The Task Force report co-chairs, Charlene Barshefsky and General James T. Hill, published an editorial yesterday in the Miami Herald. It lays out the main themes of the report, in particular the call to recognize that U.S.-Latin American relations is increasingly about U.S. domestic policy.
After taking a 3 plus month maternity hiatus, I am back and will be posting regularly again.
To kick things off, here is a link to a new Independent Task Force report from the Council on Foreign Relations, titled U.S.-Latin America Relations: A New Direction for a New Reality. The Council brought together 19 individuals of various interest and expertise under the chairmanship of Charlene Barshefsky and General James T. Hill. As director of the project, I can attest to the long hours of intense and at times spirited discussion among its members.
The group decided that U.S. policy should focus on four critical areas: poverty and inequality, public security, migration, and energy integration. The main recommendations are the following:
Poverty and Inequality:
Public Security:
Migration:
Energy Security:
Finally, the task force touches briefly on 4 bilateral relations. It recommends deepening U.S. relations with Brazil to promote global trade negotiations and manage energy demands; strengthening cooperation with Mexico to stop narcotics trafficking, increase U.S. investment in energy production, and reform immigration policies; using multilateral institutions to address foreign and domestic policies of Venezuela; and opening informal and formal channels of communication with Cuba, with the eventual goal of lifting the embargo.
As the primaries proceed, little attention had been paid to Latin America. Given the de facto integration of the Hemisphere through migration, trade, and other links, it is high time that U.S. foreign policy focus more attention on Latin America.
In this interview I lay out four main areas the next administration should focus on to reframe and redirect policy toward the region. These include: energy, public security, migration, and poverty and inequality. It is a tall order, but any progress on these fronts would be welcome after the recent years of neglect.
I recently published this article in the Americas Quarterly policy journal, which was republished in Business Chile.
While some in the United States still talk about the introduction of private individual accounts as the way to “save” social security, even the Chileans are rethinking their once vaunted private pension system. After nearly three decades of private pension management, the Chilean system is again poised for reform. This article looks at the dwindling support for private pension systems in Chile and other Latin American countries, the reasons behind this shift, and the potential directions for this wave of social security reform.
Much is made in policy circles about the role remittances can play in boosting economic development in Latin America. Proponents point out that the over US$60 billion in remittances that return each year to the region is far higher than foreign aid and often higher than foreign direct investment in a country. Yet so far this money has not greatly affected economic growth or economic opportunities at home. Instead, the vast majority of remittance money goes to consumption. Some believe it actually fuels dependency, as more local community members are incentivized or even have to migrate in order to support their families.
While these monetary flows often do lift recipients out of poverty – providing adequate food, clothing, and shelter – they do little to stimulate local or national economic growth through productive investment. And as private money, unlike foreign aid or even FDI, it has been hard for governments to direct this capital into development-oriented projects. How can governments stimulate investment through public policies without hurting these flows?
So far, governments have focused on reducing the costs of transmitting remittances through formal channels such as banks with quite a lot of success. The costs of transferring money abroad have fallen precipitously, allowing migrants and their families to keep more of the funds earned. Also, migrants and their families are beginning to put funds in local and international banks, leading to more savings and investment capital. But these changes, while beneficial, do not in and of themselves increase investment in productive activities in their home communities. The amounts in individual accounts are small, and still used primarily for consumption by local families. In addition, banks often pool these savings from remittance receiving communities and invest them in larger amounts in more attractive loan markets, such as the capital cities in each country. This limits local economic development in the places most starved for investment capital.
Another set of public policies, prevalent in Mexico, involves matching funds for local community investment. Dubbed “3 for 1†programs, migrant groups pool together funds for infrastructure investments – for instance local roads or schools – and the federal, state, and local governments each match a peso. While helping local communities, the actual size of these programs is quite small, estimated at roughly US$70 million in investment last year. Many also question why migrants are funding 25% of public infrastructure for which the state should ultimately be responsible.
Mexico recently announced another pilot program aimed at directing remittances into rural economic development (Houston Chronicle 12/24/07). Unlike earlier policies, this program targets productive private investment. And, it focuses on agriculture, ensuring that these funds go back to the communities of origin of many migrants. While obviously in the initial phases, this incentive structure is promising. It may actually get at the elusive goal of economic development in the hardest hit areas of the national economy – the areas most likely to send large numbers of migrants abroad. If tied to capacity building and technical assistance programs – either provided by the Mexican government, non-profit organizations, or international aid such as USAID – this type of program could become and important step in promoting economic development, and ultimately providing citizens the choice of staying home.
I am in Bolivia this week. In my meetings so far in La Paz, one common theme is the general support for Evo Morales. While there is significant frustration with the government, interviews with representatives from indigenous groups, from the middle class, from academic institutions and foundations, and with foreign diplomats (not to mention taxi drivers), show a general support for Morales and for his position as President. Almost all see him as genuine, as representative, and as capable of negotiating with the various interests within Bolivia.
Instead, people place blame elsewhere. Significant blame is placed on Morales cabinet and on his closest advisors. Many see them as being too radical in some cases, or not radical enough in others (especially on issues of particular interest to each group). They are also blamed for centralizing power. Instead of following through on Evo´s promise of broad participation, many view his closest advisors as making top-down and closed door decisions, much like governments in the past. Some even see the undue influence of foreign advisors, particularly Venezuelan, on government policies.
