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.
With the formation of ALBA, Unasur, IIRSA, and many others, Latin American nations are pushing towards a new era of economic, political, and social integration. But how innovative are these efforts really? Will they differ from the failed attempts of the past? I recently wrote the following article for World Politics Review on the promise and perils of the region’s integration.
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.
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I recently published this article in the Americas Quarterly policy journal, which was republished in Business Chile.
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.
The one area of real triumph for market-oriented reforms in Latin America was inflation. Unlike the uneven record on poverty, inequality, and economic volatility, structural adjustment and austerity programs of the early 1990s ended high and hyper inflation. These programs brought the Latin American average from 235% per year in the early 1990s to less than 8% by the turn of the century. Low and steady inflation has been a crucial element for attracting both foreign and domestic investment, increasing economic production, and encouraging the economic growth of the last several years.
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.
