As the world financial crisis hits Latin America, it is easy to equate it to the repeated financial crises that hit the region in 1982, 1995, and 2001. In these past episodes, irresponsible fiscal policies by Latin America’s governments often led to and then exacerbated the region’s financial troubles. But this time around, as many analysts rightly point out, Latin American countries face the global crisis with much sounder economic policies in place, including fiscal balances (and even surpluses), lower debt levels, and high international reserves. The quite different public economic fundamentals fuel predictions – by the UN’s Economic Commission for Latin America and the IMF among others – that the region will weather the crisis with only a few scratches.
Yet these analyses neglect the situation of the region’s private sector, which may prove to be the region’s Achilles’ heel. As Latin America’s economies slow down (due to tight credit, falling commodity prices, and falling consumer demand at home and worldwide), the poor and even irresponsible financial decisions of the region’s private sector are coming into relief.
With world markets teetering in recent months, rash financial bets – outside of the core competencies of many Latin American companies – went south. Stalwart firms such as Comercial Mexicana in Mexico and Grupo Votorantim in Brazil bet against the dollar and are now paying highly for it – perhaps with their very existence. More unwise financial bets are still waiting to be uncovered. In fact, one analyst recently estimated that derivative losses from Latin America’s largest companies could reach $50-60 billion in the coming months.
Latin America’s private sector troubles are not limited to dallying in derivative markets. Particularly troubling is the huge debt piled on by businesses in recent years, including many of the region’s largest companies. This became apparent this week when Cemex, a company long touted for its responsible and successful business strategy, was unable to refinance its debt. And Cemex is not alone. Others undoubtedly will follow, as tight worldwide credit markets limit the rollover of short term debt.
The macroeconomic and fiscal responsibility of most Latin American governments in recent years is welcome. And, it does mean that the effects of the worldwide financial crisis for the region differ this time around. But while necessary for a speedy recovery, public prudence alone is not sufficient. The financial health of the private sector – the main engine for the job creation and economic growth – is equally important. Here, the emerging data is not so sanguine, and some of it is missing or unreliable. Past crises have encouraged and sometimes forced greater reporting and transparency in the public sector, but the private sector remains somewhat of a blackbox. Yet how the private sector weathers the crisis will define the region’s economic future.
Reporters, CFR members, students, and other interested folks keep asking me if U.S. policy toward Latin America will change when President-elect Obama steps into the White House on January 20. The fact is that U.S. policy toward most Latin American countries will not change much under the new president. Obama will have several pressing issues on his plate when he steps into office, and Latin America is not likely to be one of them. But Obama does have a real opportunity to redirect U.S. relations with Cuba and Venezuela, and as a result change the tone of U.S.-Latin America relations.
The easier change in some respects is the relationship with Cuba. Obama won Florida with the support of the majority of Latinos in that state, though he lost the Cuban American vote. Since Cuban-Americans were not decisive in his victory, Obama doesn’t owe them anything. In addition, polls show that younger Cuban Americans were more likely to vote democratic, suggesting a longer term shift away from the core support for current U.S. policy. Obama said in the campaign he will quickly relax restrictions on family visits and remittances to Cuba. This could be a first step in a longer and larger policy shift toward greater opening between the two countries, and ultimately (after several bilateral steps) asking Congress to end the embargo.
These policy changes would transform U.S.-Cuba relations. But they would also reverberate throughout the region, ending what is often seen in Latin America as a hypocritical stance between U.S. rhetoric and policy realities. And, these changes are more likely to actually bring democracy to Cuba, allowing for new information and influences on the island after nearly 50 years of forced semi-isolation.
In terms of Venezuela, Obama’s presidency will mean that the personal animosity between Presidents Bush and Chavez will no longer affect matters of state. Second, Obama’s personal profile and life story will make it much harder for Chavez to dismiss him as a “yankee imperialist.” And third, Chavez is running into problems of his own. In addition to domestic problems of rising inflation and crime, falling oil prices limit his “petrodiplomacy” with other countries in the region – lowering the decibel of his foreign policy microphone that until now has been turned against the United States. Obama has an opportunity to redirect these relations, though here the opportunity is less clear. Even with oil prices nearer to $50 than $150 a barrel, Chavez still has significant resources to throw around. And, with domestic problems escalating, he needs a foil. The United States is an easy target, no matter who the president is. But a change on Cuba would also make much of Chavez’s anti-American rhetoric ring less true across the region, limiting its effectiveness and perhaps leading to a different bilateral dynamic down the road.
It’s hard to believe that Calderon is coming up for 2 years in office, one-third of his term. Much has been said of Calderon’s domestic agenda, but in the op-ed below, published in Mexico’s major English-language newspaper, The News, I analyze his foreign policy achievements. I argue that President Calderon has done much to restore Mexico’s bilateral relationships, but that so far his administration has failed to take on a global leadership role. With four more years in office, Calderon should shift Mexico’s foreign policy course to actively shape the international agenda.
