Wachovia Bank sign is seen at a branch in New York. Wachovia settled federal charges that it laundered nearly $400 billion in drug money from Mexican and Colombian traffickers in 2010.

Yesterday Global Financial Integrity released a new report, “Mexico: Illicit Financial Flows, Macroeconomic Imbalances, and the Underground Economy,” which provides an in-depth look at flows of illicit money from Mexico. The study finds that nearly $1 trillion in illicit capital left Mexico from 1970-2010, averaging about $50 billion a year this past decade. Illicit outflows have increased over time – in 1970 only $3 billion of illicit money left the country per year – and experienced particularly large upswings during macroeconomic crises. These flows decreased by more than 50 percent as a share of exports, though this is largely because exports overall increased dramatically as Mexico transformed from a relatively closed to open economy.

The report’s most interesting finding is that this illicit capital is not necessarily or mostly drug money. Instead it comes from Mexico’s large underground economy. In these markets the goods being traded are not necessarily in and of themselves illegal. What’s illegal is the under-the-table way that they are bought or sold. The report finds that the vast majority (80 percent) of the money leaving Mexico does so through a method called “trade mispricing.” This is when a company either undervalues exports or overvalues imports, and agrees with its trading partner (for many this is the same entity or owner) to transfer the balance to a bank account abroad. Just as when a restaurant doing cash business fakes the number of customers it receives to avoid paying taxes, companies doctor their trade records to allow money to flow out of a country untaxed.

In Mexico’s case, economic liberalization in the 1990s had the unintended effect of promoting this type of capital flight. The explosion of trade around NAFTA provided exporters and importers more opportunities than ever to manipulate the rules of the game.

Dealing with this challenge means tackling the informal economy, which both drives and is driven by illicit outflows. Mexico’s regulatory institutions need to catch up to the high volume of trade in the post-NAFTA era, strengthening auditing practices and tax authorities along the way. Another way of chipping away at the underground economy is to shrink the number of people working in it, by creating more formal sector jobs. This is good for workers, who get better social protections in the formal economy, and for businesses, which can get loans and other services needed to grow and expand. More formal sector enterprises will also generate much-needed tax revenue in Mexico (the country with the lowest rate of tax collection in the OECD and among the lowest in Latin America). These extra public funds will pay for more public schools, better roads and stronger police forces, benefiting Mexican society in the long run.

The United States also has a role to play in helping Mexico combat money laundering. As the number one destination of illicit funds from Mexico, U.S. banks could make it a lot harder to move money north by improving transparency and reporting more regularly on private deposits. Getting banks to do their part will require deeper cooperation between the United States and Mexico, with tougher rules and regulations on both sides of the border.

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

From: Ed Husain
Sent: Thursday, January 26, 2012 3:19 PM
To: Shannon O’Neil

Very bold stance in your blog yesterday on undocumented immigrants and how they are, essentially, part of the U.S. social fabric.

From: Shannon O’Neil
Sent: Thursday, January 26, 2012 3:20 PM
To: Ed Husain

Thanks – I guess bold is good. And it is true: millions are parents, spouses, or siblings of U.S. citizens. They are not going to leave even if it is hard to get a job…

From: Ed Husain
Sent: Thursday, January 26, 2012 3:27 PM
To: Shannon O’Neil

I prefer bold any day over ‘weighing options’ — taking a stance is more compelling to this reader rather than presenting alternate arguments.

My hunch is to agree with you: it’s a very humane and morally obliging argument. Not to mention economically more viable.

I struggle with its logical conclusion, though: an amnesty for illegal immigrants, and thereby encouraging others to break the law and migrate in the hope of future amnesties.

From: Shannon O’Neil
Sent: Thursday, January 26, 2012 3:36 PM
To: Ed Husain

The difference is this. Especially for Mexican migrants, given the combination of absolute number caps on legal visas combined with the large number of Mexican family members here, parents, kids, and siblings have to make the choice of growing up (for years potentially) apart waiting for a legal family visas, or coming illegally. So do you want to wait and do the paper work and hope you get to see your 4 year old when he/she is 8-9 years old? Or do you bring them illegally? That is an inhumane law, and should be changed. If you can bring your kid within months, then I think people would wait.

