Presidents Santos of Colombia, Chavez of Venezuela and Castro of Cuba chat during a family photo session during the CELAC summit in Caracas (Carlos Garcia Rawlins/Courtesy Reuters).
This is a guest post by Sebastian Chaskel and Michael Bustamante. Sebastian Chaskel is a Master in Public Affairs student at Princeton University’s Woodrow Wilson School of Public and International Affairs. Michael Bustamante is a doctoral student in history at Yale University. Both served as research associates at the Council on Foreign Relations in the Latin America program. This post draws on an article published in the February edition of Current History.
Today, Colombian president Juan Manuel Santos travels to Havana to meet with Cuban officials and Venezuelan President Hugo Chávez, currently convalescing in a Havana hospital. This hastily planned visit will last just a few hours,but the main item on the agenda holds broader regional significance. Venezuela, Ecuador, Bolivia, and Nicaragua have pledged to boycott the upcoming Sixth Summit of the Americas if Cuba is not invited to participate. As host of the April event, the Santos administration is trying to broker a solution agreeable to all parties.
President Santos is likely under no illusions about the waning salience of the Summit process and the Organization of American States to which it is linked. Colombia itself is a full participant in rival regional forums that have emerged in recent years to challenge the traditional U.S.-led inter-American system (for example, the newly minted Community of Latin American and Caribbean States, or CELAC). Yet Santos nonetheless stands to gain from a smooth summit meeting in Cartagena, especially on the symbolic front if he can broker Cuba’s ad-hoc participation in the face of U.S. opposition. (The OAS suspended Cuba’s membership in 1962, but lifted this suspension in 2009. Cuba has not requested formal readmission, and Washington opposes Cuba’s participation in the summit unless it meets requirements for full membership under the 2001 Inter-American Democratic Charter).
President Santos is proving to be an able and independent leader in the international realm in more ways than one. In the 1990s and 2000s, Bogotá’s close security ties with Washington dominated discussions of Colombian foreign policy. Indeed, Colombia’s internal problems have long drawn more concerted attention from observers than its international ties, and with good reason. Yet since assuming the presidency in 2010, and no doubt owing in part to the dramatic (although still incomplete) improvement of Colombia’s domestic security situation over the past fifteen years, Colombia’s new president has pursued an increasingly diverse, mature, and noteworthy diplomatic agenda.
The first foreign policy priority for President Santos upon taking office was repairing relations with Colombia’s immediate neighbors. The preceding Álvaro Uribe administration repeatedly alleged Venezuelan and Ecuadorian government complicity in providing refuge to the Fuerzas Armadas Revolucionarias de Colombia (FARC) within their territory. As a result, on the day of Santos’s inauguration, Colombia’s ties with both governments remained severed. Eighteen months later, Colombia has restored formal relations with both countries. Trade and bilateral cooperation are on the rise. This diplomatic reversal has withstood a number of tests. In March 2011, to cite one example, the Colombian armed forces intercepted a shipment of Venezuelan uniforms and weaponry destined for the FARC. Still, in this instance and others, diplomacy helped avoid conflict. Santos has repeatedly urged Colombians to look toward the future, and since 2010, Venezuela has saw fit to arrest and deport various alleged members of the FARC and the Ejercito de Liberación Nacional (ELN, the second major armed rebel group after the FARC) back to Colombia. In exchange, Bogotá sent Walid Makled, a drug trafficker wanted in both Caracas and Washington, to Venezuela. Dialogue and negotiation, Santos seems to believe, will prove a better strategy for reducing the FARC’s ability to use Colombia’s neighbors as safe-havens.
Of course, Colombia’s relationship with the United States continues to be critical, and in October 2011 the U.S. Congress finally ratified the bilateral free trade agreement that had languished on Capitol Hill since 2006. Yet surprisingly muted fanfare greeted news of the belated ratification in Bogotá. In a sense, Colombian foreign policy had already moved on. While the FTA was on hold in Washington, Colombia signed similar trade pacts with Canada, Chile, the European Free Trade Association, and the European Union. During President Santos’ tour of Asia in September, South Korea upgraded its relationship with Colombia to one of “strategic cooperation.” Meanwhile, exports to China have increased by 85 percent since 2006. Thus, even as the United States remains Colombia’s leading trade and diplomatic partner, and even as U.S. security and development assistance continues to flow, few Colombians see the long-sought FTA as the country’s golden ticket to success. It is but one piece of an increasingly multipronged global strategy.
