Customers look at laptops at a Wal-Mart store in Mexico City (Henry Romero/Courtesy Reuters).

Another 2011 trend is the rise of the middle class. While in the United States article after article – as well as the country-wide “Occupy Wall Street” protests — denounced the decline of the middle class, in Latin America the middle continued its gains.  Despite the tougher international climate, economic growth averaged over 4 percent, and unemployment rates fell to 6.8 percent (from 7.3 percent in 2010). Perhaps more important, GINI coefficients –  which measure inequality — lowered slightly to just over 50 (from roughly 53 in 2000). This means that the growth that happened actually spread to the bottom and middle of the pyramid.

There is an ongoing debate about how to measure the global middle class. Some of these issues I addressed in this past post. But whatever the starting point, the 2011 regional trend was positive. In Brazil, the middle topped 100 million, in Mexico it reached 67 million, and in Argentina more than 21 million.

This doesn’t mean Latin American nations don’t continue to struggle with poverty. According to the latest World Bank data, just under 30 percent of the population — 160 million people — lives on less than $4 a day (in PPP terms), and 14 percent — some 80 million — live in abject poverty (on less than $2.50 a day). The growing middle though does show the path forward, and reinforces the goal for those concerned with the less fortunate, helping them too rise the economic ranks into a more comfortable middle.

Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.

Presidents Chavez of Venezuela, Fernandez of Argentina and Rousseff of Brazil chat while posing for a family photo during the CELAC summit in Caracas (Carlos Garcia Rawlins/Courtesy Reuters).

As 2011 comes to an end, I want to reflect on just a few trends affecting the region over the course of the past year. While these developments certainly have long histories, they have all become more noticeable – and noteworthy – in 2011. To keep it interesting, I will be posting one trend a day for the rest of this week, so check back — and let me know what you’d add to the list in the comments or via my twitter account (@latintelligence).

This hasn’t been a good year health-wise for Latin American leaders. Cristina Kirchner’s recent diagnosis of thyroid cancer is just the latest. The most mysterious, and politically game-changing health challenge is that of Hugo Chávez. Officially, Cuban doctors removed a reportedly “aggressive” pelvic tumor in June, and since then he has undergone chemotherapy and steroid treatment. Though he claims to have conquered the disease, others (including his former doctor) say he may not live more than two years.

Last year, Paraguayan President Fernando Lugo was diagnosed with non-Hodgkin’s lymphoma, and spent four months in chemotherapy and in and out of hospitals. According to the most recent tests, his cancer is in remission. In Brazil, President Dilma Rousseff  continues some treatment for lymphatic cancer (discovered during her 2010 presidential campaign) and former President and still political heavyweight Luiz Inácio Lula da Silva has just begun his final round of chemo for throat cancer (diagnosed in October). Pictures of the famously bearded leader now show him hairless, though still beaming. There were also rumors circulating that Evo Morales had a cancerous tumor in his nose, though this was never proven.

This type of illness has idiosyncratic, but nevertheless real effects on politics. It can weaken a politician due to their physical absence from the public limelight as well as political backroom negotiations. Lula’s Worker’s Party (PT) will sorely miss his active leadership, especially in the run up to local elections in 2012. Kirchner is expected to make a quick recovery after surgery, though she will turn power over to her Vice President Amado Boudou (a close political confidant) for three weeks in January. It remains to be seen whether these absences will make a significant mark on either country’s internal politics.

Javier Corrales, a political scientist at Amherst, has written about a different role for illness, and its potential to strengthen rather than diminish the political patient. Calling it “participatory cancer” he chronicles Chávez’s attempts to turn his illness from a disadvantage to an electoral strength. By brandishing cancer and his fight as an electoral gimmick, the Venezuelan leader distracts voters from more serious problems (such as a floundering economy and rising crime).

While continuing to watch the political fallout, let’s hope the new year brings health to all.

Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.

A view of the San Alberto gas plant (David Mercado/Courtesy Reuters).

