Source: UNCTAD World Investment Report 2011

In the wake of the 2008 economic crisis, economists, investors, and even politicians have pinned their hopes on the major emerging markets as the new engines of global growth. International Monetary Fund Managing Director Christine Lagarde’s recent visit to Latin America (she has also made the rounds in China, Russia, and Japan) demonstrates this increasingly prominent macroeconomic role. Perhaps a first, the multilateral head came to ask for funds, not lay down rules. But for emerging economies to truly drive global growth, the real engine will be the private sector. While less measured than central bank reserves or monetary flows, anecdotal evidence suggests that this too is happening – with foreign direct investment now flowing from emerging to more mature economies.  And it isn’t just China searching for bargains.

A recent example of this worldwide trend includes Mexican-based Grupo Bimbo’s purchase of Sara Lee’s U.S. and European operations for close to $1 billion. The acquisition caps a two decade-long global expansion, buying up brands such as Entenmanns and Thomas’ and establishing plants in places as far flung as Beaverton, Oregon and Fort Worth, Texas. Begun by Spanish immigrants, Grupo Bimbo began with a family cake shop on the outskirts of Mexico City. In the post World War II economic boom the Servitje family expanded into breads, cookies, and candies, delivering their wares first in Mexico City, then throughout Mexico, and now throughout the world. Today Bimbo owns plants in 19 countries,  and is the largest baker in the United States.

Other recent acquisitions – such as Lenovo’s purchase of German electronics supplier Medion and Tata Group’s buyout of Jaguar and Land Rover – show a similar shift. To be sure, U.S. and European capital still pour into emerging economies – even in the midst of the global recession. FDI from developed to emerging economies nearly doubled from 2007 to 2010. It is not just diplomats but also Wall Street and the City of London that are adapting to a multipolar world. Developing countries are investing abroad more than ever, eating into advanced economies share of overall FDI outflows (down from 84 percent in 2007 to 71 percent in 2010). Most of the investment outflows (almost two thirds) go to their emerging market peers. This, perhaps more than other factors, will lead to the touted “rise of the rest.”

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

– Latin Americans are second only to North Americans in terms of social networking — for those that access the Internet, 8 in 10 use social media.

– While broadband access is limited but increasing (expected to surpass 30% by 2014) some 36% of Latin Americans Internet access of some form. And, 90 percent of Latin Americans have cell phones – so the potential to expand is large.

– Facebook claims 100 million Latin American users, led by Brazil, and then  Mexico, Colombia, Argentina and Venezuela.

– Some governments – most notably Colombia – are investing millions to expand Internet use, seeing it as an important driver of economic growth.

Overall it is an interesting and fairly positive technological look at the region. While Latin America falls behind Asia in terms of access to the Internet, the region’s citizens are more socially connected – at least as measured by Facebook, Twitter, and the like. These connections have had and can have broader political and economic impacts than just catching up with family and friends. Social networking has already played big roles in Colombia, with a Facebook-led series of marches against the FARC in 2008 that spread throughout the country (and as far as New York and Chicago), and in Mexico, where twitter updates on drug violence give people vital information the local press and governments are no longer able or willing to provide. Some even see the arrival of social media to Latin America as a great democratizer – helping open up governments (like in the Arab Spring) and media monopolies.

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.

Miner Gomez celebrates as he arrives on the surface as the ninth to be rescued in Chile (Ho New/Courtesy Reuters).

Today is the one year anniversary of the collapse that buried 33 Chilean miners deep underground for more than two months. Their rescue inspired a jolt of nationalistic pride in Chile, and not a little media fanfare, but now many of the survivors find themselves worse off than before the ordeal. Despite, and in some cases because of their fame (sure to increase with the production of a movie based on their tale), almost half of the 33 are unemployed, and some are back working underground to make ends meet.

Sebastián Piñera’s high hasn’t lasted either – recent polls show his ratings slipped to 31 percent last month, a far cry from his 63 percent approval rate in October 2010. Even the Economist is down on Piñera at this point, criticizing the billionaire for creating ties between government and the private sector that are often too close for comfort.

Dilma Rousseff recently unveiled the “Bigger Brazil Plan”, or “Plano Brasil Maior”, a program designed to make Brazil more competitive and stimulate investment in the face of an increasingly overvalued real and the influx of inexpensive goods from abroad. Some question whether the bill will have any positive effect in the long-run, arguing that the $16 billion in tax cuts for manufacturers will be offset by higher sales taxes, needed to finance recent government spending sprees.

For those that haven’t seen it, this Los Angeles Times four-part series on the Sinaloa cartel is an illuminating profile of the more average citizens involved, the way the business works, and one particular DEA attempt to take down a cartel.

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

]]> http://www.latintelligence.com/2011/08/05/reads-of-the-week-chiles-miners-brazils-industrial-policy-and-mexicos-sinaloa-cartel/feed/ 0 http://www.latintelligence.com/2011/05/27/latin-america%e2%80%99s-growing-middle-class/ http://www.latintelligence.com/2011/05/27/latin-america%e2%80%99s-growing-middle-class/#comments Fri, 27 May 2011 17:52:46 +0000 Shannon http://www.latintelligence.com/?p=1127

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 trader checks a newspaper at the Santiago Stock Exchange (Ivan Alvarado/Courtesy Reuters).

