given the backlash against the bailouts of “too big to fail” banks and the forced mergers during the last crisis. Compelling large banks to hold more capital reduces their risk of failure, but as the last financial crisis demonstrated, during a wide­ spread panic, investors and lenders lose all faith in the values banks September/October 2016 115

Robert Litan have assigned to their assets, and many mistrust banks that claim to have enough capital. Depositors with more than $250,000 may still run on their bank at the first hint of trouble. Regulators have also forced banks and other financial institutions to hold more liquid assets, which they can use to pay back depositors who want their money back immediately. But even this measure may not do enough to meet the demands of creditors in a full-scale panic, since no bank can have all its assets in liquid form and still turn a profit. As inadequate as the existing measures are, however, the popular ideas for bolder reform would do little more to reduce the risk of a run by uninsured depositors or short-term debt holders. Consider Sanders’ proposal to break up the “too big to fail” banks.Turning one $2-trillion- asset bank into four or five smaller banks would not make uninsured depositors any less likely to withdraw their money if one of the smaller banks faced difficulties, since their large deposits would still be unin­ sured. Such depositors would rationally conclude that if one of the smaller banks was in trouble, theirs might also be, potentially triggering a run. Nor would reinstating Glass-Steagall prevent runs if panic caught on, because separating commercial from investment banking would do nothing to stop uninsured depositors from running on com­ mercial banks or repo lenders from refusing to roll over their loans to the investment banks. Republican proposals, meanwhile, could exacerbate the risks posed by short-term debt. Conservative academics at Stanford University’s Hoover Institution, for example, have suggested designating a special district court to expedite bankruptcy cases. But making it easier for a financial firm to declare bankruptcy could make it more likely that lenders would lose their money if the firm collapsed, which might make them quicker to pull their money out. The special bankruptcy court could lessen this risk if it asked the Federal Reserve to act as the lender of last resort for short-term creditors to prevent them from panicking, but this would offer little improvement over the current system. FIXING FINANCE Yet the problem of runnable debt has solutions. One idea comes from Morgan Ricks, a former official in the Obama administration’s Treasury Department. In his new book, The Money Problem, Ricks argues that the government should drop the pretense that its insurance extends 116 f o r e i g n af fai r s

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America’s Brewing Debt Crisis only to $250,000 worth of deposits. In fact, the government implicitly insures more than that, but only if depositors place their money in the big banks that governments have a strong incentive to protect for the sake of financial stability. Indeed, since the crisis, Americans have con­centrated their assets in the largest banks. If the fdic formally abolished the insurance ceiling and thus promised to insure all accounts, regardless of size, it would eliminate the risk of runs on banks. It would also put smaller banks on a level playing field with bigger ones, since people would no longer eschew the former for fear that the government would bail out only the latter. The move would make the financial sector less concentrated, which could introduce more competition. Critics of this proposal argue that it would create a moral hazard. If the government insured everyone’s deposits, the logic goes, banks might feel emboldened to take greater risks, for example, by lending to riskier borrowers at higher interest rates. But this problem already exists Republican proposals could today: customers with large accounts exacerbate the risks posed have moved their deposits to the biggest banks, gambling on future government by short-term debt. protection in the event of a crisis, pro­ tection that the banks themselves are gambling on. The best way to limit this moral hazard is through the stiff capital requirements that regulators have imposed on large banks, measures that provide cushions for the banks in case of losses from bad decisions. But regulators need to enforce these standards more effectively than they have in the past. Ricks has an even more controversial solution for the risks that shadow banks pose. He proposes banning any financial institution that isn’t a bank from issuing runnable liabilities—in other words, he calls for the end of shadow banking. Under his plan, the government would essentially outlaw money-market mutual funds, repos, short- term commercial debt, and Eurodollar deposits. To cushion the blow to financial institutions, which would find it costlier to raise money, Ricks also suggests eliminating Dodd-Frank—something many banks have been advocating since Congress first passed the act. To put it mildly, this would be a big deal. Hal Scott, a professor of international finance at Harvard Law School, has put forward a more traditional approach to mitigating the risks of short-term debt. In his new book, Connectedness and Contagion, September/October 2016 117

Robert Litan he argues that the government should expand the Fed’s authority to step in as the lender of last resort. By setting clear ground rules for emergency lending in advance, rather Among all the potential than acting in an ad hoc fashion in the causes of the next crisis, heat of a crisis, the Fed would remove uncertainty about when institutions are the massive amount of eligible to receive liquidity support. This, short-term debt ranks as Scott claims, would leave creditors with the most probable. no reason to run on the debt. It would put an end to the concept of “too big to fail” and give regulators time to reo­ r­ gani­ze and close failing financial firms, wiping out shareholders’ equity in the process but preserving the stability of the system as a whole. As effective as Ricks’ and Scott’s proposals may prove, however, they would face major political problems. Ricks’ plan to outlaw shadow banking would surely invite fierce opposition from the firms in question. And his proposal to repeal Dodd-Frank—which he envisions as a bipartisan compromise in which Democrats agree to get rid of the legislation they support in exchange for measures that eliminate the possibility of future financial panics—seems unlikely to get very far in Congress. Scott’s idea to expand the Fed’s ability to lend to troubled firms runs counter to a rule the Fed adopted in 2016 to limit lending of last resort to specific institutions. It’s hard to imagine such a quick reversal of policy happening at a time when much of Congress is openly hostile toward the Fed. Jeremy Stein, a former member of the Board of Governors of the Federal Reserve, and Robin Greenwood and Samuel Hanson, both professors at Harvard Business School, have offered a more practical, but also more limited, plan. They argue that the government should increase the supply of public, or government, short-term debt to accommodate investors’ demand for safe financial instruments and so that investors do not have to rely on privately issued short-term debt. They suggest that the Treasury could unilaterally and gradually replace longer-term Treasuries with these shorter-term government obligations, which are immune from runs because investors view them as safe assets. Their solution is not as far-reaching as either Ricks’ or Scott’s, but at least it does not require congressional approval, since the tactic would amount merely to a change in Treasury Department 118 f o r e i g n af fai r s