Last December, Argentina’s major oil and gas company YPF discovered some 4.5 trillion cubic feet of unconventional gas in the southwest province of Neuquén. The find has the potential to totally transform the country’s (and the region’s) energy future. It pushes Argentina’s shale gas reserves to 774 trillion cubic feet — making it the third largest provider of natural gas in the world, after the United States and China. If exploited it would easily cover domestic demand for gas for the foreseeable future and end the recurring and unpopular gas crises that force factories to shut down at times during the winter months.  Argentina would become energy self-sufficient for the first time in nearly a decade.

But there are challenges to get the gas out of the ground. First, Argentina’s shortage of water may stand in the way of accessing natural gas reserves. The process of drilling to extract shale gas uses up to 6 million gallons of water per day for every well drilled, and experts say it will take 38 billion gallons of water to capture natural gas trapped underneath the Vaca Muerta, or “Dead Cow” basin.

Another challenge is the government’s oil and gas pricing regime, which has been a major disincentive to investment in recent years. Heavy regulations hold prices down to $2.00-$2.50 per cubic foot of regulated gas — nowhere near the breakeven price needed to make development worthwhile. Argentina has set up a two-tier system under its “Gas Plus” program — allowing gas produced by new investment to be sold at much higher prices – in some cases more than double the rate in the domestic market. This has brought in more than a billion dollars from the likes of Exxon, AES and Apache. But these differential prices show how transitory Argentine rules can be. To attract the huge amounts of capital needed to truly develop these gas finds in the coming years, the Argentine government will have to convince investors that the rules won’t change with the political winds.

If this happens, it will transform regional gas markets. Bolivia will be the biggest loser. As the region’s current top energy provider, its economy today depends on fueling neighboring Argentina and Brazil. By developing its own gas reserves, Argentina takes away not just a vital customer but also potential foreign direct investment – leaving Bolivia’s economic development model in jeopardy.

Another — much more indirect — loser is Mexico. The fact that investors are more interested in Argentina — known for playing fast and loose with property rights and contracts — than in Mexico, which is ranked Latin America’s most business friendly economy, shows how hamstrung Mexico’s energy sector remains. Without further changes to the system to open up outside funding for exploration and production projects, Mexico risks becoming a spectator on the energy sidelines, with huge ramifications for its overall economy as a result.

Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.

A general view of Sao Paulo, the biggest Latin American city (Paolo Whitaker/Courtesy Reuters).

A new piece by Eduardo Guerrero in Nexos looks at the growing problem of extortion in Mexico. Differentiating it from drug trafficking, he finds it more brutal and violence, and  argues it is on the rise for three reasons: fragmentation of cartels, displacement of crime rings (and their response to expand into new territories), and finally rampant impunity for such acts.

Drug abuse in the United States is on the uptick overall, though use of “harder drugs” seems to be down, according to a recent study by the Substance Abuse and Mental Health Services Administration (SAMHSA). Marijuana use has increased some 20 percent over the last four years, particularly among young people. Today more than one in five Americans aged 18-25 get high on a regular basis. On the other hand, rates of methamphetamine and cocaine abuse have been steadily declining since 2006.

The World Economic Forum released its Global Competitiveness report this week, which measures competitiveness based on twelve benchmarks that include “basic requirements”, such as institutions, “efficiency enhancers” such as market size, and “innovation and sophistication factors”, such as innovation. Among Latin American countries, Mexico had the biggest boost in the rankings, moving up 8 spots from 66^th to 58^th, and improving on 10 of the 12 categories (its only drop was in macroeconomic environment). Brazil also made gains, up 5 places to 53^rd overall (due largely to the size of its internal market and its sophisticated business environment), and Chile remains at the top of the region and the 31^st most competitive nation worldwide. Central American countries such as Guatemala, El Salvador and Nicaragua registered steep declines in their ratings, due to weakening institutions and rising insecurity, while Argentina and Venezuela remained generally unchanged, but near the bottom of the list at 84^th and 124^thoverall, respectively.

Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.

Argentine President Fernandez waves to supporters after hearing the first results of the nationwide primary election in Buenos Aires (Enrique Maracarian/Courtesy Reuters).

