U.S. Drug Enforcement Administration agents usher Fabio Ochoa, Colombian drug kingpin, to an awaiting vehicle following his extradition from Colombia to Florida, September 8, 2001(Courtesy Reuters).
One of the heralded lessons of Colombia’s fight against drug cartels is that fragmentation reduces violence. The vertical command structures of the famed Medellín and Cali cartels were legendary. Their pseudo-celebrity leaders lived extravagantly, socialized widely, and often died violently. They spent billions to buy off politicians, judges, and business leaders, and they spent more to assassinate adversaries they couldn’t buy, chasing their targets not just all over Colombia but the world. The country became, for a time, the most violent place on earth, the nationwide homicide rate topping 80 per 100,000 in 1991.
But a couple of decades later, the drastic levels of violence have fallen, the motorcycle assassins disappeared, the car bombs ended. The conventional story goes something like this: the killing first of Pablo Escobar and then the arrest and conviction of the Rodríguez Orejuela brothers fragmented the cartels and their command structures. From the ruins of the once centralized cartels sprang smaller – and less vicious – criminal organizations. While cocaine production and distribution (which hasn’t changed much) continued, violence fell.
A U.S. law enforcement official once told me that their antidrug strategy in Mexico was first to go after the wolves (the highest level cartel leaders), then go after the snakes (the next level down), and then clean up the remaining rats. The odd animal analogy aside, this strategy seems straight out of Colombia’s playbook.
Mexico has, in fact, done this fairly successfully. Of the 37 thugs on its Most Wanted list, 21 are either behind bars or six feet underground. Where once U.S. and Mexican officials cited four main criminal organizations, today the number has at least doubled, complemented by the rise of many smaller operations and local gangs. But as the Mexican cartels multiplied, violence escalated to all time highs.
Why the difference? Obviously Mexico and Colombia have different histories, and different security problems, so the reasons for divergent outcomes are multiple and complex. Perhaps one issue — seemingly forgotten in the transfer of “lessons learned” —is the direct targeting of the Colombian government by its cartels. In the early 1990s, at the peak of the violence, one of the biggest points of contention was Colombia’s extradition law. The drug cartels wrote open letters offering to stop the car bombs and assassinations, to retire from the drug business, to even pay off the national debt if extradition to the United States was taken off the table. Denied, the cartels tried to lay down their own version of the law on the nation. Fighting back, Colombian law enforcement slowly gained the advantage, and as these groups fragmented, violence declined.
In Mexico, by contrast, the cartels are not openly and directly confronting the state. Sure, they threaten, co-opt and even increasingly kill local and state police and elected representatives. But their open letters –narcomantas hung over important intersections– are primarily directed to their drug trafficking rivals, or to local political alignments. They don’t often explicitly challenge the national government, much less launch violent “campaigns” against it. Even the most high-profile recent killings – for instance DEA officer Jaime Zapata in San Luis Potosi, the brother of former Chihuahua Attorney General Mario Gonzalez or PRI gubernatorial candidate in Tamaulipas Rodolfo Torre Cantú— the assassinations don’t seem to have come from the top. If the violence isn’t ordered from on high (as it was in Colombia), then taking out the top echelons of the cartels won’t end it. Furthermore, if most of the bloodshed is between the criminals themselves, going after the heads will just escalate the cycle, as more and more mid-level criminals fight it out for control of the remaining business (catching innocent civilians and law enforcement officials in their wake).
This suggests Mexico should rethink its kingpin strategy — or at least complement it with other approaches. There are many other models out there to consider – the “broken windows” approach (perhaps the other extreme, as it focuses instead on smaller quality of life crimes before building up to the big organized crime rings); community policing models, used to good effect in U.S. cities such as Boston, Los Angeles, New Haven, and elsewhere; or a territorial approach, which integrates neighborhood level policing with other public services, and is already being used in the historic center of Mexico City. These methods may work to raise the social, in addition to the material costs of violence for the criminals.
As Mexico debates the right policy mix in the coming year under Calderón and beyond next July’s presidential elections, the big missing question is how to get Mexican society– the one weapon the cartels can’t match – involved. So far, citizens have been relegated to the status of “clients” or victims. Opening up the security policy to analysis and debate is an important first step.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
Suspects wait at the Supreme Court in Guatemala City (Jorge Lopez/Courtesy Reuters).