In general, Santos has been much less willing than Uribe to jeopardize relations with neighbors to shore up ties with the United States. In 2009, Uribe’s decision to allow the U.S. military expanded access to Colombian bases plunged his government’s relationship with almost all Latin American countries into crisis. By contrast, in August 2010, when Colombia’s Constitutional Court declared that agreement unconstitutional without congressional approval, Santos opted not to send it to Congress.
Santos’ effort to broker a solution with regard to Cuba’s participation in the Summit of the Americas represents just the latest evidence of Colombia’s renewed assertiveness on the global stage. On the domestic front, too, Santos has emerged (somewhat surprisingly, given his pedigree in the Uribe government) as a reformist leader from the political center, pursuing bold legislation dealing with fiscal responsibility, corruption, and perhaps most significantly, comprehensive land and financial restitution for victims of Colombia’s devastating armed conflict. (For more on these programs, as well as some of potential complications or risks attendant to implementation, see our article in Current History).
Regardless of whether today’s lightning visit to Havana resolves the current controversy over the upcoming Cartagena summit, Colombia appears to be coming into its own, at home and abroad. Faced with legacies of profound violence, corruption, massive forced displacement, and extreme inequality (at 0.58, Colombia’s Gini coefficient is one of the highest in the world), not to mention continuing conflict with the FARC and newer criminal gangs, clearly much progress remains to be made. Yet a year and a half into his presidency, Juan Manuel Santos has taken a number of important first steps to remedy widespread injustice at home and to pursue a more independent foreign policy in line with national interests.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
U.S. Vice President Joseph Biden and Mexico's President Felipe Calderon pose for a photograph prior to a meeting at the Los Pinos presidential palace in Mexico City (Tomas Bravo/Courtesy Reuters).
On Sunday, Joe Biden began his second trip to Latin America as Vice President. In 2009 he went to Chile and Costa Rica to talk about the global economic crisis; now he is in Mexico and Honduras, focusing on security (among other issues) in the lead up to the April Summit of the Americas.
The main event in Mexico was a Monday meeting with President Felipe Calderon. But Biden also took time to meet with all three of Mexico’s presidential candidates, Andrés Manuel López Obrador, Enrique Peña Nieto, and Josefina Vázquez Mota (in alphabetical order so as to avoid claims of favoritism). A few decades ago a U.S. official meeting with opposition candidates would have caused great consternation and tension between the governments; today it is accepted and even expected. These meetings not only highlighted the vast changes in Mexico, but also signaled that the United States is both interested in and open to working with any future president of Mexico, whomever it may be.
On Tuesday, Biden travels to Honduras to meet with President Porfirio Lobo, as well as his El Salvadoran, Panamanian, Costa Rican, and Guatemalan counterparts. Security will undoubtedly play a large role, as Central America’s governments battle drug cartels and soaring homicide rates. The U.S. has upped financial support over the last few years through the Central America Regional Security Initiative (CARSI), but the results are still quite limited.
The frustration with the current approach to tackling drug cartels has led to calls from numerous Latin American heads of state, such as Guatemalan President Otto Perez Molina and Colombian President Juan Manuel Santos, for an international debate on drug legalization. The declarations stem largely from these government’s struggles on the ground with organized crime and violence. In Guatemala’s case it also likely reflects the desire to increase U.S. aid and to lift the ban on weapons sales instituted in the 1970s. During his visit Vice President Biden will, at least privately, likely be fielding questions about the United States’ “war on drugs,” and the seeming inability to rein in the money, guns, and drug demand that fuels the violence.
It appears that, at least for now, there will be no change in U.S. drug policy. Dan Restrepo, NSC Senior Director for Western Hemisphere Affairs, commented that “the Obama administration has been quite clear in our opposition to the decriminalization or legalization of illicit drugs.” But while the United States won’t be changing policies this go round, the fact that drug legalization is a central part of discussions is in itself something new.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
A pharmacy employee looks for medication as she works to fill a prescription while working at a pharmacy in New York December 23, 2009 (Lucas Jackson/Courtesy Reuters).