Same with parents that are illegal. Do you send them back, meaning they won’t see their kids for 10 years (at least), at least here in the United States? Yes they are illegal, but in part because of the dysfunction of current laws. So laws in my view need to be changed to reflect realities.

From: Ed Husain
Sent: Thursday, January 26, 2012 3:54 PM
To: Shannon O’Neil

Not much of a choice between obeying the law and parting from one’s family for an indefinite amount of time. Thanks for explaining. I come to this with a European bias where we have a mess with consequences of legal and illegal immigration and no ’solution’ in sight. The US seems better suited to absorb immigrants (legal or otherwise). In Europe, we’re wrestling intensely with identity, race, multiculturalism, and what it means to be ‘European’. In contrast, immigrants here integrate into the United States and adopt the U.S. Constitution and history as their own.

Any other readers who would like to weigh in should feel free to do so in the comments section. I look forward to your feedback.

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

Republican presidentical candidate Romney speaks as Gingrich listens during the Republican presidential candidates debate in Tampa (Scott Audette/Courtesy Reuters).

During Monday’s Republican presidential debate, Mitt Romney put forth his plan for dealing with illegal immigration: self-deportation. Here is how the exchange went:

Debate Moderator Adam Smith: Governor Romney there’s one thing I am confused about, you say you don’t want to round people up and deport them but you also say that they would have to go back to their home countries, and then apply for citizenship. So if you don’t deport them, how do you send them home?

Governor Romney: Well the answer is self-deportation, which is people decide that they could do better by going home because they can’t find work here because they don’t have legal documentation to allow them to work here.

Will this work? Unlikely. Lessons from Mexican migrants, which comprise more than half of the unauthorized population and, the country closest and presumably the least costly for “self-deportation,” suggest otherwise. Studies show that during the 1970s and early 1980s, roughly one of every two migrants returned home within a year – and seventy-five percent left within two years – meaning most did in fact “self-deport.” The vast majority of Mexicans came not to settle, but to earn enough money to better their and their families’ lives at home. But this pattern – called circular migration by scholars – starting changing in the late 1980s (also when the United States began hardening its southern border). Today, fewer than one in ten immigrants return each year to Mexico. Thirty odd years ago Romney’s policy of self-deportation occurred regularly, today it does not.

Romney says adding stronger enforcement at the workplace (through E-Verify and other mechanisms), would encourage self-deportation again. He explained this part of his strategy:

We have a card that indicates who’s here illegally, and if people are not able to have a card and have that, through an e-verify system determine that they are here illegally then they’re going to find they can’t get work here, and if people can’t get work here they’re going to self-deport to a place where they can get work.

Analyzing migration trends also cast doubt on these expectations. First, while the economic downturn has slowed those coming to the United States from Mexico, it hasn’t done much to send more home. This hints at the underlying reality for millions of America’s undocumented immigrants – they have deep roots in American society that go far beyond their jobs . As spouses, children, siblings, neighbors, customers, homeowners, and worshippers, they are intricately intertwined in America’s social fabric. They won’t voluntarily leave behind their families and their lives. Instead, the only way to change the status quo is through an immigration policy that sees unauthorized migrants for what they really are: an integral part of America’s social fabric.

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

“Mexico’s lawmakers sit for only 195 days a year, the second-fewest among Latin America’s bigger countries. (Their $11,200-a-month pay, however, is the highest after Brazil’s.) When they do stir themselves to vote, it is more often to block rivals’ bills than to pass reforms. Gridlock in the palace of San Lázaro partly explains why Felipe Calderón’s presidency, which ends in December, now looks like a six-year damp squib.”

To a certain degree, this is true. Many issues have been stalled or stymied by Mexico’s Congress — electoral reform, police reform, and fiscal reforms to name a few. But the legislative gridlock may not be as bad as the Economist would have us believe. Since 2000 more bills have passed through the divided congress than during the years of one-party (PRI) rule. The Congress has approved the annual budget every year over the last decade (far better than the U.S. Congress’s track record), and it ratified 176 of the 195 treaties submitted for review from 2000-2005. Over the last ten years the Congress has passed a fundamental health care reform (Seguro Popular), a fundamental judicial reform (that will transform the court system and introduce oral trials), a sweeping privatization of Mexico’s public pension system, and numerous smaller changes to its energy, electoral, and tax regimes.

Slow, gradual, and often piecemeal reform — one can label this inefficient and unproductive. Or they can call it democratic.