The continued support for Evo, despite the limits on actual policy changes in the first year and half of his government, questions the alarmist views often seen in the press. While frustrations continue, and marches are frequent through the downtown of the capital, there isn´t a sense here (at least in La Paz), of crisis or real unrest. That said, a few people see this as the lull before the storm, which will occur when the real negotiations happen (or more likely don´t happen in their view) within the Constituent Assembly, which is currently scheduled to conclude their process in August.
The one area of real triumph for market-oriented reforms in Latin America was inflation. Unlike the uneven record on poverty, inequality, and economic volatility, structural adjustment and austerity programs of the early 1990s ended high and hyper inflation. These programs brought the Latin American average from 235% per year in the early 1990s to less than 8% by the turn of the century. Low and steady inflation has been a crucial element for attracting both foreign and domestic investment, increasing economic production, and encouraging the economic growth of the last several years.
But heterdox economic policies – reminiscent of Sarney’s Brazil, Alfonsin’s Argentina, and Garcia’s Peru (the first time around) – have reemerged. In both Argentina and Venezuela, the Kirchner and Chavez governments are using wage and price controls on basic goods as key parts of economic policy. Venezuela has gone a step further to reintroduce public control and management of “key” industries, including telecommunications, oil, and now perhaps steel and the banking sector. These policies are bringing back worries of inflation and leading to shortages in basic goods.
Venezuela’s inflation for 2006 topped 17%, the highest in Latin America. Most expect it to surpass 20% this year. Argentina too has seen increasing inflation, from a negative rate in the late 1990s to 10% last year. As worrisome, Kirchner fired the head of the national statistics agency, INDEC, briefly replacing her with a more malleable political appointee until public clamor forced the promotion of a INDEC senior employee.
Shortages in these economies are as important, and hamper both consumer-led and manufacturing-led growth. A recent Wall Street journal article argues that Chavez’s threat to nationalize the steel and banking industries has as much to do with the issue of shortages as with nationalism. News articles, as well as personal conversations, show that shortages and economic bottlenecks are again appearing in Argentina. These mismatches are hampering growth, not to mention the quality of life of individuals within the country.
Poverty, inequality, and equal opportunity are key issues for the future of Latin American nations. Government programs to directly improve the health care, education, and resources of the poor are important and laudable. But, these governments should not overlook the dire effects of inflation on poverty and inequality. Inflation hits the poor the hardest. They are the ones least likely to receive compensatory pay raises, and are those unable to hedge their savings in indexed accounts or abroad. High inflation will wipe out any benefits of direct assistance programs, leaving individuals certainly no better off and most likely in a much worse situation. This means that as governments are designing programs for the poor, they need to include measures to keep inflation low, be that independent monetary policy, controlled deficits, and better financial regulation. Only with this combination will governments be able to truly help those at the bottom of the pyramid.
Over the last eighteen months Presidential elections occurred in twelve Latin American countries. While Hugo Chavez and his anti-American tirades grab most of the headlines, these elections actually show the rise of a new Left in Latin America. In contrast to Chavez’s more socialist populism, these new leaders promise to balance market-friendly economics with broader social policies and protections.
These new governments have already shown their commitment to free markets. In less than a year, Chile’s President Michelle Bachelet has signed free trade agreements with China, New Zealand, and Singapore, and is negotiating new accords with both Japan and Australia. Alan Garcia of Peru appointed a well-known private banker as Finance minister and vocally supports free trade agreements with the United States, Canada, and many Asian countries. Brazil’s Luiz Ignacio Lula da Silva was re-elected based on his conservative first term economic policies. Tabare Vazquez of Uruguay also continued the orthodox economic choices of the previous government, attracting both Finnish and Spanish foreign investment for Uruguay’s cellulose industry.
Even the more rhetorically radical leaders are governing or likely to govern near a pragmatic center. During his first year in office, Bolivian President Evo Morales drew back from his more populist campaign appeals. He cancelled the nationalization of the mining industry, and is now negotiating gas contracts with foreign companies. While peppering campaign speeches with anti-American quips, Nicaragua’s Daniel Ortega left the Sandinista’s economic ideology behind. During his first weeks in office he has already started courting domestic and foreign investment, promising to uphold contracts and maintain open markets. Rafael Correa’s of Ecuador began moderating his promises in the final weeks of the presidential campaign, and even reached out to U.S. ambassador, Linda Jewel. In fact, only Venezuela’s Hugo Chavez, supported by oil revenues – represents a firm holdover from the political past.
Yet while rejecting old-style socialism, Latin American voters did turn left. The winning candidates all reached out to the large portions of the population that have not benefited from economic reforms. They promised to improve the social welfare of ordinary citizens. Now in office, they are pushing forward to create jobs, eliminate hunger, and provide better access to education, social security and health care.
This shift Left reflects the real needs of Latin America’s populations. While Latin America’s economies have grown in recent years, these benefits have not trickled down. Some 25% of the population still lives in poverty. The difference between the haves and have nots stubbornly remains one of the most pronounced in the world.
More positively, this political turn reflects the spread of democracy. As more open and inclusive governments take root, politicians are responding to voter demands. The winning electoral campaigns focused not just on overall economic growth but also on increasing economic opportunities, particularly for the poor.
These newly elected leaders now will try to soften the rough edges of globalization while continuing to compete in international markets. This is a difficult balancing act for any leader, and many will not meet the challenge. But as Leftists, they have an opportunity to build a social consensus behind the long-term investments necessary for real change in these countries. To that end, this new Left represents the best chance for strengthening the economies and the democracies of Latin America.