America’s Brewing Debt Crisis policy. The problem, however, is that issuing short-term government debt would expose Washington to swings in short-term interest rates, introducing more volatility into the federal budget. In the end, then, the strategy might prove more expensive than other approaches. Long-term interest rates have fallen to their lowest levels since the early 1950s, and the government could save money by issuing longer- term, rather than shorter-term, debt. But perhaps the boldest proposal comes from Mervyn King, who was governor of the Bank of England during the financial crisis. In his book The End of Alchemy, King argues for even higher capital and liquidity standards for both traditional banks and shadow banks. King would phase in these tougher requirements over a period as long as 20 years. And like Scott, King wants clearer policies from central banks on when they will act as a lender of last resort. He argues that central banks should lend to almost anyone with sufficient collateral, and not just to banks—a significant expansion of central banks’ lender- of-last-resort role, but one that would help provide liquidity when it is most needed. King’s idea is clear and logical. Yet it is likely to face as much hostility as Ricks’—if not more, since King is tougher on banks. And Congress would likely have the same reaction to King’s plan as it would to Scott’s, since it also expands the role of central banks. ONE STEP AT A TIME Most of the reforms that politicians have advocated have neglected the problem of runnable debt, and the academics’ proposals are currently politically impractical. But there is a way forward: regula­ tors should focus on more moderate reforms that reduce the role of short-term and other uninsured debt in the financial system. Some of these reforms would be possible under existing law, while others would probably require new legislation. The Federal Reserve has already suggested one useful reform: man­ dating that issuers of repos back those instruments with extra collateral. The requirement should discourage investment banks from using repos for funding and, in a crisis, reassure those lending through repos that their loans are sound and will be repaid. Regulators could also discourage investment banks from issuing short-term debt by requiring them to hold capital in an amount that increases in proportion to their short-term liabilities (an idea similar September/October 2016 119

Robert Litan to the “risk fee” that the Democratic presidential candidate, Hillary Clinton, has proposed for banks and sifis that rely on short-term debt). U.S. regulators could take this step on their own now, although it would make the global banking system safer if they could persuade regulators in other developed economies to adopt a similar system. Meanwhile, Congress could downsize money-market funds, stopping short of outlawing them altogether. To do so, it should eliminate the current $250,000 ceiling on insured bank deposits. The change would make money-market funds less attractive to large investors, since they could invest in banks with full protection without having to take on extra risk. Among all the potential causes of the next financial crisis, the massive amount of runnable debt ranks as the most probable. Yet so far, policymakers have overlooked this problem, perhaps believing that all will be fine if they simply cut big banks down to size or promise never to protect any of their large depositors. This is wishful thinking. The financial system will never be immune from crises, but solutions exist that may go a long way toward reducing the risk.∂ 120 foreign affairs

SPONSORED SECTION SUDAN Photo: shutterstock New Viable Investments Flow In Sudan is a vast country where lucrative business opportunities are growing by the day. With new investment laws in place, the scope is tremendous. Read on to find out more. Modern, dynamic and vibrant are not the words usually associated Foreign Affairs Prof. Ibrahim A. Ghandour explains: “I would love with Sudan yet this is the reality in a country of entrepreneurs people to come and see this with their own eyes. The business taking the initiative to create global investment opportunities, environment in Sudan is very friendly, and is not only supported despite inner strife and regional conflict. by laws and the commitment of the authorities, but by the Sudanese business personalities themselves.” As it prays for US sanctions to be lifted—President Obama has been negotiating with Sudan officials through a special envoy “The business environment is not only since 2013—this determined country, having lost a great deal supported by the authorities, but by the of its oil industry with the cessation of South Sudan, is moving Sudanese personalities themselves.” forward with reforms and initiatives to diversify the economy. Reforms have already led to massive investment surges in the raft Minister of Foreign Affairs, Prof. Ibrahim A. Ghandour of opportunities on the table. At the Ministry of Investment, Dr. Mudathir Abdulghani A. While there are lucrative openings growing in infrastructure, Hassan adds: “The government is privatizing some public entities, mining, agriculture, tourism and renewable energies, the Sudanese plants and production projects to give private partners a chance government is also investing in its people; more children are to participate in successful PPPs. If you come to Sudan to work in entering primary education than ever before, and GDP per an export-oriented production business, you will generate twice capita has grown from $350 in 2000 to almost $2,000 today. the profit, thanks to a wide profit margin when exporting and Khartoum, the country’s affluent capital, is a shining jewel of a the difference in currency. We are inviting people from all over city, with coffee shops, office blocks and resplendent shopping the world to come here, use our resources, transform our raw malls bustling against a backdrop of historic monuments and the materials, and access local, regional and international markets. We confluence of the White Nile. are ready and fully adapted to meet investors’ needs.” Sudan has also recently been named by the World Bank as one of the easiest places to start a business in Africa. As Minister of www.worldfocusgroup.com