A boy from the "Insurgentes de la Paz" (Peace Insurgents) school receives lessons inside an old bus turned into a class room in the settlement of Pueblo Nuevo, Oaxaca (Courtesy Reuters).

It is campaign season in Mexico, and aside from security issues, front-runners Enrique Peña Nieto of the PRI and Andrés Manuel López Obrador of the PRD are focusing on poverty and inequality. Both criticize the past two PAN governments for not improving the lot of Mexico’s poor, and for perpetuating if not exacerbating an uneven playing field that benefits the few and not the many. In a recent campaign stop in the Southern state of Veracruz, Peña Nieto came down hard on the PAN, saying “[the PRI] knows what Mexico hasn’t achieved in the past decade. We haven’t forgotten that more people are poor, that we haven’t had the economic growth that creates jobs that the public demands.”

But recent data from the World Bank and Mexico’s own household survey call these claims into question. Over the past fifteen years, inequality has fallen consistently, and since 1996 Mexico’s Gini coefficient has dropped by nearly one percent each year (reaching pre-1980s crisis levels – 49.8 – in 2006). Poverty is also down slightly, as five million fewer people live on four dollars a day or less in 2010 than in 2005.

A number of factors are behind these trends. First, macroeconomic stability (even with slow growth) has been particularly beneficial for the poor, who, studies show, are hit the hardest by economic crises.  Real wages also improved, due to a mix of broader education and increased worker productivity. Finally, social spending targeting the poor rose. Programs such as Oportunidades (started under President Zedillo as Progresa), give monthly stipends to low income households that keep their kids healthy and in school, and now reach nearly six million families.

Unfortunately, the world financial crisis of 2008 brought this progress to a standstill. In contrast to the rest of Latin America, Mexico has seen an uptick in extreme poverty in its wake, with more families dropping below the poverty line even as the economy recovered in 2010. The big question going forward is whether – and how – Mexico can get back to spreading the gains of strong growth more evenly among the larger population. To make this happen, the next president should learn from the lessons of the last fifteen plus years – and focus on improving education, expanding targeted social programs, and redistributing wealth more generally (for instance through a more progressive tax system). These policies already have and would continue to make a difference in the lives of the many Mexicans that still struggle to make ends meet.

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

Venezuela's opposition Democratic Unity coalition potential presidential candidates attend a second debate in Caracas (Jorge Silva/Courtesy Reuters).

Though fewer in number than in 2011, the two Presidential elections on the docket for 2012 will make up for it in terms of their importance in the region.

The first will happen in July in Mexico. Leaders of the Institutional Revolutionary Party (PRI) are already talking about not only winning Los Pinos, the Mexican White House, but taking the “carro completo” – gaining a majority in the House and Senate. Recent trends favor the PRI – they won four out of six governorships in the 2011 midterm elections, now control almost half of the 500 seats in Congress, and have united behind Enrique Peña Nieto, the young, handsome former Governor of the State of Mexico. The National Action Party’s (PAN) close association with rising violence – as Calderón made the war on drug traffickers his signature issue – will likely hurt the incumbent party’s chances, whomever wins their presidential nomination in February. And the Party of the Democratic Revolution’s (PRD) choice of Andrés Manuel López Obrador (AMLO) –who lost to Calderón in 2006 by a razor thin margin (he claims the election was rigged) – suggests this party too is stuck in the last sexenio, which should also benefit an energized PRI.

Though many see the race as locked up, there are still six long months to go. The PAN has yet to choose its hopeful, and current front-runner Josefina Vázquez Mota could shake up the race as the first female presidential candidate from one of the main political parties (and due to her distance from President Calderón). AMLO too has been working to revamp his image away from the combativeness of the last five years, talking to the media about “love and peace,” and saying recently, “I want to be the Mexican Lula,” the market friendly former president of Brazil. His poll numbers have risen, and even some business leaders have switched over to AMLO’s camp. Peña Nieto has stumbled a few times in unscripted moments, for instance when he couldn’t name his favorite books (even as he hawked his own campaign book) at the Guadalajara International Book Fair.  Some wonder if he can hold his own in a debate.

If the PRI does triumph, domestic and international observers alike will be watching to see if Peña Nieto is in fact the epitome of the much heralded and marketed “new PRI” – a modern, democratic, grassroots party — or if he is just a young face for the “old PRI,” one more used to back room deals, corruption, and opaque governance.