The conventional Guatemalan security story is one of a country riddled with violence, where law enforcement institutions are in shambles and corruption reaches the highest levels of government. Its homicide rate triples that of Mexico, and its notoriously weak rule of law system lets more than 99 percent of criminals walk free. The growing presence of Mexican and Colombian cartels, pushed out of their home countries due to intensive antidrug campaigns, has only made matters worse. As the Zetas in particular move into the northern provinces, observers sound alarm bells about Guatemala’s possible descent into a “narco-state”.
Still, it may be too early to give up on Guatemala. Since the capture of top drug-smuggler Juan Alberto Ortiz-López, alias ‘el Chamalé’, in late March of this year, Guatemalan officials have arrested a number of local gang leaders, some with close ties to the Zetas. Within days of folk singer Facundo Cabral’s murder this month, the authorities announced the arrest of three suspects, presenting a slideshow with a play-by-play rundown of the events. The swift response became a point of pride for Guatemalans accustomed to sluggish, if any, justice.
The UN International Commission against Impunity in Guatemala (CICIG) can take much of the credit for these improvements. Set up in 2007, the commission has been an enormous boost to law enforcement’s (still limited) capacity; assisting in high-profile investigations and promoting important reforms, notably witness protection and plea bargaining laws. It works in conjunction with domestic security agencies, employing a “learning by doing” model that teaches investigative methods to Guatemalan prosecutors on the job. Not least of all, CICIG played an instrumental role in the appointment of current Attorney General Claudia Paz y Paz, who has had a markedly positive impact on the public prosecutor’s office.
But Paz y Paz and her fellow reformers face an uphill battle. Guatemalans are among the most mistrustful of judicial institutions across Latin America, and the most skeptical of democracy overall. Winning the public’s trust in the justice system requires sustained improvements, not just sporadic high-profile successes. The lack of funding for security poses another major challenge – last year the government cut the public prosecutor’s budget by a quarter. More generally, Guatemala’s tax revenue is the lowest in the region at around 10 percent of GDP (its Central American neighbors are not much better, with this part of the region ranking below the rest of the continent and even Sub-Saharan Africa in tax collection).
The upcoming elections may also stall progress. The presidential frontrunner, Otto Pérez-Molina, is a retired army general with a questionable human rights record and a preference for iron fist, hard-line security policies. While he has promised to respect political appointees’ mandates, many fear that if elected he would replace Paz y Paz and even block the continuation of CICIG’s work beyond its current 2013 deadline. While outsourcing justice is not a long-term solution, banishing the UN commission before it has completed its investigations and trials will handicap efforts to strengthen the rule of law.
For a place that many have already labeled a failed state, the recent advances in security are a ray of hope. A committed Attorney General and external commission have shown that it is possible to make inroads combating organized crime and Guatemala’s pervasive culture of impunity. But to sustain and further these small islands of progress, other branches of government and citizens more generally will have to do their part. The very wealthy will have to pay higher taxes to underpin public security (a point stressed by Hillary Clinton during last month’s Central American security conference). The next president may have to forgo partisan calculations and bolster the justice system, starting with keeping the effective Paz y Paz as chief prosecutor. These are by no means easy steps to take. They require personal sacrifices and the setting aside of self interest for the public good of a stronger state. But if Guatemalans truly want a more stable and secure future, they will have to start making these tough choices. Instead of writing Guatemala off as a lost cause, we should applaud the work of a few courageous reformers and encourage the rest of the country to follow their lead.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
Peru's new President Ollanta Humala is sworn in to office in Congress in Lima (Mariana Bazo/Courtesy Reuters).
As President Ollanta Humala assumes office today, it looks as if he has chosen to emulate Lula rather than Chávez. His cabinet is full of moderates, and some even see it as leaning center-right. While growth is expected to continue at about 6 percent, the new administration will face many challenges, in particular security and the increasing presence of transnational crime, as well as high levels of inequality.
This week the Obama administration released a new directive on combating transnational organized crime (TOC). Among its 56 “priority actions” are new and deepened efforts to stop the money laundering and flows supporting these crime networks. New tools include barring TOC members entry into the U.S., freezing assets and other financial sanctions. The document also expands the role of the Justice Department and FBI in investigating transnational crime more generally. Still, many of the nearly five dozen items seem little more than aspirations– such as the commitment to “stop the illicit flow from the United States of weapons.” But generally, this revamped strategy and more focused game plan is welcome.