SUDAN SPONSORED SECTION Sudatel: The Pride of Sudan An exclusive interview with Eng. Tarig Hamza Zain Elabdin, the visionary President and CEO of Sudatel Telecom Group (STG), now one of the most admired telcos in Africa. Since its foundation on 13th September 1993, STG has grown over as President and CEO in May 2014 and steadily from a local operator to a major regional player we presented profits of up to $52 million in after a highly successful privatization. As the bridge for the 2015. We intend to generate between $120- telecommunications movement between the Arab world, Africa 150 million in profits by 2020. This year, we and beyond, the company is investing $267 million over the next are focusing on the liabilities, especially on three years to achieve an even greater global reach. Eng. Tarig the suppliers, so we can maintain a healthy Hamza (TH) sat down with World Focus (WF) to discuss Sudatel’s and long-term relationship with them. Since evolution and future objectives. 2014, we have paid 94% of all our liabilities. TH: The global telecoms sector has witnessed a tremendous Our strategy now is to carry out heavy revolution in the last 15-20 years. A poor family living in a rural area investment. This year, we intend to invest Tarig Zain Elabdin with little connectivity would still have a small phone, giving them $174 million in total—we have already CEO, Sudatel access to communication and additional services such as health care invested $100 million. I call it the “Smart or education. In Sudan and Africa, the telecoms sector is arguably even Investment”, which is basically focusing on those areas which can give more crucial as we simply don’t have the banking infrastructure of the us appealing net profits with less cost. I want to maximize our bottom west. Telecommunications allow our citizens to access basic financial line and the dividend for the shareholders. services via their mobile, and they also play a pivotal role in education. E-learning is now being welcomed by the Sudanese government, and it WF: How is the transition to Sudatel as an ICT platform going? is also looking seriously into e-government. It is now time to put pressure TH: It took us almost nine months to prepare the strategy for our on all the ministries to adopt this process as it will only bring benefits to the overall system. For instance, it will help to eradicate corruption. board of directors and we invited international firms to help. The board meeting was held in Dubai and attended by the Sudanese State Minister Sudan is now connected to Saudi Arabia through two enormous of Finance, Chairman of the Board as well as many investors from submarine cables from Cape Town in South Africa, and to the west outside Sudan. The main pillars to focus on are developing our human coast of Africa though the Africa Connecting Europe (ACE) submarine capital, maximizing our Key Performance Indicators and transforming cable. There is also a cable from Cape Town that goes all the way to our technology to become a world-class ICT platform. Each week we the east of Africa through Port of Sudan, thereby linking us to Chad, carry out comparisons in order to see where we stand in relation to the Egypt and South Sudan. Telecommunications have made an enormous objectives we have set. Sudan will play a pivotal role in the development impact on the quality of life of the Sudanese people and is vital for the of world affairs in the coming years. It is an exciting time. ongoing development of the country. WF: What can you tell us about your CSR activities? WF: How do you see Sudan’s telecoms sector in comparison to other TH: Our social activities started in 1998 to execute sustainable SAMENA members? development projects for the benefit of the needy population across all TH: In terms of infrastructure, I’d say we are more or less on the our operations in Sudan and West Africa. Over the last years, our CSR same level as the other members. In technology, however, we are much activities have been concentrated in many areas; in the health sector, we more competitive. Sudan is now deploying 4G which truly shows how have contributed to the construction of, and provided equipment for, advanced we are. Business-wise, we need to have diversity, so I am many hospitals and clinics. We funded more than 500 water projects trying to bring Ericsson, Motorola and some US companies on board, out of which 150 projects are in the western regions of Sudan. Civil war but due to the US sanctions, it is a complex story. has affected the population in Darfur and such projects contributed positively on the stability of the population. With regards to the WF: Sudatel celebrated an impressive financial performance in 2015 and education sector, STG has funded the construction and rehabilitation the core areas of services currently offered and the benefits Sudatel’s data of many schools and the equipment of many college laboratories. More center will add to its portfolio. Where do you go from here? than 200,000 students across the country are benefiting from the desks and seats donated by STG. Since 1998, STG has spent more than TH: Our data center is certainly a competitive advantage as it is $40 million on CSR activities to ensure a better life for the population. only the second one after South Africa in the region. We are now in an Unfortunately, the US sanctions hindered our activities so we are not excellent position to compete with Africa’s main telecoms players. I took able to offer better social services for our communities. www.worldfocusgroup.com

SPONSORED SECTION SUDAN Keeping Sudan Moving Ahead For an impoverished country—the third-largest in Africa—getting around is a challenge. Luckily, the will for development is there and the gates are wide open for joint ventures. For any country on the verge of a new “We are creating free zone areas for growth plan, the need for good transport foreign investors, similar to those in Dubai links and reliable infrastructure to better and Jeddah, and invite interested parties assist increased business demands and to come and discover the opportunities the transit of goods and people cannot be within the free zone sector here in Sudan. under-estimated. We want to benefit from international For centuries, Sudan’s main business partnerships, including those with the advantage was its natural inland waterway US. Our infrastructure has been heavily system—it has easy access to the Nile Makkawi Mohmed Eng. Gaffar Hassan affected by the sanctions: they are the main River and its tributaries and was the final Awad, bottleneck for the country’s development.” destination for Silk Road merchants. It is Min. of Transport, General Manager also home to one of the most important Roads & Bridges National Highway The train is arguably the safest mode Authority of transport in Sudan today. The country deep-water ports in the region, the Port of Sudan on the Red Sea, currently has 4,578 kilometers of narrow-gauge, single-track with other smaller ports also in operation. railroads that serve the northern and central parts. The main line These factors makes Sudan a natural logistical hub; however for runs from Wadi Halfa on the Egyptian border to Khartoum and the country to fully develop, there is a lot of work ahead. Minister southwest to Al-Ubayyid via Sannar and Kusti, with extensions to of Transport, Roads and Bridges Eng. Makkawi Mohmed Awad Nyala in Southern Darfur and Wau in Bahr al Ghazal. Other lines outlines how he is rising to the challenge: connect Atbarah and Sannar with Port Sudan, and Sannar with “Sudan is a very important country connecting east and west, so Ad Damazin. A 1,400-kilometer line serves the al Gezira cotton- our responsibility is immense. The transportation sector is a vital growing region part of the equation for Sudan’s economic development. We are Sudan Railways, operated by the government-owned Sudan improving the road and railway networks, connecting the country Railways Corporation (SRC), is the main linkage to most of to Port Sudan, and improving the passenger terminals, as Sudan the country’s production and consumption centers, but as Eng. is an important platform for pilgrims going to Mecca. China, our Mohamed Taha Ahmed explains, “Sudanese railroads are very old main foreign investor, is also looking to upgrade the former Silk and need to be rehabilitated in order to improve the connectivity Road links. throughout the whole country. Paving the way for foreign investment With mega-road projects leading to national and regional growth under way, Sudan’s highway authority—a driving force in the fast developing country—invites interested partners to jump on board. National Highway Authority Gaabaa Street, Khartoum, Sudan Tel: +249 183 730 458 | Fax: +249 183 730 459 [email protected] | www.nha.gov.sd Close to the main east-west shipping route, our ports are the natural choice for transhipment and logistics Sea Ports Corporation (Sudan) P.O Box 2534 Khartoum, Sudan Tel: +249 311 822 061 | Khartoum Office: +249 183 775 869 | Fax: +249 311 822 258 | [email protected] | www.sudanports.gov.sd www.worldfocusgroup.com