Venezuela too heads into Presidential elections in October, with Hugo Chávez now running for his third six-year term. Many things seem the same – already the opposition is denouncing the regime’s electoral machinations (such as moving up the election date from December to October 2012) and repression of anti-Chávez media.

Some things, though, are different, making the elections interesting for observers and for Venezuela’s future. First, the opposition has finally come together [learning its lesson in 2005 when it boycotted  legislative elections and was left out in the cold, allowing Chávez and his United Socialist Party of Venezuela (PSUV) to govern unchallenged]. It will hold a February primary, where voters will choose between six candidates, including front-runners Henrique Capriles Radonski, Governor of Miranda state, and Pablo Pérez, Governor of Zulia state.  This early on, the opposition holds a much stronger position in opinion polls as well. Recently released data place Capriles Radonski just two percentage points below Chávez in the general election.

The biggest difference though is Chávez – and his health. Though he claims to have beaten cancer, others, including his former doctor, believe he may not live more than two years. Worries of succession continue to plague PSUV, as all recognize none can replace the charismatic (if erratic) leader. This 2012 election lead up will be one to watch – for Chávez’s health and his ability to campaign, for ever increasing electoral shenanigans and repressive measures (particularly if the ruling party feels their candidate is flagging, either in his health or the polls), and for the broader actions and reactions of Venezuela’s society, and its international neighbors.

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

Britain's Prime Minister Cameron stands with other leaders during the family photo session of the G20 Summit in Seoul (Courtesy Reuters).

2012 will be a year to watch Latin America’s rising role on the multilateral stage.  The hints of Latin America’s growing stature were already there in 2011. In November, International Monetary Fund (IMF) head Christine Lagarde toured the region, meeting with Brazil, Mexico and Peru to ask for help (and extra funds) to stabilize Europe and the eurozone. But 2012 will be the real stage, as both Mexico and Brazil – the region’s largest economies – take the reins.

The first stage will showcase Mexico’s role at the helm of the G20. Its year of leadership will culminate in the annual summit to be held in Los Cabos in June 2012. Given the eurozone crisis, fights over currency valuations, and volatile financial markets, the path will be choppy at best.  Mexico ambitiously wants the issues of the structure of international financial regimes, food security and financial inclusion all on the table, with the goal of transforming, at least somewhat, the role and mandate of this vital multilateral institution for the future.

The second major event will be the 2012 Earth Summit to be held in Rio De Janeiro (just one day after the Group of Twenty meet). It commemorates the first groundbreaking 1992 Earth Summit (also in Rio), where the United Nations Framework Convention on Climate Change (UNFCCC) was adopted, and which still forms the basis of the global climate change regime today. But the Brazilians hope for more — to push forward with international negotiations, perhaps even setting the agenda for the next twenty years. There are real doubts as to what can actually be achieved (particularly given what little happened in Durban, South Africa, which hosted the last UNFCCC negotiation late last November). But, whatever the odds stacked against it, Brazil will be at the fore, burnishing both its environmental credentials as well as its aspirations for global leadership.

Neither climate change nor world financial stability are easy sells today. But both depend on multilateral actions. And whether progress is made in 2012 will very much depend on the leadership of Latin America.

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

Central American immigrants await a train departure to the north of Mexico, on top of a freight train in Arriaga, Chiapas (Jorge Lopez/Courtesy Reuters).

Looking ahead to the new year ahead of us, these next two weeks I want to look at important developments affecting Latin America that are worth keeping a close eye on in 2012. The first is the changing nature of immigration.

The flow of immigrants from Latin America to the United States, a constant and often accelerating trend of the last three decades, slowed in 2011. The most prominent was the change from Mexico. New arrivals fell off a cliff, with apprehensions at the border hitting their lowest levels in seventeen years. The drop is so great that Doug Massey, head of the Mexican Migration Project (a long term survey of Mexican emigration at Princeton University), claims that for the first time in sixty years, Mexican migration to the United States has hit a net zero.

Though Mexico is the single largest source of migrants to the United States, providing roughly a third of all newcomers, they weren’t the only change.  Anecdotal evidence at least suggests that many Brazilian migrants – which once numbered around one million – started heading home as well. Unemployment fell to all time lows, and numerous articles pointed out the labor scarcities both for high and low skilled workers.