The U.S. Substance Abuse and Mental Health Services Administration recently released the findings of its 2010 National Survey on Drug Use and Health (NSDUH). The report draws on data collected from face-to-face interviews of 67,500 people aged twelve years or older across the United States (the U.S. government has been conducting this type of research since 1971). Of the many findings in the report, some of the most interesting include:
Over 22 million Americans used drugs in the month before the survey; about 9 percent of the population over twelve years old and a slight uptick from 2008 numbers. City-dwellers (9.4 percent) were more likely to use drugs than those residing in more pastoral settings (3.7 percent), and Westerners (11 percent) got high more often than Southerners (7.8 percent). Men were almost twice as likely to use drugs than women, and they liked to smoke pot. And perhaps not unsurprisingly, young people—aged eighteen to twenty-five—were more likely to use drugs (21.5 percent) than other age groups.
The most popular drug was marijuana—consumed by over 17 million Americans—and its usage is trending upward. An estimated three million more Americans were toking up in 2010 as compared to 2007. Cocaine, ecstasy and meth use stayed flat or fell over a similar time period.
The trends for the non-medical use of prescription drugs are perhaps the most interesting and challenging for current drug policies. An estimated seven million Americans got high on prescription medications in the month prior to the survey; over five million using pain killers. The popularity of prescription drugs is evident in the increasing number of people trying them for the first time each year (some two million), and the doubling of emergency room visits for pain killer abusers from 2004 to 2008. Prescription pain killer abusers seeking publicly funded rehab also tripled from 2002 to 2009.
While the conventional wisdom holds that America’s drugs come from Mexico and Latin America, the study shows this is not wholly true. Prescription drugs were almost exclusively created, bought, sold, and consumed north of the border. Over half of those using and abusing prescription drugs received them from a friend or relative. Fewer than 5 percent got them from a stranger or the internet. Just a fraction of these sales then can be linked back to international cartels. When policymakers debate thorny questions of drug use and international drug enforcement, it’s wise to remember that cartels, though formidable, are hardly the only suppliers in a vast American drug market.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
Bundles of confiscated drug money worth two million euros ($2.7 million) are displayed at a police headquarters in Madrid January 18, 2011. (Andrea Comas/Courtesy Reuters).
On Tuesday, the UN Office on Drugs and Crime (UNODC) released a new report on global money laundering, “Estimating Illicit Financial Flows Resulting from Drug Trafficking and Other Transnational Organized Crime.” The upshot? It is really hard to estimate. But, the report does provide some tangibles. Surveying numerous studies, it calculates that illicit global proceeds amount to over $2 trillion dollars every year (roughly 3.6 percent of global GDP), with some $1.6 trillion of this laundered. Within these staggering figures, roughly $870 billion of these revenues relate to drug trafficking and organized crime, and close to $580 billion of those illicit funds are laundered through financial institutions. The study drills down and looks specifically at the global cocaine market, estimated at some $85 billion. Most of this, again, is laundered.
The report provides some hints as to how this happens. Of the $85 billion cocaine market, most (estimated at $61 billion) stays in the retail markets – the United States and Europe primarily. Producers – mostly Andean farmers – receive in total $1 billion, or just over 1 percent of the gross profits. This leaves, by their estimates, roughly $23 billion for those processing and moving the drugs from the fields to the domestic wholesalers. Shipping cocaine from producing regions to transit locations generates at least $8 billion in profits.
When it comes to laundering this money, at least half occurs locally, and most of the rest in nearby countries. In South America, the report estimates that some $13 billion dollars of laundered cocaine money likely flows into and through local banks and local businesses, and roughly $7 billion is probably cleaned nearby, often in the Caribbean. The report also touches on the profound (and mostly negative) impacts of these flows on local economies, including corruption, real estate price distortions, large income disparities, and weaker growth (since criminals aren’t usually looking for long term productive investments in local economies).
