Below is a video interview I did for the Council on Foreign Relations’ Campaign 2012 series. In it I talk about the three big issues in U.S.-Latin America policy facing the next presidential term: security, immigration and economic relations. I look forward to your feedback in the comments section.
(To watch the video on Youtube, click here.)
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
Former Guatemalan dictator Efrain Rios Montt leaves the public prosecutor's office in Guatemala City (Jorge Lopez/Courtesy Reuters).
This is a guest post by Natalie Kitroeff, a research associate here at the Council on Foreign Relations who works with me in the Latin America program.
Last Thursday, former de facto President of Guatemala during military rule, General (ret) Efraín Ríos Montt walked into the Attorney General’s office to ask whether they planned on trying him on ten-year-old war crime charges anytime soon. He stands accused of committing genocide and crimes against humanity against indigenous civilians in the early 1980s – the most violent years of the country’s civil war. Flanked by his lawyer and a gaggle of reporters, he calmly told public prosecutors, “I’m here, I’m healthy, and I’m not afraid… if there’s a criminal investigation against me, it should go forth according to due process and I should stand trial.” While this may seem like an ill-advised move, it’s actually quite cunning given the weak hand he now holds.
When the new legislature takes office next month, Ríos Montt will officially lose his congressional seat, and with it his immunity from prosecution (granted to all members of congress unless they’re removed by court order). What’s more, the party he led for over two decades – the Guatemalan Republican Front (FRG) – is weaker than ever – winning just 2 percent of the vote in local elections last September. This is not good news for Ríos Montt, who has had his differences in the past with incoming president Otto Perez Molina. Longstanding tension between the two came to a head in 2000 when Perez Molina left army ranks to form his own Patriot Party (PP) after the ruling FRG government denied him a top spot in the military.
The newly strengthened Attorney General’s office may be an even bigger problem for the aging ex-General. With Claudia Paz y Paz at the helm this year, the Public Ministry has shown that it is willing and able to aggressively pursue his case, convicting four soldiers and charging five more for their roles in two massacres that occurred on Ríos Montt’s watch. But if he leaves the country he risks facing an even fiercer opponent in Spain’s National Court, which issued an international arrest warrant for Ríos Montt on genocide charges in 2006.
An obvious reason why Ríos Montt turned himself in voluntarily is that he wants to avoid the embarrassment of a very public arrest. He also may be angling to get in the good graces of public prosecutors, who have already detained his third in command, former Chief of Staff Hector Mario López Fuentes for acts of genocide. He has made clear that he intends to shed all responsibility onto his subordinates, using the excuse that he was the political, not the military leader during the civil war and was not aware of any human rights abuses. Regardless of his motives, the fact that Ríos Montt has to engage with the charges at all shows that something may finally be right with Guatemala’s fledgling justice sector.
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.
President Obama delivers remarks on immigration reform at Chamizal National Memorial Park in El Paso (Jim Young / Courtesy Reuters).
Framed by sunny El Paso skies, President Obama put immigration back firmly on center stage yesterday. In his speech he called on Congress to “put politics aside” and find “common ground” in order to reform a broken system. His justifications are similar to those of the past – immigration reform is both an economic and moral imperative, as important for the future competitiveness of our country as for our understanding of ourselves as Americans. The basic outline for reform is also similar to the last legislative round in 2007 – tougher penalties against businesses employing undocumented workers; temporary worker programs; a path to citizenship for those living in the shadows requiring applicants to pay penalties, taxes, and learn English; legal status for American college graduates hoping to start businesses here; and citizenship for young people brought to the U.S. as children who go on to college or serve in the military (the so-called DREAM Act).
What is different this time around is that in reopening the debate, Obama explicitly called on a constituency that remained decidedly quiet during the last polarizing round: business. In his speech, he singled out and quoted as many businessmen as immigrants. Alongside the voices of immigrants serving in the U.S. marines and navy, Obama added those of Bill Gates and Rupert Murdoch. He went on to mention some of the largest corporations founded by immigrants – Google, Intel, Yahoo and Ebay –which add billions of dollars and thousands of jobs to the U.S. economy.
An eloquent speech in and of itself will change few minds, particularly as the 2012 Presidential election season nears. But if it would open the deep pockets of the private sector, it could perhaps make a difference. Of any constituency business has a cross-cutting power to pressure for the necessary reach across the aisle. And openness to immigration reform seems to span the private sector – from agriculture to high tech, from small businesses to the largest corporations, from the coasts to the center. Even the U.S. Chamber of Commerce – a consistent Obama critic – agrees with the President on the issues and has been pushing these types of reforms for a decade.