The Pew Research Center released the results of a wide-ranging public opinion poll based on interviews with some 800 Mexicans (the study is part of their larger Global Attitudes Project). It finds strong continued support for military – 83 percent favor their role in the drug war – and for U.S.-Mexico security cooperation, with nearly 3 in 4 Mexicans supporting U.S. training and weapons for national security forces. Calderón, despite an economic recession and ever more bloody drug war, still enjoys the confidence of a majority of Mexicans, with 57% saying they view his political influence in a positive light. While these numbers look bad vis-à-vis past Mexican presidents entering their last term in office, other Western Hemisphere leaders (Barack Obama and Sebastian Piñera, for example) would be quite pleased with such levels of support.

A recent survey of the Guatemalan judiciary, on the other hand, paints rule of law institutions in a much more more troubling light. The Plaza Pública study shows that overall Guatemalans see judges as corrupt, controlled (by vested economic interests and other political elites), and inefficient.

This Cefeidas Group report provides an update on the Argentine elections, where Cristina Fernández de Kirchner looks even more likely to win a second term in the October 23rd election, due in part to the weakness of the opposition.

On a different note, Rolling Stone has an in-depth and well written article about La Barbie, a native Texan who rose to become the top drug kingpin in Acapulco. The behind the scenes narrative of his rise and fall shows why going after kingpins will not, on its own, make Mexico safer.

Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.

Argentina's President Cristina Fernandez de Kirchner waves as she enters Congress for the inauguration of the annual ordinary sessions in Buenos Aires (Marcos Brindicci / Courtesy Reuters).

By the end of next week, Argentina’s current president Cristina Fernández de Kirchner will have to decide whether she’s in or out of the upcoming presidential race. According to recent polls, if the Peronist leader runs, she will win reelection, likely in the first round. Nearly half of Argentines say they would vote for her if the election were today, and her overall approval ratings top 60 percent.

Her opposition is divided and as a result more easily conquered. Ricardo Alfonsín, the Unión Cívica Radical (UCR) candidate and son of former President Raúl Alfonsín, leads the pack, but his support is just under 20%.  So far he has been unable to bring other opposition figures into his fold, likely dooming his rise.

Argentine presidential races often come down not to a contest between political parties but between different factions within the Peronist party. Here Kirchner’s best-known challenger is Buenos Aires province political boss and former president Eduardo Duhalde. Once an ally, now a fierce opponent, Duhalde has the support of some breakaway Peronist factions. But with political patronage flowing (boosted by a strong economy), it will be difficult to entice many other party leaders away from the Kirchner fold.

In the end, assuming Cristina jumps in to the race, it is hers to lose. The challenge will be maintaining her current momentum through October. A bumper soya crop and a booming Brazil should help. Most expect Argentina’s economy to continue growing at a fast clip – 5 to 6 percent — over  the next four months.  Energy could pose a problem, as years of (government mandated) low prices have both increased demand and limited investment. A cold winter could expose the cracks in the system, causing a (politically challenging) energy crisis. But if Argentina can muddle through without any large shocks,  Cristina looks to remain in the Casa Rosada for another term. The markets seem to have come to this conclusion as well and are voting with their proverbial feet: capital flight increased during the first 5 months of the year.

Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.

Thousands of commuters pack the Se metro subway station in Sao Paulo (Paulo Whitaker / Courtesy Reuters).

Two recent studies look at the rise of Latin America’s middle class. The first, by ECLAC (Economic Commission for Latin America and the Caribbean), shows that nearly across the board, the share of Latin America’s middle has expanded (the exceptions being Argentina, where it shrank and Colombia, where it held steady).  The second study from Brookings places Latin America in a global comparison and looks toward the future. Here, they define the middle class on global terms, as those that earn enough to be above the poverty line in the two advanced European countries with the lowest poverty lines (Portugal and Italy) and earn less than double the median income of Luxemburg (the richest advanced country). Again the Latin American metrics are impressive. Using 2005 numbers, it finds the middle class now comprises over half of the population in four countries: Mexico (61 percent), Uruguay (56), Argentina (52), and Costa Rica (52). Data since then show that Brazil too has crossed this threshold. Impressive too are the results of their simulations for the future – even in their more conservative estimates, most Latin American countries will become solidly middle class over the next two decades (the current leaders overwhelmingly so).