Finally William Rempel’s new book, At the Devil’s Table, showcases the role one individual can play in the fight against drug cartels. This gripping read chronicles the life of Jorge Salcedo, a Colombian engineer that rose to be head of security for Miguel Rodriguez Orejuela, a godfather of the Cali cartel during its heyday. The tale tells the true story of Salcedo’s introduction to crime, his rise within one of the most powerful drug cartels in the world, and the actions he ultimately took to help bring it down. It shows the power of one courageous individual, but also the challenges of going it alone in the belly of the criminal underworld. While the Cali cartel is now gone, others have willingly taken its place, and Colombian coca and cocaine continue unimpeded.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
A girl stands in front of a mural as she waits for Spain's King Juan Carlos and Queen Sofia for the inauguration of a public library in a suburb of Medellin (Jose Gomez/Courtesy Reuters).
I wrote this op-ed for Bloomberg Views on the lessons for Mexico from Colombia’s wealth tax.
In 2002, strife-torn Colombia took a bold step that paved the way for vastly improved public safety. Now Mexico is struggling to subdue drug wars that have killed almost 40,000 people during President Felipe Calderon’s tenure. It’s time to try the Colombian remedy.
Part of Colombia’s success can be traced to Plan Colombia, the multibillion-dollar U.S. assistance package. That plan concentrated on beefing up military capacity, professionalizing the police and reforming Colombia’s judicial system. The desperately needed money and strategy helped pull Colombia back from the brink of chaos.
Just as important — and much less heralded — is a transformation within Colombia. The country’s privileged rallied together, not just to demand better security but also to shoulder responsibility. In 2002, newly inaugurated President Alvaro Uribe and Colombia’s elites negotiated a wealth tax. In the decade since, the tax has raised nearly a billion dollars annually for security. It also changed the nature of the fight, throwing the establishment’s weight behind the government in the battle for public safety. More than foreign security aid, this is what Mexico needs today: an investment by Mexico’s elites in the safety and well-being of all its citizens.
Click here for the full story.
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.
An employee arranges cotton in a textile factory in Bello, Antioquia province, Colombia (Albeiro Lopera / Courtesy Reuters).
In Washington the final negotiations for the three long-awaited free trade agreements (FTA) seem complete. Initially penned by the Bush administration in 2007, the South Korea, Colombia, and Panama FTAs languished for over three years due to Democratic (and some Republican) concerns over labor and human rights, environmental standards and tax haven laws.
These agreements are now finally on their way to approval. Most expect them to pass before the end of the year – perhaps even by the summer. For South Korea, the main issues over Korean cars and U.S. beef have been resolved. For Colombia, an agreement on better protections and enforcement of labor rights (while still with its critics) has been enough to overcome the final hurdles. For Panama, a tax information sharing agreement sealed the deal. Sent together (as Republicans insisted), the package will also restart Trade Adjustment Assistance —which expired in February— easing the costs for the “losers” from free trade.
There is in fact a lot that all sides can support in the final result. The trade agreement with Colombia should boost U.S. exports by over $1 billion a year (up from $12 billion last year), benefiting small and medium-sized companies as well as large agribusiness ventures (exporting grain and cotton) and flagship corporations such as Caterpillar, GE and WalMart. It will end the previously required yearly renewal process for trade privileges, locking in protections for companies in both countries to plan – and invest – for future production and trade. Likewise, the Korea pact should add over $10 billion annually in U.S. exports, opening up markets for farm products as well as financial, engineering and other service companies.
These trade agreements should boost manufacturing jobs. For instance, Caterpillar’s exports to Latin America are exploding – up nearly 60% in the last year. Manufacturing jobs making bulldozers, trucks and excavators in Peoria, Illinois, increasingly depend on trade to places such as Panama and Colombia. The boost in trade to Korea should also protect and/or add thousands of jobs.
Even with this belated success, free trade supporters shouldn’t start celebrating just yet. This last week marked the (likely) death of the World Trade Organization’s (WTO) Doha Round. After ten long years, the deepening rifts between not just developed and developing nations, but many within those blocks now look insurmountable. While some talk of make-or-break negotiations this week in Geneva, many nations have already moved on to Plan B, negotiating bilateral and regional trade deals. Indeed, the Europeans and others already are pursuing active policies in this direction.