There are many reasons behind these trends, some general, some country specific. Many point to the Obama administration’s rather tough immigration policy as one reason for the decline. A record-breaking 400,000 immigrants were deported last year, and immigration prosecutions increased almost eighty percent along the U.S-Mexico border in the last four years. For Mexico, others speculate that the rise of organized crime and violence along the border may deter some from contemplating the journey (though studies, such as that done by Jezmin Fuentes et al., suggest this may be less of a deterrent than many claim).

An important factor is the weak U.S. economy. With unemployment rates hovering at just over eight percent, there are fewer jobs for natives and migrants alike. This has occurred at a time when many of their home countries are growing steadily – at a decent 4 percent regional average clip, and much more in particular countries and economic strongholds. Better job opportunities in the region broadly — but particularly in Brazil — encouraged many to return home, and kept others from leaving at all.

Looking ahead, a U.S. economic recovery would recreate the pull north for Latin Americans seeking to improve their lot. If the Chinese economy stumbles this too could slow returns, or push more migrants north (especially from Brazil, which counts China as its largest trading partner). Meanwhile, flows from Central America are likely to continue as long as economic opportunities there remain scarce. The real question is Mexico. There, demographics have already shifted, with fewer Mexicans coming of age and entering the work force each year. As a result, the Mexican immigration boom of the 1990s and early 2000s is unlikely to be repeated ever again.

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

A stuffed bear hangs from a cross of a child's grave at the children section of the San Rafael cemetery in Ciudad Juarez (Courtesy Reuters).

Latin America has the ignominious distinction of being one of most violent regions in world. Though not known for its wars or even (at least violent) border disputes, homicide rates average nearly 20 per 100,000 people. Central and South America are among the most murderous regions worldwide, behind only  Southern Africa. Six of the ten most violent nations in the world are in Latin America, with Honduras and El Salvador claiming the number one and two spots. The biggest headline-grabber this last year has been Mexico, which counted some 12,000 deaths in 2011 and over 40,000 drug related homicides since the start of President Calderón’s term (non-official estimates put these numbers even higher). Though Mexico is not the most violent in per capita terms, this escalation has deeply impacted the country.

But the region’s security outlook is not all gloom and doom. Ciudad Juárez, still Mexico’s most violent city, saw its homicides drop by almost half since 2010, to just under 1,700 this year. Given the well-documented inertial effect of violence (i.e. violence tends to breed more violence, ratcheting up the effect over time), this is a doubly encouraging trend. Further south, the Brazilian government rolled out its “Favela Pacification Program” beyond the original pilot (launched in 2008), sending Police Pacification Units (UPPs) to 19 favelas in Rio de Janeiro. Since last year, the city’s homicide rate dropped 13 percent and armed confrontations with police were down by a quarter. Meanwhile, Guatemala enjoyed a relatively peaceful year, with a slight (2.5 percent) decline in murders, bringing its homicide rate under 40 for the first time since 2004.

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

Customers look at laptops at a Wal-Mart store in Mexico City (Henry Romero/Courtesy Reuters).

Another 2011 trend is the rise of the middle class. While in the United States article after article – as well as the country-wide “Occupy Wall Street” protests — denounced the decline of the middle class, in Latin America the middle continued its gains.  Despite the tougher international climate, economic growth averaged over 4 percent, and unemployment rates fell to 6.8 percent (from 7.3 percent in 2010). Perhaps more important, GINI coefficients –  which measure inequality — lowered slightly to just over 50 (from roughly 53 in 2000). This means that the growth that happened actually spread to the bottom and middle of the pyramid.

There is an ongoing debate about how to measure the global middle class. Some of these issues I addressed in this past post. But whatever the starting point, the 2011 regional trend was positive. In Brazil, the middle topped 100 million, in Mexico it reached 67 million, and in Argentina more than 21 million.

This doesn’t mean Latin American nations don’t continue to struggle with poverty. According to the latest World Bank data, just under 30 percent of the population — 160 million people — lives on less than $4 a day (in PPP terms), and 14 percent — some 80 million — live in abject poverty (on less than $2.50 a day). The growing middle though does show the path forward, and reinforces the goal for those concerned with the less fortunate, helping them too rise the economic ranks into a more comfortable middle.

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