The report ends on a fairly pessimistic tone. Drawing on a separate, heavily cited 2009 report from the U.S. Department of Justice’s National Drug Intelligence Center, the UNODC estimates that Mexican and Colombia’s drug-related money laundering may amount to between $18 and $39 billion each year. The authors argue that, unlike taking down kingpins (who are easily replaced), seizing illicit funds has much more severe and long lasting impacts on illicit trade. But, then the report goes on to show that our global ability to find and stop these financial flows is abysmal – estimated at far less than 1 percent – not much different than the fees brokers charge to clients to buy and sell stocks, and less than hedge funds take to manage your (legal) money. With the cost of doing business – at least in terms of money laundering – remaining low, the UN office points out the vital need for international law enforcement to truly step up and follow the money.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
Governors (L-R) Jose Guadalupe Osuna Millan of Baja, Humberto Moreira Valdes of Coahuila, Texas Governor Rick Perry, California Governor Arnold Schwarzenegger, Jose Natividad Gonzalez Paras of Nuevo Leon, Arizona Governor Janet Napolitano and Eduardo Bours Castelo of Sonora pose as characters from the movie "Terminator" at the 26th Border Governors Conference (Courtesy Reuters).
This week the Mexican state of Baja California will host the two-day Border Governor’s Conference. Started nearly two decades ago, the annual meeting brings together governors from all four U.S. and six Mexican border states to discuss the issues directly affecting their states and citizens. At its height in the early 2000s, the governors and their ministers met not just with each other but also with representatives from Commerce, Homeland Security, the Environmental Protection Agency (EPA), and other departments and agencies to influence border-centered debates in both Washington, DC and Mexico City.
But in recent years the conference has fallen on hard times, a victim of polarizing politics. The 2009 session hinted at the divides, as the governors of Arizona, California and Texas failed to make it to Monterrey due to “scheduling conflicts.” It hit its nadir in 2010 in the wake of Arizona SB 1070. The Mexican governors wrote a letter calling the law “discriminatory [and] racist” and announced their plan to boycott the meeting if hosted, as planned, by Arizona Governor Jan Brewer in Phoenix. Brewer cancelled the conference in retaliation. In the end, Governor Richardson of New Mexico held the meeting, but no other U.S. governors attended, leaving the future of this consultative mechanism in limbo.
The conference also has suffered from a sprawling agenda and size. With its initial successes the agenda items grew, as did the number of participants. In recent years there have been some 25 working groups on topics ranging from wildlife to science and technology. The influx of hundreds of staffers and activists has made the process much more cumbersome, and reduced the intimacy and spirit of cooperation that guided the conference in the past. Reduced in large part to the signing of agreements and photo opportunities, many governors (particularly from the United States), began skipping the event.
As the United States and Mexico search for common ground and mutual solutions to pressing problems, it is time to revitalize this mechanism. It should refocus on practical problems facing the border states and their residents. Rather than covering the gamut, the agenda should be streamlined to emphasize a few vital issues. It must enable leaders to actually meet and discuss the serious challenges facing their states and constituencies, re-energizing the consultative element of the event. Most pressing today is security, where policy so far has been guided from the center, even though the effects are concentrated on the border.
Once refocused, the border governors need to organize better to influence their respective governments, shaping policies that in turn shape the border. One potential model is the Pacific Northwest Economic Region (PNWER), which brings together state legislators, governors, civil society and businesses to lobby the federal government and strengthen U.S.-Canada border security and the region’s economic competitiveness. Another is scaling up the San Diego Association of Governments’s (SANDAG) annual binational conference, which brings together local leaders in California and Baja California to address just one broad agenda item at each meeting – such as the economic impact of wait times at shared border crossings.
As Arizona Governor, Janet Napolitano repeatedly said that one of her closest day-to-day working relationships was with Sonora Governor Eduardo Bours. This reality – that cross-border issues and events strongly affect border state residents’ daily lives — hasn’t changed. Revitalizing the Border Governor’s Conference is one means to address these shared challenges, and reincorporate regional problem-solving strategies into larger U.S.-Mexico debates.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
Container ship sails beneath Golden Gate Bridge en route to port in California (Robert Galbraith/Courtesy Reuters).