At first glance, it would seem the United States will move in this direction as well. The Obama administration has staked economic growth on increasing trade, pledging in the State of the Union to “double exports over the next five years.” The current U.S. Congress is the most trade friendly in at least five years – indeed, trade remains one of the only areas where Congressional representatives seem to have any inclination to reach across the aisles.
Yet the lessons learned for potential trade partners from the Korea, Colombia, and Panama deals is that the United States – though tempting as the largest world market – is a fickle partner. Future trade deals will likely become more —not less— onerous to negotiate and complete. A real trade agenda will require more than a few feelers across the political aisle— an unlikely prospect today. And, without “fast track” authority (that would allow the President to negotiate a deal that will then be voted up or down without amendments), Obama today (and whoever is in office come 2012) can’t credibly negotiate with other nations. As the worldwide momentum shifts to bilateral and regional deals, the United States is going to find it difficult to keep up.
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.
I published the following article with my colleague Dora Beszterczey in the Winter 2011 issue of the Americas Quarterly.
Latin America has the sad distinction of being one of the world’s most violent regions, with crime rates double the world average. Actively struggling to provide safety to their citizens, Latin American governments are pouring millions of dollars into law enforcement, and in some places even deploying the army. Many countries are also working to strengthen law enforcement institutions through reforming court systems and professionalizing police forces. While these are all important measures, governments risk losing sight of the relationship between security, economic opportunity and growth.
In the long term, only prosperous societies will be able to address the roots of today’s escalating insecurity. The deciding factor may well be the fate of micro, small and medium enterprises—the mainstays of the region’s economies and the drivers of job growth and economic output. Unfortunately, these entities are also on the frontlines of the bloodshed—hit hardest by rising violence. Latin America’s future, as a result, hangs in precarious balance.
Businesses on the Frontline
Just a few years ago, Ciudad Juárez was Mexico’s fastest growing city, burgeoning with new maquiladoras churning out auto and computer parts, medical supplies and consumer goods bound north. Universities, restaurants and real estate blossomed in the export economy’s wake. Yet in the last few years, Ciudad Juárez has become the most violent city in Mexico and, by many accounts, the world. The number of drug-related killings has climbed each year, and 2010 is set to break another bloody record. October alone recorded 352 drug-related killings, more than the annual toll in 2007.
Three years into Mexico’s war against the drug cartels, narco-violence has left big business still standing and foreign direct investment still flowing, even in places like Juárez. Large corporations quickly beefed up security and changed the daily rituals for many workers. For instance, in border towns, managers, engineers and other support staff often move to the United States, returning to Mexico for work each day. Instead, the devastating effects of the violence occur at the micro- and small-enterprise level.
Over 10,000 small businesses—four out of 10 firms—have closed their doors in Ciudad Juárez alone. The city’s official unemployment rate climbed from virtually zero to 20 percent in the last three years, swelling the ranks of sidewalk vendors and other informal jobs. With few economic options available, many of the unemployed also found work in the drug cartels and local gangs, accelerating the downward economic and violent spiral.
The Real Costs of Insecurity
Policymakers, academics and financial analysts wrangle over the supposed cost of violence—estimated to slice between 1.2 and 3 percentage points off Mexico’s gross domestic product. But these numbers do not get at the more intangible impact of opportunities and jobs lost to violence and insecurity—and the disproportionate cost to small businesses and entrepreneurs.
Rising violence and insecurity have placed a financial burden on Mexican firms of all sizes. For larger firms, this has meant increased spending on insurance, security equipment, armored cars, and the like, amounting, on average, to 3 percent of their operating expenses. However, for small businesses, such costly insurance measures are simply out of reach. Their owners are obvious targets for organized crime. They lack the political weight, access and lobbying power to solicit policymakers to address their concerns. They are also less able to afford the private security forces upon which so many large corporations now rely. Subsequent robbery and extortion payments take a larger share of their revenues.In this insecure climate, financing at local banks dries up as banks further ration access to credit for small businesses.
Even if available, the insecurity adds a “violence premium” on loans that small entrepreneurs can ill afford. These combined factors prevent small business owners from making productive investments that would allow their firms to grow and innovate. In many cases, the effects prove insurmountable, leading firms to stay small and informal, or to close shop altogether.
These individual decisions—and often tragedies—have an impact on broader communities and the national economy. In Mexico, micro and small enterprises employ 28 million people, or 50 percent of the workforce. By being forced to remain small and informal, these businesses fail to spur the creation of new jobs and other economic opportunities.