It’s time for Mexico to lead
BY Shannon O’Neil
Special to The News
November 28, 2008
As he celebrates his two-year anniversary in office, President Felipe Calderón gets mixed reviews on his domestic and foreign policy. Many point to the numerous successful reforms – pension, tax, justice, and energy – that have passed as evidence he can deftly guide serious issues through a divided Congress. These achievements do stand in stark contrast to the gridlocked Vicente Fox administration. Yet others dismiss these reforms as too little, too late, and lament the wasted potential for real change.
This ambivalence is not limited to national politics. While much lower in profile, Calderón´s foreign policy elicits both praise and dismissals. It shines in comparison to Fox´s, which left Mexico’s relations with Venezuela and Cuba in tatters and U.S. relations weakened by recriminations on both sides. But as in the domestic arena, many worry Calderón is wasting the opportunity to fundamentally transform Mexico’s role on the world stage.
Upon entering Los Pinos, Calderón quickly moved to repair broken bilateral fences. In his first year, he returned Mexican ambassadors to both Venezuela and Cuba, taking the first necessary steps to re-engage with all of Latin America. He followed up with visits to Argentina and Chile, and received Presidents Tabaré Vázquez of Uruguay and Luiz Inacio Lula da Silva of Brazil at home. Through these renewed ties, his government pushed to increase trade and to further energy partnerships – all important for Mexico´s future. This new hemispheric camaraderie permitted Mexico´s successful U.N. Security Council seat bid, providing Calderón a new international platform in 2009.
While at times seeming almost desperate to ignore his northern neighbor – during his first trip there as head of state in April he even bypassed Washington – Calderón’s administration has actually made more concrete headway with the United States than many of his predecessors. The harsh realities of his “get tough” domestic agenda, and the increasing worries of U.S. policy-makers about drug-related violence in Mexico, have facilitated this newfound cooperation.
Negotiations with President George W. Bush culminated in the three-year package known as the Mérida Initiative, which provides $400 million in the first year for the fight against the drug cartels. Just as important, these discussions changed the terms of the drug war debate, getting the United States to at least grudgingly accept some responsibility in the violence and to promise to stem the flow of illegal guns and money into Mexico.
QUIET CONFIDENCE
On other bilateral issues, Calderón has been notably silent. Coming on Fox’s burned heels, he has virtually ignored U.S.-bound migration in his discussions with the U.S. president. Calls for better treatment of Mexico’s citizens abroad, and for economic development and job creation at home to stem the steady human flow outward, have been geared almost exclusively to his domestic audience. On NAFTA, too, the administration has been uncommonly reticent, particularly amid calls by U.S. democrats for its renegotiation.
Two years in, Calderón’s foreign policy has promoted better Latin American relations, and assuaged past rifts with the United States. Not bad – but not visionary. As the 13th-largest economy in the world, and according to The Economist, soon to break into the ranks of the top 10, Mexico has been decidedly quiet on the international front. It is time for Mexico to lead.
The current financial crisis provides an unprecedented opportunity. Given its own tortuous history with financial upheaval (and more than one near-death experience of its banking sector), Mexico has quite a lot of wisdom to share. And since the exclusive G-7 has given way to the G-20 in worldwide negotiations, Mexico now has a seat at the table.
Other countries understand this. Brazil is the most obvious example, and one to be emulated rather than envied. Its steady and confident leadership on the world stage (backed by good macroeconomic policies and solid domestic economic growth), seduces not just international businesses and investors, but also worldwide diplomats. Having the world’s ear, Brazil´s eminence has become a self-fulfilling prophecy. In contrast, Mexico´s more timid foreign policy stance leaves it out of the game.
In the coming months, we will likely see a narrowing of the Mexican government’s domestic policy agenda. The unfortunate combination of escalating criminal violence, the almost certain National Action Party losses in next year´s midterm elections, and the deepening of the global financial crisis will prove too much for an ambitious reform program in the second half of the president´s term. But this unlucky trifecta for the home front opens the opportunity for a more aggressive foreign policy approach. Mexico should turn outward in earnest, building on the solid blocks of support developed so far by Mexico´s diplomats. With now two years of distance from Fox´s unfortunate travails, the arrival of a new administration in Washington provides an opening for the Calderón government to shift Mexico´s foreign policy course. Through the U.N. Security Council seat, its OECD and G-20 membership, and its intricate economic, security, social, and cultural ties with what is still the most powerful world economy and government, Mexico has a chance to shape the international agenda. It is an opportunity Calderón should not waste.