SUDAN SPONSORED SECTION “The US sanctions have had a major GDP. The growth potential of the roads impact on the volume of freight transport sector is tremendous in Sudan, with a fast- in Sudan; it has reduced from 2 million growing economy and an increasing need tons per year to less than 1 million. We are for world-class infrastructure paramount doing our best to maintain the lines and As the country is the “gateway into rehabilitate the locomotives without US Africa” especially in terms of its access to products, and are importing from other the four neighboring landlocked countries, countries, particularly China. a revitalized roads sector is paramount. “Our priority now is to find adequate Eng. Mohamed Taha Dr. Jalal Eldin M. A. For this reason, the NHA is seeking more financing for our 2029 strategic vision, Ahmed Shelia finance and technology, especially funds when we expect to be transporting more General Manager for investment in transport networks and than 7 million passengers per year and General Manager services. It hopes foreign partners will Sudan Railways Corp. Sea Ports Corporation more than 20 million tonnes per year in freight. By then, we also participate and cooperate in mutually viable projects. hope to have standardized all of our lines and be connected to all The government provides various incentives for private and four of our neighbors.” foreign sector investment in the roads sector. 100% of foreign With the cost of this project estimated at $16 billion, the railway direct investment (FDI) is allowed for support services to land chief is naturally looking for partners. transport such as operation of highway bridges; services incidental to transport, such as cargo handling is incidental to land transport; Connecting People construction and maintenance of roads, bridges; and construction When the railroads became neglected, Sudan’s highway network started to emerge. In 1990, there were only between 20,000 and and maintenance of roads and highways offered on build-operate- 25,000 kilometers of highway—an extremely sparse network for the size of the country—and only 3,000 kilometers of this were transfer (BOT). NHA is also open to co-construction, upgrades and improvement in regards to financing (loans) and highway- widening projects that qualify for tax breaks. Most foreign investors in the Sudanese roads sector can form “Our priority now is to find adequate consortiums with local companies and/or the NHA to participate financing for our 2029 strategic vision.” in the development of road projects in the country. Eng. Mohamed Taha Ahmed, General Manager Ports and Shipping Sudan Railways Corp. As the only port authority in Sudan, Sea Ports Corporation handles all Sudanese exports and imports. It provides all the facilities to sufficient and strong enough to take the strain of heavy traffic manage ports operations and ensure all the port handling and and wet weather. Links were forged from Khartoum to Port of storage business is well handled in the port. Sudan, and even Kenya, and smaller private companies, chiefly owner-operated trucks, ran the gauntlet to build most of the road Sea Ports Corp. also provides marine services for port transport needed, followed by more private investment. Since operations as well as crude oil terminals and oil drilling platforms 2005, thousands of kilometers of tarmacked roads have been built requirements. It handles all main operations for all the Sudanese and a new program is underway. ports for its clients, which tend to be shipping liners, imports and export companies, ship owners and agencies. The prospects for Eng. Gaffar Hassan is the General Manager of the National improving this sector are good and attainable, but it is crucial the Highway Authority (NHA). As he says: “Sudan’s roads are the whole system of operations, management, manpower and training backbone of the transport network and at the heart of many of aspects are modernized. the infrastructure projects. Roads guarantee industrialization, with the natural consequence of generating more jobs and higher Over the years, the Port-Sudan harbor has acquired great economic importance as it is the only port through which Sudan’s oil products were exported before South Sudan was formed, and it Sudan Railways Corporation: Connecting Sudan and beyond Providing a first-class service to the major production and consumption centers in the region. Sudan Railway Corporation Tabya Street North, Khartoum, Sudan Tel: +249 183 774 009 | Fax: +249 183 770 652 [email protected] | www.sudanrailways.gov.sd www.worldfocusgroup.com

