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.

When the United States thinks about the drug war, most focus on Colombia and Mexico. Yet concerted efforts in these two countries are leading to problems elsewhere. Argentina may be the next victim.

Drugs are available throughout the country, specifically a lower-cost and highly-addictive smokable cocaine residue called paco. News articles highlight the worries of government officials and non-governmental organizations over the social costs of increased drug consumption, both in human lives and increased crime rates. But this may be just the beginning for Argentina. In response to enforcement elsewhere, Argentina is increasingly becoming a drug producing and transit country of methamphetamine in particular, also known as crystal meth or ice.

Last July Mexico outlawed imports of ephedrine and pseudoephedrine, two common cold medicine drugs that are the basis for crystal meth. In response to Mexico’s crackdown, domestic meth production in the United States rose. But the United States is not alone. Production also seems to have moved to countries with less restrictive import rules for these basic ingredients. Two weeks after Mexico’s ban, nine Mexicans and an Argentine were arrested in Buenos Aires for running a meth lab linked to the Sinaloa cartel. Since then, Argentina has experienced several violent episodes – more reminiscent of Mexico’s than Argentina’s recent past. In two separate cases, one in August and one in October, three Argentine narcotraffickers were abducted, handcuffed, and sprayed with bullets; their bodies left to be found days later.

Argentina’s entry into the drug trade has built up in recent years. Twenty-six tons of ephedrine were imported to Argentina in 2007, compared to only 5 tons in 2006. This 5-fold increase still falls below the legal annual maximum of 37 tons, meaning that there is still more potential for legally supplying the ingredients for ultimately illegal drugs. Recent regulations limit importers to registered pharmaceutical laboratories, but a November case shows the weakness of this strategy. Last month Argentine police arrested Mario Roberto Segovia in Rosario, accusing him of trafficking 9 tons of ephedrine worth $35 million dollars. Segovia had received permission from the Argentine government to import the ephedrine used to make the drugs and had recently requested permission to legally import 2.5 kilos more.

Following Segovia’s arrest and facing increased international pressure, Argentine policymakers may choose to further regulate ephedrine imports. But this is not Argentina’s only problem. Regulating cash flows will be just as important to halt the nascent illegal drug industry. Here, Argentina’s recent policy decisions are even more worrisome.

In a desperate attempt to bring cash into Argentina, the country’s Congress passed a law on December 18, 2008 that provides tax incentives for repatriated undeclared offshore funds. While the country’s basic tax rate on earnings is 35%, the plan offers a 1% rate on money that is repatriated and invested in industry, infrastructure or farming. Funds that are repatriated but invested in other sectors will pay a maximum tax rate of 8%. Argentines have about $140 billion in offshore accounts, so the government is hoping that some of those funds will return, benefiting the economy. But the law also opens a door for money laundering. Faced with increasing economic woes, it is unlikely that the Argentine government will scrutinize the history of incoming investment flows.

In effect, Argentina is offering a very attractive rate for money launderers – a mere 1 %. This can only deepen the danger for a country that’s becoming a hub of ephedrine and pseudoephedrine trafficking, and will accelerate drug related violence and corrosion of institutions.

While some in the United States still talk about the introduction of private individual accounts as the way to “save” social security, even the Chileans are rethinking their once vaunted private pension system. After nearly three decades of private pension management, the Chilean system is again poised for reform. This article looks at the dwindling support for private pension systems in Chile and other Latin American countries, the reasons behind this shift, and the potential directions for this wave of social security reform.

But heterdox economic policies – reminiscent of Sarney’s Brazil, Alfonsin’s Argentina, and Garcia’s Peru (the first time around) – have reemerged. In both Argentina and Venezuela, the Kirchner and Chavez governments are using wage and price controls on basic goods as key parts of economic policy. Venezuela has gone a step further to reintroduce public control and management of “key” industries, including telecommunications, oil, and now perhaps steel and the banking sector. These policies are bringing back worries of inflation and leading to shortages in basic goods.

Venezuela’s inflation for 2006 topped 17%, the highest in Latin America. Most expect it to surpass 20% this year. Argentina too has seen increasing inflation, from a negative rate in the late 1990s to 10% last year. As worrisome, Kirchner fired the head of the national statistics agency, INDEC, briefly replacing her with a more malleable political appointee until public clamor forced the promotion of a INDEC senior employee.

Shortages in these economies are as important, and hamper both consumer-led and manufacturing-led growth. A recent Wall Street journal article argues that Chavez’s threat to nationalize the steel and banking industries has as much to do with the issue of shortages as with nationalism. News articles, as well as personal conversations, show that shortages and economic bottlenecks are again appearing in Argentina. These mismatches are hampering growth, not to mention the quality of life of individuals within the country.

Poverty, inequality, and equal opportunity are key issues for the future of Latin American nations. Government programs to directly improve the health care, education, and resources of the poor are important and laudable. But, these governments should not overlook the dire effects of inflation on poverty and inequality. Inflation hits the poor the hardest. They are the ones least likely to receive compensatory pay raises, and are those unable to hedge their savings in indexed accounts or abroad. High inflation will wipe out any benefits of direct assistance programs, leaving individuals certainly no better off and most likely in a much worse situation. This means that as governments are designing programs for the poor, they need to include measures to keep inflation low, be that independent monetary policy, controlled deficits, and better financial regulation. Only with this combination will governments be able to truly help those at the bottom of the pyramid.