About the writer: Shannon O’Neil is Douglas Dillon Fellow for Latin America Studies at the Council on Foreign Relations in New York.
It has been two years since the United States and Colombia signed a free trade agreement, and it still has not been approved by Congress, in part due to concerns over Colombia’s human rights record. In the op-ed below published by the Washington Times today CFR Research Associate Sebastian Chaskel and I argue that withholding the agreement will not improve human rights in Colombia, but that the U.S. has other policy tools that could have an impact.
The Washington Times
Monday, December 1, 2008
O’NEIL/CHASKEL: Pass FTA and amend Plan Colombia
Shannon O’Neil and Sebastian Chaskel
Two years ago President Bush and Colombian President Alvaro Uribe negotiated a free trade agreement (FTA). Yet when Barack Obama steps into the White House in January, it will still await congressional ratification.
Experts agree that both countries will benefit from the pact – Colombia by attracting investment and the United States by reducing tariffs on its Colombia-bound exports. As a senator and presidential candidate, Mr. Obama opposed the FTA for non-economic reasons, arguing along with House Speaker Nancy Pelosi that as long as Colombia maintains a dismal human-rights record Congress should not review the agreement. During the last campaign debate, Mr. Obama stated that Colombian “labor leaders have been targeted for assassination on a fairly consistent basis, and there have not been prosecutions.”
While true, withholding the FTA will not solve this situation. Instead, the United States can improve Colombia’s human-rights situation by bolstering economic opportunities through the FTA and more importantly by strengthening Colombia’s courts through Plan Colombia, the multi-billion dollar aid program to fight drug production and insecurity in Colombia.
Colombia has made great strides in the last decade, reducing the violence tied to the drug trade from a threat to the state itself to a serious law enforcement problem. Yet even though Colombians are now safer, political killings continue.
In 2007 at least 39 trade unionists were murdered. This year 41 have died, comprising about half of the assassinated union leaders worldwide. Perhaps more important is that impunity remains rampant. Of the nearly 500 union murders during Mr. Uribe’s presidency, only 14 perpetrators have been brought to justice. The latest news, that members of the armed forces kidnapped poor civilians and presented them as combat deaths, is one more gruesome reminder of the lack of accountability and widespread impunity enjoyed by human rights violators.
President Uribe reacted to this most recent scandal by purging the military. But he tellingly said that human-rights scandals “make us look bad,” as if the problem were simply one of perception. He also called a representative of Human Rights Watch, an organization that helped uncover the violations, an “accomplice of the FARC,” Colombia’s largest guerrilla group. These actions suggest that the Colombian government is more concerned with wooing American congressional representatives than with stopping human-rights violations.
Yet the lack of presidential will is not the only problem.
Just as detrimental is the weak capacity of Colombia’s judiciary, the branch responsible for investigating human-rights violations and prosecuting its perpetrators. Since 2006 the Colombian attorney general has valiantly tried to prioritize the top 200 union-leader cases, out of the backlog of some 2,600 assaults. But his two-plus years of work garnered only five convictions. This lack of progress shows that without strengthening Colombia’s court system, human rights will continue to suffer.
Withholding the FTA will not improve the courts’ capacity, but redirecting U.S. aid to Colombia could. As it stands, the United States gives Colombia $600 million a year to fight the drug trade. Starting in 1999, when the government was nearly toppled by drug dealers, this aid provided armament and military training, and was a key element in Colombia’s success against the drug lords. Recognizing the new, safer situation, in 2007 the Democratic Congress decreased Plan Colombia’s military component somewhat. But the aid package remains lopsided, funding predominantly military programs while largely excluding support for the country’s democratic institutions.
Nine years into Plan Colombia the country’s new Achilles heel is its civil governance, particularly its judicial branch. Using Plan Colombia to support the work of the country’s attorney general, inspector general, and ombudsman, and tying that aid to benchmark reductions in impunity, could, unlike withholding the FTA, improve human rights.
Combined with a revamped Plan Colombia, the FTA can then promote both human rights and the overall quality of life in Colombia. One of the loudest proponents for the FTA is Asocolflores, Colombia’s flower exporters association. Dependent on the U.S. market, its companies employ 200,000 Colombians. This and other export industries create jobs and opportunities that provide poor Colombians alternatives to growing coca, the plant used to make cocaine.
Real change will not come from bulletproof armor, helicopters, and tanks, but will depend on Colombia’s institutional capabilities and the economic opportunities it can offer its citizens. The United States should focus Plan Colombia on improving justice and human rights, and pass the FTA to improve economic opportunities for both countries’ citizens. President-elect Obama’s campaign promised change; our regional partners could use some, too.
Shannon O’Neil is Douglas Dillon fellow and Sebastian Chaskel is a research associate with the Latin America Studies Program at the Council on Foreign Relations.