SPONSORED SECTION SUDAN is still exporting South Sudan’s oil today. Hashim Hago Group (HHG). Acting Jalal Eldin M. A. Shelia, General Manager says: “Sea Ports Corp. General Manager takes up the story: encourages exports in this area, especially iron, minerals and agriculture products. Because of their locations, our ports benefit “We work in many different fields such from easy access to roads and railways between western and eastern worldwide markets, as well as inland and transit countries. They as construction and agriculture which is also provide links to the Northern and Western African countries. The ports export livestock, liquefied petroleum gas, and bitumen. the historical activity of the company. We “Sea Ports Corp. seeks to make Port Sudan a major global also work in the fields of export and import, shipping and transshipment hub. A look at the country’s development shows that expanding transshipment activity is exporting Sudanese crops like sesame now an important growth strategy. We are emphasizing the development of our transshipment business, as this will form the and nuts. Importing mainly agriculture basis for port expansion and infrastructure upgrades. Muslih Ahmed El machines, we have been the only dealer of “The company seeks to attract new transshipment cargoes in Sanosi the US company CASE international. We Oceania, Africa, Europe, and South America where they experience used to buy a lot of machinery from them a strong growth potential of logistics. Sudan’s strategic geographical Ag. General Manager however due to the US sanctions, this has location in North East Africa means it can serve as a bridge between Hashim Hago Group the Arab and African regions. We are therefore repositioning ourselves as a transshipment hub for the region. Sea Ports Corp. sees stopped. its goals of diversifying the economy, bringing in more commerce, and having a better gateway for exports.” “Hashim Hago Group also operates in the field of construction An Ever-Growing Sector. and roads, conducting many projects with the National Highway Infrastructural upgrades will do much to help the agricultural sector, the backbone of the Sudanese economy. It represents 40% Authority in order to rehabiliate the national road network. We of the GDP and employs around 80% of the population—a large part of which are subsistence farmers—and plays a major role in are more than ready to work hand in hand with foreign investors. securing food security for the East African region. We have many potential projects that need partnerships or direct Resources are not the problem—the country is the world’s number one producer of Arabic gum and a key manufacturer finance.” of sugar and animal feed. It also has livestock, and a vast array HHG is most interested in finding financing for projects in edible oils processing, plastics, mining, and agricultural services. It wants to develop these projects and enable mechanisms that can trigger a self-reinforcing virtuous cycle. In order to make this vision a reality, the company needs access to financing and in exchange we will provide the equipment and expertise. “Our dream is to convert Sudanese Partner of choice for foreign investors natural resources into commodities that will help address global food security.” With progress comes responsibility. The Hashim Hago Group, active in manufacturing, agriculture, construction Minister of Agriculture and Forests, Prof. Ibrahim El-Dukheri and a range of other sectors, is proud to play a key role in Sudan’s growth, as well as being a reliable business partner. of crops, such as sorghum, cereal grains, vegetables and fruit, including lemons, mangoes, grapefruit and oranges. The challenge Hashim Hago Group is that of the 57% of land suitable for cultivation, only 8.5% is being H. Q. Bldg No. 26 - Al-Zubair Hamad Al-Malik St. No.12 Sq.10. used. There are excellent incentives available and a good climate for sustained investment: a fact noted by the UN Food and Agriculture Al-Riyadh City, P.O Box 459 Khartoum – Sudan Organization in a recent report. What’s needed is capital, good Tel: 249 83 560201 / 560205 FAX: +249 83 491831 / 491833 management capabilities and sound technologies. [email protected] | www.hagogroup.com As Agriculture Minister Ibrahim El-Dukheri says: “Our dream is to convert Sudanese natural resources into commodities that would help address global food security. Sudan is ready to share its potential and resources.” One of the local players offering partnership options is the www.worldfocusgroup.com

SUDAN SPONSORED SECTION A treasure trove of minerals Sudan is a hugely untapped nation when it comes to its gold and other gems, but it needs technology and capital to mine the potential. Read on for where the opportunities lay. . The mineral extraction sector is another economic “Our plan this year is to produce 70 tons of gold both pillar the government is building on. There are plenty from traditional mining and using high technology. of resources—particularly gold—but, because of the This is an indicator that we have so much potential and large surface area of Sudan and a very diverse geology, this is spreading throughout the 16 states of Sudan,” the potential has never been fully explored. says the Minister of Minerals. Six years ago, the government set up the Ministry of “We are also amending the Mineral Wealth and Minerals, marking an important turning point in the Mining Development Act to accommodate new sector’s fortunes. Dr. Ahmed M. M. development and encourage more investment in the “The mining sector’s contribution to GDP has Alsadig Al-karory fields of transfer of technology scientific research and Minister of Minerals institutional capacity building.” increased to more than 8%,” says Minister of Minerals, Dr. Ahmed M. M. Alsadig Al-karory. “A million jobs have been created, and the sector has helped to Taking Mining To A New Level accelerate rural development because the gold reserves are located Nasr Eldin Elhussein, General Manager of the Ariab Mining in remote areas. Minerals are widespread in each of the Sudanese Company (AMC)—Sudan and East Africa’s mining leader— states. There is gold in 12 of them and other minerals, such as iron, shares his views on the situation. chrome, copper, silver, zinc, lead, aluminium, cobalt, and nickel “I believe Sudan is on the road to becoming one of the most across the country. We are currently dealing with a number of attractive mining sectors in the world,” he says. “The Sudanese companies, both local and foreign to enter the mineral fields. mining sector is relatively young with fast growth in the opportunities and the production outcome. It hasn’t yet properly “Minerals are widespread in each of the tapped into the full potential of other minerals and is still Sudanese states. There is gold in 12 of focusing on gold, although possibilities in other minerals, such as them, and others, such as iron, copper, gemstones, are limitless. “With the current recession in the global mining markets due silver and zinc across the country.” to the heavy extraction that has taken place over the years, Sudan is still a virgin area with a high concentration of mineral deposits. Minister of Minerals, Dr. Ahmed M. M. Alsadig Al-karory As a company, our intention is to shift into other minerals apart “There are 403 companies working in this field in Sudan; 52 of from gold in the near future due to the large amounts of zinc and which are foreign.” copper we have discovered. We are developing the world’s second- Challenges exist, however, one of which is the lack of added largest “super pit” after Australia and expect this to increase our value: “We still export these minerals as raw materials, iron productivity five-fold.” is exported as a raw material, for example, and we import The US embargo remains the biggest challenge for the sector manufactured iron. Chrome is also exported raw,” the Minister as a whole. explains. “It is hindering us from importing the technology needed not But the solutions are there, with technology and further only from the US, but also other countries that don’t want to investment providing the key. deal with Sudan because of the sanctions,” Eldin says. “Despite Bringing added value to Sudan’s economy With superior onsite services and a customer-centered ethos, let us help your company strike gold and obtain long-term prosperity. Sudamin No.36, Block 28, Al-Mansheya, Khartoum – Sudan P.O. Box 7770 – Postal code: 11123 Tel: +249 183 286 230 | Fax: +249 183 286 233 [email protected] www.worldfocusgroup.com