Today the Council on Foreign Relations is releasing its independent Task Force report, “U.S. Trade and Investment Policy.” Led by Andrew H. Card — former White House Chief of Staff under George W. Bush – and Thomas A. Daschle – former U.S. Senator and Senate Majority Leader – and directed by my CFR colleagues Edward Alden and Matthew Slaughter, the 22 members took on the increasingly thorny issue of the future of U.S. trade policy.
One of the most interesting discussions within the report is of multinational corporations. While representing less than 1 percent of all companies, they provide nearly a quarter of all private sector jobs, nearly 40 percent of all U.S. capital investment, and conduct the vast majority of research and development. These are the engines of today and tomorrow’s economy – and as such the United States needs to become much more competitive in attracting these corporations to its shores.
Another important discussion involves the increasing skepticism among the U.S. public toward trade’s benefits. The group rightly points out this has occurred not because of the general public’s lack of understanding or “ignorance”, but because of the experience of the average American worker. Over the last ten years –the time frame within which trade became a much harder sell — nearly all American workers saw their real earnings fall. U.S. based export oriented jobs – which in general pay more than domestically oriented ones – haven’t grown, even as the world economy exploded. Inequality too has grown during this time frame. And while the report rightly points out that trade was not the only, or perhaps even the deciding factor behind these shifts, it did play a role. As such, any new policy must take into account and work to enhance the widespread benefits of trade for America’s citizens.
Too often participants in policy debates come out as for or against trade, without defining for what end. Here, the Task Force usefully defines the main goals of U.S. trade and investment policies as “improving American living standards and advancing America’s broader interests.” To better meet this end it provides several concrete recommendations, including prioritizing service sector opening in ongoing trade negotiations, reforming the tax code and removing protectionist regulations on international mergers and acquisitions in order to encourage foreign investment in the United States, streamlining the WTO and creating stronger international trade enforcement mechanisms, and expanding adjustment assistance programs to provide a broader safety net for American workers.
As is often the case in trade oriented debates, Task Force members weren’t able to reach a unanimous consensus on what a better trade policy would look like, and how to get there. It is worth looking at the additional dissenting views section to get a sense of the varied perspectives on the report’s conclusions. Still, everyone did agree to the Task Force’s basic takeaway – that the administration and Congress must revise America’s trade strategy or risk losing out on the enormous potential gains of deeper global engagement. The report is well worth a read, offering insights on how the United States can emerge from the recession and financial crisis a stronger and more capable leader in the international economy.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
A general view of Sao Paulo, the biggest Latin American city (Paolo Whitaker/Courtesy Reuters).
A new piece by Eduardo Guerrero in Nexos looks at the growing problem of extortion in Mexico. Differentiating it from drug trafficking, he finds it more brutal and violence, and argues it is on the rise for three reasons: fragmentation of cartels, displacement of crime rings (and their response to expand into new territories), and finally rampant impunity for such acts.
Drug abuse in the United States is on the uptick overall, though use of “harder drugs” seems to be down, according to a recent study by the Substance Abuse and Mental Health Services Administration (SAMHSA). Marijuana use has increased some 20 percent over the last four years, particularly among young people. Today more than one in five Americans aged 18-25 get high on a regular basis. On the other hand, rates of methamphetamine and cocaine abuse have been steadily declining since 2006.
The World Economic Forum released its Global Competitiveness report this week, which measures competitiveness based on twelve benchmarks that include “basic requirements”, such as institutions, “efficiency enhancers” such as market size, and “innovation and sophistication factors”, such as innovation. Among Latin American countries, Mexico had the biggest boost in the rankings, moving up 8 spots from 66th to 58th, and improving on 10 of the 12 categories (its only drop was in macroeconomic environment). Brazil also made gains, up 5 places to 53rd overall (due largely to the size of its internal market and its sophisticated business environment), and Chile remains at the top of the region and the 31st most competitive nation worldwide. Central American countries such as Guatemala, El Salvador and Nicaragua registered steep declines in their ratings, due to weakening institutions and rising insecurity, while Argentina and Venezuela remained generally unchanged, but near the bottom of the list at 84th and 124thoverall, respectively.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
Passengers on a bus pass a vehicle painted with a slogan during an anti-drugs campaign to mark International Anti-Drug Day in Jakarta (Dadang Tri/Courtesy Reuters).