The recent economic downturn is only sweeping more workers into the informal ranks. In Mexico and elsewhere in Latin America, the lack of opportunities available to young people makes crime an attractive alternative. In Ciudad Juárez, the 80,000 ni-nis—youth neither in work nor at school—are offered 500 pesos ($40) for each stolen car and 1,000 pesos ($80) for an assassination.
As the cartels up the ante in Monterrey, Mexico’s industrial heart and one of its wealthiest cities, young people run murderous errands for a “salaried” 4,000 pesos ($320) a week. Throughout the region, the challenge of providing opportunities and legal employment for youth coming of age will only grow. Without solutions, violence will continue to escalate.
So Where Can Governments Start?
Strategies that support micro and small entrepreneurs should be a first step. A 2008 World Bank study on Mexico shows that small injections of cash into microenterprises generate very high returns to capital—between 20 and 30 percent, and even higher for those on the lower rungs of the income ladder.1 Access to capital not only provides a legal income for microentrepreneurs, but can also spur growth and employment in their broader communities.
This is particularly important in marginalized areas, where cartel and gang recruitment is common. As Latin American governments struggle against rising violence, pilot programs in a few cities illuminate the importance and potential, as well as the real challenges, of incorporating economic policies into crime-fighting efforts. The growing evidence also suggests that government initiatives need to move beyond just loans for small businesses. Coordinating efforts to retake the streets, to facilitate economic endeavors, and to open up broader social opportunities are all important for lasting success. And all these take time.
An Integrated Model in Medellín
Medellín, Colombia’s second largest city, has been actively confronting violence for nearly 20 years with some success. In 1991, Medellín’s annual homicide rate was 381 per 100,000 inhabitants. By 2004, homicides had fallen to 57 per 100,000, and 26 in 2009—lower than Washington DC (34) or Baltimore (43).
Improving law enforcement was an important factor in this decline. A national strategy to take down kingpins and extradite the most notorious drug lords cleared the way for the Colombian military and local police to storm the most violent barrios of Medellín, eliminate local militias, and begin reintegrating gang members into society.
But also important for Medellín’s recovery was the creation of a strong partnership between political leaders, the private sector, universities, and NGOs dedicated to rebuilding the city’s frayed social fabric and promoting widespread economic opportunity and growth. These concerted and sustained efforts created the nation’s first business cluster, which now employs 40 percent of the city’s workforce and made the city the top exporter in the country. In six years it also reduced poverty from 50 percent to less than 40 percent.
Programs to support microentrepreneurship were an integral part of the wider peacebuilding strategy from the outset. Neighborhood small business centers, or Centros de Desarrollo Empresarial (CEDEZOs), opened in eight of Medellín’s poorest barrios. These centers offer computer training and courses in business, administration and management and serve as incubators of new businesses, assisting start-ups with the paperwork needed to enter the formal sector. The CEDEZOs also bring together local microentrepreneurs with established businesses from similar industries across the city—providing new mentors for small and budding entrepreneurs. Just as significantly, the CEDEZOs are a one-stop-shop for a network of 12 microfinance institutions that provide entrepreneurs with a range of credit options under one roof. One of those institutions, the government-funded Banco de las Oportunidades, dispersed over 50,000 loans over the last eight years to the bottom rung of Medellín’s aspiring entrepreneurs. This led to the creation of over 2,000 microenterprises, employing over 6,000 people.
As Medellín recovered public space and brought security to the barrios, it mobilized the private sector and civil society to support government efforts to integrate barrio residents into the rest of the city. Top architects and engineers designed library parks and cultural centers. Private schools took over poorly performing schools. The municipal government expanded the transportation system to link the commercial and industrial city center with the once-marginalized peripheral area, thus opening up new opportunities for independent workers and small businesses. When a new cable car stop was established in the barrio of Santo Domingo Savia, in the northeast of the city, commerce in the area boomed as family stores, restaurants and banks opened.