SPONSORED SECTION SUDAN adversity, however, we see the positive Some 80% of this production comes side of things and have been encouraged from artisan mining—people working to be more creative.” with their bare hands, rather than Born from a highly successful machinery. collaboration between Sudanese “More than 100 companies are here to government and Cominor, a Canadian invest into the gold sector, and many of French company, in 1991, the Ariab them are in the state of exploration, while Mining has developed excellent skills 15 of the 100 companies are in the actual and competences. These are not only Kamal Hassan Alhaj Nasr Eldin Elhussein state of production.” being implemented in Sudan, but other Rahma General Manager Sudamin has made various joint countries that former employees have gone on to work in. General Manager Ariab Mining Company ventures with many international Sudamin companies and is keen to make more in More recently, the shareholding was restructured to 95% for the the next five years, especially in the field of creative laboratories, Sudan government and 5% for the Industrial Development Bank. the GM says: “We have the know-how and the financial capital, “Our main mission is to deliver production at optimal cost; but we need foreign technology. We can assist any investor this makes us one of the companies with lowest operational who is eager to invest in Sudan. Creative laboratories are crucial costs in the region,” the Ariab chief says. “We want to lead the for the development of Sudamin as analyzing samples takes far mining industry in Sudan and Africa, by setting a benchmark too long at the moment. in operational excellence, enhancing the efficiency and level of We have to take our samples to international laboratories. “For extraction, adopting latest technologies, responsibly managing that reason we plan to attract big companies who are specialized the HSSE and environmental issues, attracting and retaining in the field of laboratories. Future investments would be very diversified talent and contributing to the development of local profitable for these companies as the return rate is high. Also communities.” further investment in the field of drilling is needed, and especially foreign machinery is something we try to attract. Right now is a Sudamin Assists Investors good time for these potential companies to invest.” Established in 2012, Sudamin it a vital force in the mining sector, providing ancillary services in all areas to most of the mining Safe, responsible, high-tech companies in Sudan so help them reach their targets successfully. activity in mineral-rich Sudan Its field of expertise includes: logistics, camping sites, civil works, catering, moving the earth, water supplies (which involves making long pipelines and pumping stations, drilling wells and linking them to company facilities, and providing tankers), maintenance services, and providing limousines and transport. ”We want to lead the mining industry The nation’s leading operator in gold in Sudan and Africa by setting a exploration and exploitation, we dig deeper to benchmark in operational excellence unlock added value in existing mines and new and enhancing efficiency.” prospects through sustainable development. Nasr Eldin Elhussein, General Manager, Ariab Mining Co. Ariab Mining Company Corner Baladia & Osman Digna Streets, Khartoum East, P.O. Box 2350 “We also distribute the chemicals the companies need for processing minerals and are also active in extracting gold from the Tel: +249 183 770 127 / 742 133 | Fax: +249 183 770 404 tailing,” Kamal Hassan Alhaj Rahma, General Manager, Sudamin [email protected] | www.ariabmining.net explains. “This tailing contains about 30% gold, while the rest is waste. We remove the mercury from this waste, as it is harmful.” Working directly under the Ministry of Mining, Sudamin has been extremely proactive in its mission. “After the separation of South Sudan and Sudan, Sudan lost a lot of money from petroleum revenues. It does, however, have good mining resources an gold production has hit almost 100 tons per year. www.worldfocusgroup.com

SUDAN SPONSORED SECTION The Sweet Smell of Success Kenana Sugar Company is broadening its global reach thanks to a pioneering business model, a full range of sugar by-products, new ventures and a happy, healthy workforce. One of the largest and most diversified sugar producers revered for its superb quality and enormous versatility. in the world, Sudan’s Kenana Sugar Company, is Added to all this, being situated on the Red Sea means enjoying its journey to becoming a leading global Kenana can easily serve export markets, including the agro-industrial conglomerate. On an estate that spans US, Asia, Europe and the Middle East. 100,000 acres of irrigated land between the White The ultimate sugar company sees itself as a three- Nile and the Blue Nile, the company produces a range way partnership of Sudanese natural resources, Arab- of value-added goods that include ethanol, animal feed, world financing, and Western technology. It is, of milk and dairy products, poultry, meat, wood products course, ripe for expansion. and certified seeds, as well as sugar. Abdel Sayed Taha “We have identified 17 projects through which The first seeds of this success story were sown in Managing Director we can boost the business,” Sayed Taha says. “This will increase our economic competitiveness, our 1975, when the governments of Sudan, the Kingdom Kenana Sugar environmental sustainability and the market potential of Saudi Arabia and Kuwait joined forces to create a Company company that would provide food security for the Arab world. within the next five to 10 years.” In just over 40 years, Kenana’s worth grew to more than $5 The MD and his team are actively seeking “the best partners” billion and some 5,000 employees keep the huge operation from to help bring the projects to fruition. Kenana is looking to invest toppling over as business orders continue to pour in. $94 million to have its own terminal and dry bulk facility in Managing director Abdel Sayed Taha explains the company’s Port Sudan that will bring the loading time for a vessel going business model and activities in more detail: to Europe, for example, down from seven days to one. Factory “We use a diversification strategy within which we have modernizations are another major focus, with an investment of adopted business units that work for themselves,” he says. “Each $165 million needed to get sugar and ethanol production figures of these has a general manager responsible for profit and loss, up, and there are also plans to open a meat-processing factory. and who ensures the unit makes a positive contribution to the company, within the realm of added value. This set-up, which we Kenana - A Champion for Social Welfare. call an integration model, has been designed around the cane itself Meanwhile, Kenana Sugar Company is proud to have been practicing the art of corporate social responsibility before the “We were invited to share our business terminology became fashionable. The vision of its founders was to model with the ACP states so they develop the plantation areas and set up a responsible business in a way that people could work in a safe and comfortable atmosphere too could diversify, and overcome the with clear rights and duties. Before the initial project was launched, hazards in commodities markets.” the founders built a complete township for the workers and their families. Following safety regulations and rules is common culture Abdel Sayed Taha, Managing Director, Kenana Sugar Co. in Kenana as it gets passed through the generations. Interestingly, as the project grows, services have expanded and the idea that it doesn’t just produce sugar but ethanol and simultaneously providing all the amenities needed for a healthy, animal feed, and by that token, the capacity to produce red meat. modern society completely free. Within the sugar industry area, “The model we use was praised by the African, Caribbean there are now 48 primary schools (entrance is 95% compared with and Pacific (ACP) Group of States summit in 2012 in Fiji, when 63% in the rest of Sudan), five high schools, 23 nursery schools, Kenana was invited to provide a model that sugar industries in the a hospital, two pharmacies, eight health centers, 12 social clubs, least developed countries in that region could adapt. The idea was a training center and a sports center. There are also 22 mosques that they too could diversify and overcome the hazards involved and two community mosques. Most impressive is how the sugar in the commodities markets.” industry area compares with the rest of the country in terms of Sudan’s strategic location on fertile scrubland between the Niles infant mortality rates (10 in every 1,000 compared to 104 in has helped the sugar industry take off. Not only does the country every 1,000) and maternal death during childbirth (14 in every boast the highest yield of sugar cane per acre in the world, it is also 1,000 compared to 60 in every 1,000. Kenana is clearly a beacon one of the most cost-efficient producers. The sugar cane itself is for companies to emulate all over the world. www.worldfocusgroup.com