Three interesting points come out of these studies. First, it reaffirms Latin America’s increasingly positive economic story. In addition to exports, Latin American countries can increasingly rely on domestic consumption to fuel economic growth and advance well-being.

Second, on these metrics Latin American nations far outpace China and India. While the absolute numbers of the middle class in these Asian giants are substantial, as a percentage of the overall population they remain miniscule – a paltry 3.8 percent in China and 2.5 percent in India. And they aren’t likely to catch up any time soon. Even in the best case scenarios this gap won’t close for two decades. This vast difference – and the structural ramifications for these economies – grants Latin America a potential competitive edge in today’s globalized world.

Finally, if the old truism holds, the rising middle class should be good for democracy. Preliminary evidence suggests that this is indeed the case. The expansion of the middle class and of democracy have coincided in most places in the region. But more telling than this correlation, policies favored by the middle – health care, security, education, and general economic openness – are increasingly on the political agenda,  suggesting that the votes of this group matter. These dual trends hold out the hope that an expanding middle can provide both more resources to the state (through increased tax intakes) and demand greater accountability and transparency of their respective governments, deepening democracy in the process.

Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.

Plans for a $340 million overhaul of Rio de Janeiro's iconic Maracana stadium are among those behind schedule for the World Cup (Sergio Moraes / Courtesy Reuters).

The UN Economic Commission for Latin America and the Caribbean (ECLAC) released its report on foreign direct investment (FDI), with generally good news for Latin America. While 2010 investment worldwide was fairly flat (and fell in developed economies), it soared forty percent in the region – reaching nearly $113 billion. Of the just over a trillion in worldwide flows, Latin America captured a tenth of the total (and over twenty percent of that invested in emerging economies).

These investments were divided between natural resources, domestic market players, and outsourcing venues. Within the region the biggest winners were Brazil (nearly doubling to $48.5 billion), followed by Mexico ($17.7 billion) and Chile ($15.1 billion). And, according to ECLAC, the trend is set to continue – it expects FDI to the region to rise a further fifteen to twenty-five percent in 2011.

A few interesting trends jump out of the data. One is the geographic pull of the Southern Cone. While investment in Mexico and Central America increased, the real upswing occurred in South America—almost four times as much. Brazil and Chile gained the most, but Peru, Bolivia and Argentina all saw large inflows. Only in the Caribbean did FDI actually fall.

You also see quite stark differences in the type of investment. In South America nearly a majority of FDI poured into natural resources—oil, gas, copper, iron, and soya. Further north, a greater share of the money went into manufacturing. There the biggest winners were Mexico, Panama, Costa Rica, and the Dominican Republic – all countries with free trade agreements with the United States (NAFTA and CAFTA). These trends, if they continue, suggest long-term structural economic differences may develop between the north and the south of the hemisphere.

The report also provides some context for the much-touted (and in some quarters much feared) rise in Chinese investment. It has indeed increased: last year China invested twice as much in Latin America as it did over the previous two decades combined. Directed almost solely at natural resources, it is also geographically concentrated, with most going to just three countries – Brazil, Argentina and Peru.

But the data reveals that China is still just the third largest investor — behind the U.S. and the Netherlands (the latter’s investment bumped up significantly last year due to Heineken’s acquisition of Mexico’s FEMSA brewery). Interestingly, China trails the combined Latin American investment in the region. Taken together, multilatina outlays hit a record $43 billion – almost triple China’s $15 billion contribution. These investments were more apt to go into financial services, retail, and utilities – value-added activities with more positive trickle down effects for the broader economy. This suggests Latin American nations should be more enthusiastic about trade missions from their neighbors than from China.

The report also hints at the hurdles the region continues to face. The proportion of investment in high tech fell far short of its global competitors—only eight percent compared to fifty-two percent among the Asian Tigers—and limited mostly to Brazil and Mexico. The region has a lot to do to upgrade educational systems and its workforce in general to change this balance.