Despite the dampening effect of these efforts on crime and unemployment, a resurgence in violence in some of Medellín’s barrios last year took the city by surprise. Many local observers blamed the intensified competition among regrouped local gangs and successor paramilitary groups, as well as persistent poverty and inequality. Another factor may have been the economic recession, which reversed several years of growth. The textile industry alone shed 10,000 jobs. Nevertheless, even though armed gangs have resurfaced across Medellín, the alternatives offered by coordinated programs have blunted the escalation of violence. The number of microloans awarded by the 14 banks in the microcredit network increased. Between February and August of this year, Banco de las Oportunidades disbursed over 360 loans in Comuna 1 alone, where Santo Domingo is located. In this way, the new businesses encouraged by the CEDEZOs have helped to create a buffer against the rising tide of unemployment.
From Favela to Barrio?
Rio de Janeiro’s efforts to tackle crime are more recent, and they lack the integrated approach that brought the government, private sector, NGOs, and universities in Medellín together. After years of escalating violence and crime spilling out of its over 1,000 favelas, Rio embarked on a more holistic approach to fighting crime in 2008.
Community-based Unidades de Polícia Pacificadora (UPPs) combine community trust-building—through the use of street patrols and civic work, such as teaching English, martial arts or music to youth—with more traditional anti-gang efforts. The establishment of local health clinics and improved public transportation also figure in the campaign. In the once-notorious favela of Cidade de Deus, one of the eight favelas where UPPs have been operating so far, there has been only one murder this year—down from 34 in 2008. These combined small steps are having a ripple effect on the Rio’s homicide rate, down 20 percent in the first six months of 2010.
Jobs, however, have been slower to arrive. Building on the initial momentum, the city launched programs to integrate favela microentrepreneurs into the city’s broader commercial fabric. The city established partnerships with NGOs to offer favela residents computer training and courses in business administration and management. The National Industrial Training Service (Serviço Nacional de Aprendizagem Industrial, or SENAI) now certifies painters, carpenters and repair workers—hoping to improve their access to the broader service market. Another agency announced a pilot project in Cidade de Deus to link favela entrepreneurs to municipal services, such as the provision of school lunches.
These efforts complement the ambitious Empresa Bacana program, which aims to bring informal businesses into the formal economy. Over a weekend in August, officials registered 220 informal businesses in Cidade de Deus, just under 10 percent of all businesses in that favela. To do so, the city reduced red tape by streamlining the procedures required to register a business (formerly involving over 40 separate forms) and allowing entrepreneurs without a legally recognized address (common in the illegal hillside settlements) to register through the nearest formal entrepreneur or community association. At a monthly cost of 60 reais ($35), businesses gain a legal license, allowing them not only to reach a larger market beyond the boundaries of the favela, but also increase their bargaining power with commercial wholesalers who often refuse to supply or charge inflated prices to informal businesses. Perhaps more important, the program represents a first step in giving these businesses access to commercial credit.
While a move in the right direction, these newly formalized businesses in Cidade de Deus are only a drop in the bucket. Broader opportunities remain elusive for many of these poor urban communities and their aspiring entrepreneurs. While Medellín’s CEDEZOs show that lenders with a deep understanding of poor residents’ needs can make microlending profitable, this type of encompassing initiative hasn’t yet spread within Rio’s favelas. Only one commercial bank operates a single branch in the over one thousand favelas in Rio, despite a potential customer base of over 300,000 households. Federal laws mandating that banks engage in microlending are not working. Many banks prefer to pay the penalties rather than devote the required 2 percent of their cash deposits to microcredit.
Instead, the government has left it up to a handful of NGOs to lead the way, without public coordination or oversight. VivaCred is one example. A pioneering institution that opened its first office in one of the largest favelas, Rocinha, in 1997, VivaCred today operates in six of Rio’s favelas. Thanks to a partnership with Brazil’s largest microfinance institution, CrediAmigo (operated by Banco do Nordeste do Brasil), VivaCred has brought CrediAmigo’s cheaper credits (lowering interest rates from 3.9 percent to 1.2 percent) and broader product range (including group credit with easier guarantees) to the favelas. Today, VivaCred is able to profitably administer some 4,500 loans annually to Rio’s favela residents.
While impressive, this still leaves most of Rio’s 1 million favela residents without access or opportunity. To really turn the tide for budding entrepreneurs and those trying to make a go of a new business in marginalized communities, a well-coordinated and integrated effort led by the city and the state government will be needed, building on the expertise of NGOs working in these areas and a strong commitment from the private sector.
Marketing Peace
In Ciudad Juárez, the Mexican government, with U.S. assistance, is refocusing its security strategy. The army presence is receding, replaced by federal and local police. Policymakers are intent on engaging citizens to take back the streets. For Juárez and urban centers struggling with violence, the lessons of Rio and Medellín provide starting points and cautious optimism.