Comprehensive immigration reform is a long shot. The hostility of a vocal portion of the electorate will still likely hold the political process hostage, at least until after the 2012 election. But involving the quite powerful groups sitting on the sidelines is the way to give reform its best chance.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
Soldiers escort four detainees for presentation to the media at a military zone on the outskirts of Monterrey (Tomas Bravo/Courtesy Reuters).
At the Mexican port of Lázaro Cárdenas, containers arrive from China laden with toys and electronics. Some never make it into the hands of customers: they are dumped as worthless merchandise. Their value, instead, lies in a simple bill of sale that allows the buyers – drug trafficking organizations and organized crime syndicates – to launder billions of funds through seemingly legitimate trade.
Drug-related money laundering conjures up images of plastic-wrapped bundles of $20 or $100 bills stashed in car tires and dashboards, or hauled across the U.S.-Mexico border in semi-trailers. It includes tales of storied banks moving billions in sophisticated operations and entangles Western Union and other money transfer companies in the flow of profits south. Some worry that prepaid cards or even “virtual worlds” will be the new avenues for illegally moving billions and billions of dollars.
But trade-based money laundering is likely where the real money is. Less understood and perhaps more pernicious, this includes the stereotypical restaurant that never seems to serve any customers, except for a few toughs at the back table, but “rakes in” profits. But it is much more than that. It can involve jewelry stores, textile factories, travel agencies, or car dealerships. Any type of trade across borders is a potential opportunity for nefarious transactions, buried among the billions of legal ones.
Price mismatches—reporting different values for the same goods – offers a means of concealing the money’s origins. A Mexican front company can send a shipment of computers to the United States, and, by over-invoicing it, can cover both the legitimate cost of the merchandise and the extra laundered funds. In this way, the extra funds are washed clean and enter a U.S. bank account as a formal, legal transaction, skirting the warning flags provided by current financial transparency laws and regulations. The same can happen in the reverse, when drug trafficking organizations want to repatriate their earnings from U.S. street sales. Often they do it through third or even fourth countries, further obscuring the true origins of billions of dollars. Egregious discoveries include Pakistan-made dishtowels imported to the United States for over $150 a piece, and missile and rocket launchers sold for just $50 each, destined for Israel.
Another path is through seemingly normal import/export business transactions. Drug dealers on the U.S. side buy goods (in dollars), ship them to Mexico, where they are sold. The proceeds (now in pesos) are given to their partners. This almost inevitably requires complicit businesses, who can receive a cut worth 3 – 8 percent of the funds passing through the books.
Trade-based money laundering is only likely to increase between the United States and Mexico. New Mexican laws limiting the use of U.S. dollars will push the drug cartels to shift transaction to more “illiquid” assets like goods and real estate. Coming into effect just last fall, already law enforcement agents are seeing the exodus of physical dollars from Mexico. Money changing houses on the U.S. side of the border are beginning to report their inability to keep pesos in stock – another sign that taking dollars straight to Mexico is on the decline.
Trade-based flows are especially worrisome, as they represent quite ingenious and ever changing ways to get money to the bad guys, which then feeds corruption and violence. But even more, trade-based money laundering undermines legitimate business and commerce. With criminal organizations happy to dump imported goods at a discount to get their now “clean” cash, legitimate businesses can’t hope to compete with the “discounts” of twenty, thirty, forty percent often provided. As Mexico (or any other country) struggles to compete in an increasingly globalized world, the last thing it needs is an additional barrier to entrepreneurship, crowding out legal economic activity.
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
Starting today, I will also be publishing my blog on CFR.org, the Council on Foreign Relations’ website. My new blog, Latin America’s Moment, can be accessed here.
If you have been following LatIntelligence, you can continue to do so here, as the two sites will mirror each other.
As always, I look forward to your comments and suggestions.
I published the following CFR expert brief on the U.S.-Mexico summit this week.
The surprise announcement of President Felipe Calderón’s trip to Washington is a chance to right a teetering relationship. On March 2-3, the Mexican president will meet with U.S. President Barack Obama, Speaker of the House John Boehner, and members of the U.S. business community. This trip could prove an important turning point in U.S.-Mexico relations. It will, assuredly, be a defining test of Calderón’s statesmanship.
U.S.-Mexico relations have hit a rough patch. The February 15 attack on two U.S. Immigration and Customs Enforcement (ICE) agents raised the stakes for the U.S. government in Mexico’s drug war. Agents Jaime Zapata and Victor Avila were driving to Mexico City from Monterrey when drug cartel gunmen intercepted, then fired upon their armored SUV. Zapata died and Avila was wounded. Though the details remain unclear–whether it was a carjacking gone wrong, a case of mistaken identity, or a calculated hit–the idea that drug traffickers would target U.S. officials sent chills through the U.S. embassy and beyond. And the attack lays bare the security challenges Mexico faces in securing even the country’s main thoroughfares.