And, with the exception of perhaps some smaller island economies, FDI isn’t going to be the ticket to the big time. It can’t make up for domestic savings and investment. In the end, growth will have to come from home. Nevertheless, these flows can provide a leg up if these nations can translate this investment into productive growth.

Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.

A shaman performs a ritual in front of a photograph of President Barack Obama in Lima (Mariana Bazo/Courtesy Reuters).

Between March 19 and 23, President Obama will take his first foreign trip this year – and his first ever to South America. He will kick it off in Brasilia and Rio de Janeiro, then head to Santiago, and finish up in San Salvador. The trip’s goal, as announced in his State of the Union address, is to “forge new alliances across the Americas.” Alongside the obvious meetings between presidents, in the works are business roundtables, a visit to one of Rio’s favelas, an Egyptian style speech to “all Latin Americans” in Santiago, and educational activities for his daughters, who, along with the First Lady, will accompany him.

Why these three nations?

Brazil is the obvious choice. It has grown into an economic and diplomatic powerhouse, weighing in on world issues from financial reform to climate change. Under Lula, it flexed its muscle at times to the discomfort of the United States – on nuclear proliferation and Middle East politics, U.S. bases in the region, and the Honduran standoff. With newly installed President Dilma Rousseff’s openness to deepening U.S.-Brazil ties, there are high hopes on both sides that the trip will open a new chapter in the relations between the two largest economies of the Americas.

On the table will be trade and investment, particularly on clean energy and Brazil’s infrastructure needs in the lead up to the World Cup and the Olympics games. Also up for discussion will be China and its currency, as companies in both countries struggle to compete with Chinese imports and investments.

The other two nations are less obvious stops. Important as nations with which the United States maintains strong friendly ties, they are also examples of pragmatic and progressive governments from across the ideological spectrum. Chile’s Sebastián Piñera is leading one of the region’s most prosperous and stable nations from the center-right– the first elected conservative leader since the end of the Pinochet dictatorship. Obama’s visit will put the finishing touches on a nuclear pact, and the two leaders will work on clean energy and intellectual property issues (in particular the steps to get Chile off the U.S. priority watch list for failing to protect IP rights). Both leaders are keen to discuss innovation and entrepreneurship – part of their domestic political platforms.

El Salvador’s Mauricio Funes rules from the other side of the spectrum. A reformed revolutionary, he is the United States’ strongest partner today in Central America. The presidents will focus on security– Funes presented a $900 million plan to Hillary Clinton last fall, which would quadruple U.S. commitments under the Merida Initiative to Central America – as well as issues of economic cooperation and poverty reduction. The future of the 2.5 million Salvadorans (roughly one of every four) living in the United States will also be on the table, as Funes hopes to replace the Temporary Protected Status under which most live with a path to permanent residency.

What is also interesting is who is not on the list. The President, First Lady, and family will not be stopping in Buenos Aires, Argentina; a decision said to upset President Cristina Fernández de Kirchner. Behind the scenes, many feel that the old aphorism once attributed to Brazil is perhaps now more applicable to Argentina, that it is “not a serious country.” Also not on the itinerary is Colombia, in part because Obama has no good news to bring his counterpart on the long-delayed free trade agreement.

Though timed to coincide with the 50th anniversary of the Alliance for Progress, nothing so grandiose will be in the works. Nevertheless, as the heads of state meet and talk about an array of issues, Obama has the opportunity to make a significant change. In addition to the usual bilateral and regional topics, it is important that Obama bring Latin America into his thinking about global challenges. This shift, though subtle, would be the start of a real transformation in U.S.-Latin America relations.

Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.

The Promise and Perils of South American Integration
Shannon O’Neil
January 12, 2009
World Politics Review

In the 21st century so far, regional integration has been one of the most notable elements of South American foreign relations. Picking up speed in recent years, the continent’s heads of state have enthusiastically met in numerous summits, promising increased political, economic, social, and development cooperation. Across the spectrum, governments are expanding current integration frameworks and entering into new agreements. Expectations are no less grand. As Brazil’s President Luis Inacio “Lula” da Silva recently stated, “South America, united, will move the board game of power in the world, not for its own benefit, but for everyone’s.” Read the entire article here.