Much is made of ALBA, the Bolivarian Alliance for the Americas, a pact backed by Hugo Chávez and Fidel Castro to integrate the region based on “21st Century Socialism,” and incorporating neighbors such as Bolivia and Ecuador among others. Over the past five years, Venezuela has spent some $60 billion to back the project. In concrete terms the achievements so far are fairly limited: sponsoring some 75,000 health workers and subsidizing electricity within the participating countries. This has been undoubtedly helpful to hundreds of thousands, perhaps even millions of individuals, but it is not a comprehensive economic, political, or social model by any means. Instead, many of ALBA’s member countries continue to straddle the ideological fence, remaining open to trade with other regional groupings, as well as with the United States and China.

Substantive integration efforts are in fact taking shape elsewhere in Latin America – just without the fanfare. Several of the region’s fastest growing democracies — Mexico, Peru, Colombia, and Chile — will sign a free trade accord on May 2.  Connecting two hundred million people, 10,000 miles of Pacific coastline, and over $1.4 trillion of GDP—triple that of ALBA and rivaling the Brazilian economy—the group aims to ease the flow of goods, capital and people to create a common and more powerful front for exports to Asia. The pact brings together Chile and Peru’s strengths in commodities with Colombia’s energy and Mexico’s services and manufacturing. It should help Colombia, whose free trade agreement with the U.S. remains in limbo, and open up Mexico to finally profit from — instead of just compete with — China.

Additionally, Bogotá, Lima, and Santiago are combining their stock exchanges into the Mercado Integrado Latinoamericano (MILA). MILA will become the largest stock exchange in Latin America, surpassing Brazil’s Bovespa and Mexico’s BMV. The economies of scale should increase liquidity to the region’s expanding – and increasingly diverse — private sector.

With far less rhetoric, these recent efforts will likely transform the way many of the hemisphere’s nations interact with each other in day to day business. It may in fact lead to a new economic model, one based on  “21st century markets,” finally enabling the integration Latin American leaders have long sought.

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.

Right-leaning Alianza candidate Sebastián Piñera won the first-round December vote, outpacing Concertación candidate Eduardo Frei by nearly 15 percentage points. Sunday, by a closer margin, Piñera pulled another victory, making him the first elected conservative Chilean leader in several decades.

This was not an election driven by issues or ideology: Both candidates promised to continue Chile’s market-friendly macroeconomic policies and its popular social welfare programs. Instead it was driven by personal stories. Piñera presented himself as an entrepreneur who would foster greater innovation and competitiveness; Frei as a wise, experienced former president (he led the country from 1994 to 2000).

Piñera’s victory suggests a new era for Chile’s politics. It signifies that the right has finally emerged from the shadow of Pinochet’s military dictatorship to become a viable electoral alternative once more, able to lead an open and dynamic country without a fear of backsliding into the past. It is the end of the pro/anti Pinochet political divide–the guiding cleavage of Chile’s politics since the 1970s.

The Concertación’s loss is also in some ways the result of its successes. While many talk of the economic growth and stability brought by Pinochet’s reforms, it is the policies and actions of the governing Concertación coalition that have truly transformed Chile into a modern state. These successive governments–through sound macroeconomic management combined with the creation of a broad social safety net–succeeded in reducing Chile’s poverty rate from nearly 40% in 1990 to just under 14% today (nearly equivalent to U.S. rates). Chile’s now much larger middle class is more politically independent, and Piñera openly wooed this cohort–ultimately successfully.

While highlighting the diminishing role of Chile’s old political fracture, this election also highlighted a new divide–that between the old and the young. While Frei and Piñera came firmly from the old guard, the spectacular rise of Marco Enriquez-Ominami, a 36-year-old filmmaker and former congressman with the Socialist party, upended politics as usual. He became the most successful independent candidate in Chilean history, winning 20% of the first round votes. His strength lay in an emerging middle class focused on the future and open to political change. Whether we see an Enriquez-Ominami candidacy again in four years, this will surely be the last election where the leading candidates’ formative years occurred under the Pinochet regime.

But Chile’s future political challenge will be how to engage its younger generations. Unlike their parents, seared by the turmoil of the 1970s and 1980s, Chile’s youth is politically apathetic. Less than 10% of 18- to 29-year-olds are even registered to vote. Many older citizens are also disillusioned. Polls show that 60% of the population believes that none of the candidates–or their parties–represent their ideas well. As the leftist Concertación tries to recreate a winning strategy and the right Alianza looks to deepen its victory, opening up the political system is vital. Chileans are demanding new approaches and more diversity. This election shows us that after decades of dominance by first the right and then the left, Chile’s politics are now up for grabs.

This op-ed first appeared on Forbes.com

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.