As U.S. officials worked through the ramifications of Zapata’s death, longer-standing simmering grievances within Mexico’s government boiled over. Behind the scenes, many experts and officials recognized the serious damage done to U.S.-Mexico relations by by WikiLeaks’ revelations late last year. Secret cables signed by current Ambassador Carlos Pascual on December 17, 2009, and Deputy Chief of Mission John Feeley on January 29, 2010, in particular presented unfiltered assessments of the strengths and weaknesses of the Mexican government’s security efforts, pointing to a hidebound Mexican army, infighting between Mexico’s various security institutions, and worries about corruption and human rights abuses. While in line with the views of numerous independent analysts–as well as many security officials in their more candid moments–the leaks have embarrassed the Calderón government, and provided fodder for rival politicians as the Mexican electoral arena heats up for 2011 gubernatorial races and the 2012 presidential contest.
In a wide-ranging and sensational interview in El Universal, one of Mexico’s leading newspapers, on February 22, Calderón vented his anger. He accused the U.S. diplomats of “laying it on thick,” distorting and exaggerating their analyses for ulterior motives. He went further, saying the lack of coordination and rivalry was not on the Mexican but the U.S. side, between ICE, Drug Enforcement Agency, and Central Intelligence Agency. The vitriol was so strong that U.S. Homeland Security head Janet Napolitano formally responded the next day, asserting that not only did U.S. agencies work well together, they did so closely with their Mexican counterparts.
Historically, it is remarkable that the two countries have gotten along this well for so long. For decades, the bilateral relationship has had fits and starts–beginning with expansive promises from new presidents, ending with bitter divisions. Domestic politics were often behind the fracture, as Mexico’s ruling Institutional Revolutionary Party (PRI) painted the United States as the great imperialist to justify its excesses and heavy political hand, and U.S. administrations changed course at the first hint of domestic opposition. Just as often personal differences, and real and perceived affronts, sank once promising bilateral ties.
Calderón’s upcoming visit has the potential to break this counterproductive historical cycle, principally by getting the two countries’ conversation back on track. That will require strong leadership from Calderón himself. Can he rise above personal grievances and his not unjustified frustrations with the United States to become the rare Mexican president who succeeds during his term in moving the bilateral relationship forward?
This trip will test U.S. policy and commitment to Mexico. The now often repeated rhetoric of co-responsibility and Secretary of State Hillary Clinton’s heartfelt words of “being a fan” of Calderón are fine, but the United States has to go beyond these niceties. Calderón is right to ask for more–U.S. demand for drugs remains unchanged, illegal guns and illegal gains flow south unabated. Estimates range widely, but tens of thousands of guns and tens of billions of dollars flow south each year. Though the Obama administration recently tried to boost the Bureau of Alcohol, Tobacco, Firearms and Explosives’s ability to track gun sales (specifically multiple assault rifles–AK-47s, AR-15s, and the like), it was struck down by the new Republican-dominated Congress. Boehner will have to square his vocal support for Mexico and the Merida Initiative with his reflexive heeding of the National Rifle Association’s demands.
There is a real possibility that U.S.-Mexico relations could fall into a downward spiral. That would be dire for both nations. Much more than security cooperation hangs in the balance. Mexico is the second largest U.S. export market, the largest source of U.S.-bound migrants, the ancestral home of over thirty million Mexican Americans, and an important partner in multilateral negotiations ranging from world financial markets to climate change. With economies, societies, and communities indelibly intertwined, whether it likes it or not, the United States’ future is tied to Mexico’s.
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.
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.
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.
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.
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.
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.
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.
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.
I was interviewed by Globo TV’s “Sem Fronteiras” about strategies to fight crime and drug violence across some of Latin America’s largest cities.
The interview is available here.
Last month, when Rio de Janeiro’s two main drug gangs began hijacking and torching vehicles at gunpoint, the police, backed by marines and armoured vehicles, pushed into Complexo do Alemão, a cluster of favelas in the north of the city. At dawn on November 28th police and troops went in and took control after a firefight that killed 37 people.
After years of escalating violence and crime spilling out of its over 1,000 favelas, in 2008 Rio embarked on a more holistic approach to fight crime. Community-based Police Pacification Units (UPPs) combine trust-building in individual communities, through the use of street patrols and civic work.
UPPs are operating in 13 favelas today, covering 200,000 people. Another 27 are planned by 2014. Crimes in pacified favelas have fallen drastically, but perhaps even more importantly, the UPPs send a sign to favela residents that there’s the political will to extend them the rights of citizenship.
Medellin offers some lessons for the next steps. After bringing security to violent, peripheral barrios and recovering public spaces, Medellin mobilized the private sector and civil society to support government efforts to break down the barriers separating these marginalized communities from the rest of the city.
My forthcoming article with Dora Beszterczey in the Americas Quarterly discusses these issues in greater detail (published in January 2011).