Kenana Sugar Company: A leading integrated sugar business achieving sustainable food security in the Arab world and beyond. A beacon for diversified sugar industries around the globe, KSC has developed a unique and highly effective business model, using sugar byproducts to add value to the economy and create thousands of jobs. Over 40 years, we have expanded our core sugar industry to include: animal feed, dairy products, poultry, meat, wood products, certified seeds, and ethanol, as well as other engineering goods and services. We are also a pioneer in CSR, offering basic infrastructure and services to the Kenana community, including education, electricity, treated water, roads, transport and healthcare, free of charge. Kenana Sugar Company Obeid Khatim Street, Riyadh, Khartoum, P.O. Box 2632 Tel: +249 187 152000 | Fax: +249 183 220563 [email protected] | www.kenana.com

An installment of our multi-part series: Mexico’s Infrastructure Needs and Opportunities October 11, 2016 | New York : Mexico’s Infrastructure Needs and Opportunities is a full-day, multi-faceted examination of Mexico’s overhaul of its infrastructure policy, featuring high ranking viewpoints on mega projects, investment, ecological impact and the legacy of the Peña Nieto administration. Venue: Speakers Include: 58 East 68th Street, New York, NY 10065 Secretary Gerardo Ruiz Esparza Secretariat for Communications Topics Include: & Transport, Mexico Mexico as a Global Logistics Platform Yuriria Mascott Mexico City's New Airport Deputy Secretary for Transport, Mexico Multimodal System Telecommunications Reform Raúl Murrieta Financial Instruments of the Federal Deputy Secretary for Administration: PPPS & Investment Infrastructure, Mexico Alternatives Guillermo Ruiz de Teresa Time: General Coordinator of Ports and Merchant Navy, Mexico 8:15AM- 6:00PM Federico Patiño Questions: General Director, GACM, Mexico City's Airport Group Contact [email protected] Roberto Calvet General Director, Mexico AECOM Earn 25% OFF the ticket price with code FAMEXICO Visit for details

Return to Table of Contents The Strategic Costs of Torture How “Enhanced Interrogation” Hurt America Douglas A. Johnson, Alberto Mora, and Averell Schmidt It has been more than seven years since U.S. President Barack Obama issued Executive Order 13491, banning the U.S. government’s use of torture. Obama’s directive was a powerful rebuke to the Bush administration, which had, in the years after the 9/11 attacks, authorized the cia and the U.S. military to use “enhanced interrogation tech­ niques” in questioning suspected terrorists. Some detainees were shackled in painful positions, locked in boxes the size of coffins, kept awake for over 100 hours at a time, and forced to inhale water in a process known as water­ boarding. Interrogators sometimes went far beyond what Washington had authorized, sodomizing detainees with blunt objects, threatening to sexually abuse their family members, and, on at least one occasion, freezing a suspect to death by chaining him to an ice-cold floor overnight. By the time Obama came to office, the cia had apparently abandoned the most coercive forms of torture. Obama sought to ensure that the United States had trulyturned the page.Today, however, manyAmericans are considering electing a president who wants to bring such abuses back. During a Februarydebate among the Republican presidential candidates, Donald Trump vowed to reinstate torture, including treatment that would be “a hell of a lot worse than waterboarding.” Asked in a subsequent talk show if he stood by his proposal, Trump replied, “It wouldn’t bother DOUGLAS A. JOHNSON is Director of the Carr Center for Human Rights Policy at the John F. Kennedy School of Government at Harvard University. ALBERTO MORA is a Senior Fellow at the Carr Center. From 2001 to 2006, he served as General Counsel of the Department of the Navy. AVERELL SCHMIDT is a Fellow at the Carr Center. September/October 2016 121