They also point to the vital importance of economic initiatives alongside the more obvious law enforcement and judicial reforms. Expanding credit—particularly to micro and small enterprise—is a first crucial step. Although the region has a solid and highly profitable financial system, access to capital is surprisingly limited.
In Mexico, nearly 90 percent of the country’s 5-million-plus businesses operate without any credit. Most of the remaining 10 percent depend on loans from families and other businesses, not from financial institutions. Across Latin America, total private sector credit averages just 31 percent of GDP—less than half the figure for Western Europe, the U.S. and East Asia.
The lack of credit represents a significant barrier not just to furthering GDP growth but to improving regional security. Policymakers will need to encourage banks to lend more broadly, and they must urge microfinance institutions—who have been accustomed to working with rural clients—to better cater to urban clients, whose project and financing needs differ.
But this still won’t be enough.
Successfully scaling up the micro and often informal businesses that fuel the economy to small- and medium-sized legal entities that can become more powerful engines of growth and job creation will continue to be a primary economic challenge. This is made only more difficult by today’s escalating violence. Yet without this shift to fill the “missing middle,” Latin American nations will likely remain trapped in today’s vicious and violent circle. Medellín’s and Colombia’s experience more broadly offer important lessons. Without integrated economic, social and political programs, law enforcement campaigns and institutional reforms will not halt the violence. Another vital lesson is that Latin America’s economic elites must be a part of the solution. In Colombia, former President Álvaro Uribe, shortly after being inaugurated, levied a wealth tax on the country’s elites both to provide the finances necessary to step up the country’s security efforts and to symbolically demonstrate the collective responsibility to bring an end to its national trauma.
Similar efforts to establish a national commitment to address insecurity have yet to be replicated elsewhere in the region. Instead, too few among the economic elite have raised their voices to help turn the tide of violence. Until these leaders use their money and influence to build stronger governments and broader opportunities instead of higher walls, the region will continue to be plagued by insecurity. Establishing the conditions that will allow micro and small businesses to open and grow is an essential first step toward breaking that cycle and providing a long-term path out of violence.
Recommendations to increase urban micro- and small-business lending
Latin America’s solid financial system and strong economic growth, and the growing interest in the region among international financial institutions and investors, provide a promising climate for widening access to credit. Here are three steps that regional governments and institutions can take to help fuel the process:
1) Catalyzing finance for underserved urban clients
To increase micro lending, Latin American governments and international financial institutions can begin by offering funds to local banks to help them share lending risks, with a priority on underserved urban areas. Next, they should encourage innovative schemes to leverage further capital for microfinance institutions. For example, linking remittances to microlending would channel these funds into formal activities and promote productive investments while lowering costs for clients who frequently use both services. Governments should also do more to attract international investors to access local capital markets through Microfinance Investment Vehicles. Last year, the region received $37 million in such investments—a good start but still small in a region where microfinance portfolios make up over $12 billion in annual lending.
2) Building institutions to scale up long-term financing for development
To help microenterprises grow into small- and medium-sized enterprises (SMEs), governments should create departments and loan programs specifically targeted toward financing SME development—today largely nonexistent across the region. Since SMEs seek investments that are often too big to benefit from microfinance products yet too small to attract the interest of commercial banks or investors, greater government coordination is required both to evaluate and mitigate risk—and also generate the long-term, low-cost, fixed-rate capital currently lacking for these firms.
Facing these constraints, the role of international investors could be particularly powerful in the short term while domestic institutions are built up to cater to their needs. Involving the private sector and NGOs to build a pipeline of investment prospects for international investors and secure funding for SMEs would be the first step to link them to global investor networks. In November 2010, the G-20 SME Finance Challenge drew international attention to the importance of investing in SMEs at its meeting in Seoul. Latin American governments now should capitalize on the new interest from potential investors and incorporate the innovative ideas being developed globally to inject additional capital into SMEs.
3) Reaching non-established clients
In the short term, governments can seek the help of regional development banks and organizations such as the Inter-American Development Bank to train local banks on how to evaluate the creditworthiness of clients when they lack collateral and credit history.
In the longer term, governments should support the establishment of credit bureaus and other institutions to provide the data necessary for lenders to make decisions about credit offerings, and enable them to share data on borrowers’ loan histories.
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.