Douglas A. Johnson, Alberto Mora, and Averell Schmidt me even a little bit.” And this is hardly a fringe view: according to a 2014 Washington Post–abc News poll, a majority of Americans now think that the cia’s use of torture was justified. In 2014, the U.S. Senate Select Committee on Intelligence released a series of reports as part of a five-year investigation into the cia’s detention and interrogation program. The committee’s Democratic majority, joined by the Republican senator Susan Collins, argued that the use of torture had not produced unique intelligence.The Republican minority claimed that it had. Meanwhile, several former senior cia officials launched a website, cia Saved Lives, on which they declared that the agency’s interrogation program had disrupted terrorist plots and helped the United States find and capture al Qaeda leaders. Despite their disagreements, all these perspectives share one key assumption: that whether the torture was good or bad depends on whether or not it “worked”—that is, whether it produced lifesaving results. Leaving aside the very real human and legal consequences of torture, a truly comprehensive assessment would also explore the policy’s broader implications, including how it shaped the trajectory of the so- called war on terror, altered the relationship between the United States and its allies, and affected Washington’s pursuit of other key goals, such as the promotion of democracy and human rights abroad. To assess the overall effect of torture on U.S. national security, one should consider not only its supposed tactical benefits but also its strategic impact. Our team of researchers at the Carr Center for Human Rights Policy at the Harvard Kennedy School has begun the first such review, and we’ve found that Washington’s use of torture greatly damaged national security. It incited extremism in the Middle East, hindered cooperation with U.S. allies, exposed American officials to legal repercussions, undermined U.S. diplomacy, and offered a convenient justification for other governments to commit human rights abuses. The takeaway is clear: reinstating torture would be a costly mistake. “THE GREATEST RECRUITING TOOL” In 2004, reports surfaced that U.S. soldiers had tortured and humiliated prisoners at Abu Ghraib, a prison 20 miles west of Baghdad that held as many as 3,800 detainees. Our preliminary analysis has found that these revelations, alongside allegations of torture at the U.S. detention center in Guantánamo Bay, Cuba, spurred foreign extremists to join insurgents in Afghanistan and Iraq, contributing to the violence in both places. 122 foreign affairs

STRINGER / REUTERS The Strategic Costs of Torture The human toll: at Guantánamo Bay, January 2002 According to State Department cables made public by WikiLeaks, in the spring of 2006, a group of senior U.S. officials gathered in Kuwait to discuss how to stem the flow of foreign fighters into Iraq. Their conclusion was startling: that the mistreatment of detainees at Abu Ghraib and Guantánamo Bay was “the single most important motivating factor” in persuading foreign jihadists to join the war. U.S. Senator John McCain reached a similar conclusion in 2008, when he asked a captured senior al Qaeda leader what had allowed the group to establish a foothold in Iraq. “Two things,” the prisoner replied, according to a State Department cable. “The chaos after the success of the initial invasion, and the greatest recruiting tool: Abu Ghraib.” Of course, the claims of a captured terrorist are easy to discount. But in 2009, a Saudi official echoed this sentiment, when, according to another cable, he concurred with the Obama administration’s decision not to release any more photos of Abu Ghraib, alleging that when the scandal first broke, Saudi authorities arrested 250 people attempting to leave the country to join extremist groups. And Robert Pape, a political scientist at the University of Chicago, has lent further credence to this assertion by identifying 26 martyrdom videos in which the suicide bombers cite torture at Abu Ghraib as the motivation for their attacks. Even though the total number of foreign fighters in Iraq remained relatively low throughout the war—less than ten percent of all insur- September/October 2016 123

Douglas A. Johnson, Alberto Mora, and Averell Schmidt gents were foreigners, based on a 2007 estimate by the director of the U.S. Defense Intelligence Agency—their brutality gave them dispro­ portionate influence on the character of the conflict. According to U.S. and Iraqi officials, foreign fighters conducted more than 90 percent of the suicide bombings in Iraq between 2003 and 2005, killing thousands. The revelations about mistreatment at Abu Ghraib and Guantánamo Bay made it easier for Sunni jihadists in Iraq to paint the United States as a villain. Images of Americans torturing prisoners became a motif in their propaganda, used to justify the targeting, kidnapping, and behead­ ing of Shiites, Kurds, and anyone else Images of Americans suspected of cooperating with the United torturing prisoners States and its allies. When, in 2004, Abu became a motif in Musab al-Zarqawi, then the leader of al Qaeda in Iraq, beheaded an American jihadist propaganda. contractor named Nicholas Berg—the first beheading of the conflict—his group claimed that it had acted in retaliation for the abuses at Abu Ghraib. Even today, U.S. torture plays an impor­ tant role in the propaganda of the descen­dant of al Qaeda in Iraq, the self-proclaimed Islamic State (also known as isis). Isis fighters regularly force prisoners to wear orange jumpsuits similar to the ones the detain­ ees wear at Guantánamo Bay, and they have reportedly waterboarded captives. Of course, jihadists in Iraq likely would have adopted cruel tactics even if the United States had not tortured prisoners. Yet the United States nevertheless helped legitimize such tactics by allowing terrorists to cast them as justified forms of vengeance. In lowering the bar for acceptable behavior, the United States signaled that in the war on terrorism, standards of humane treatment did not bind either side. The torture revelations also made it harder for the United States’ to recruit potential Iraqi allies. Part of the U.S. Army’s strategy in Iraq included persuading locals that they would be better off siding with U.S. soldiers than with insurgents. After the photographs of detainee abuse at Abu Ghraib emerged, however, many Iraqis no longer saw the United States as trustworthy, and they rejected requests for help. As General StanleyMcChrystal, the former head of the U.S. Joint Special Operations Command, acknowledged in a 2013 interview with this magazine, “The thing that hurt us more than anything else in the war in Iraq was Abu Ghraib.” He continued: “The Iraqi people . . . felt it was proof positive that the Americans were doing exactly what Saddam Hussein had 124 f o r e i g n a f fai r s