The “drug war” strategy of the last four decades revolves primarily around supply side measures. Whether eradication, interdiction, or arrests, it fixates on stopping the seemingly endless flow of drugs and cash across U.S. borders. But there is obviously another side to the equation – U.S. demand. The United States is the largest consumer of drugs across the globe (though there are signs that the cocaine and marijuana markets in Europe and the developing world are catching up) with 1 in every 7 Americans having tried an illegal substance. Marijuana accounts for the vast majority of that consumption, followed by prescription drugs and cocaine.
Three basic strategies underlie the traditional approach to dealing with drug abuse at home: prevention, treatment and enforcement. Prevention programs seek to stop substance abuse by educating primarily schoolchildren on the dangers of narcotics. Even with their memorable slogans (such as Nancy Reagan’s “Just Say No” campaign or Drug Abuse Resistance Education’s “D.A.R.E. to resist drugs and violence”) the results have been disappointing. A number of studies show these efforts – costing millions of dollars – may slightly slow marijuana experimentation among teens.
Treatment programs, particularly when focused on rehab for heavy drug users, are by far the most cost effective U.S. policy. For every million dollars spent, these programs reduce lifetime cocaine consumption by 100 grams.This may not seem like a lot, but it is more than three times as effective as preventive programs and punitive measures. Investing in treatment also yields impressive returns in terms of public safety, as every dollar spent on substance abuse rehabilitation reduces the costs of associated crime by an estimated seven dollars. Still, soaring dropout rates – even within mandatory programs — question the long-term benefits of formal treatment for the relatively few drug addicts who choose to participate.
A final major element of demand side in the United States has been enforcement, namely incarceration of those selling and using drugs. From 1972-2002, the number of drug offenders behind bars increased twelve-fold (accounting for about half of the total growth of the federal prison population). This has hit African American communities the hardest, as 1 in every 3 black males goes to prison at some point in his life (1 in 15 black adults are currently behind bars). This is at least in part because the punishments for crack are harsher than those for powder cocaine, leading to longer sentences for black vs. white offenders. This style of stepped up enforcement doesn’t seem to have changed the fundamental drug markets, at least not for the better. Cocaine and heroin prices have hit all-time lows, indicating greater availability, while purity has increased by more than half in recent years. Methamphetamine rose from near obscurity in the early nineties to become the drug of choice for roughly 1.5 million Americans today.
Latin American officials such as presidents Felipe Calderon of Mexico and Juan Manuel Santos of Colombia are increasingly calling on the United States to do more to reduce consumption, and a recent report co-authored by former President of Brazil Fernando Henrique Cardoso urged a “paradigm shift” in global drug policy to treat “drug addiction as a health issue, reducing drug demand through educational initiatives and legally regulating rather than criminalizing cannabis.” So what should the U.S. government do?
Some experts favor legalizing narcotics, putting an end to drug war once and for all. These advocates maintain that making drugs commercially available will replace illicit markets with formal ones, and thus eliminate the violence of the illegal drug trade. Researchers have found that legalizing marijuana would not necessarily lead to a rise in substance abuse (since those that want to get high today can, at least in many states, do it quite easily), and could slash one fifth of Mexican cartels’ profits. Ending the prohibition on harder drugs may not have the same effect, as legalization could prompt more consumption of cocaine, heroin or methamphetamine (because current enforcement against these drugs is more effective than for marijuana). To appreciate the potential costs of a surge in use, one need only to look at the double-edged consequences of ending the prohibition against alcohol. While the likes of Al Capone are history, Americans today are four times more likely to abuse alcohol than all illicit drugs combined. Alcohol-abusers are also more prone to break the law, as more than half of the current prison population committed their crimes drunk.
Other experts (especially those at RAND corp.) suggest we focus our anti-drug resources on enforcement that prioritizes harm reduction. The idea here is not to lock people up indiscriminately, but to go after the most violent drug traffickers and retail dealers. While this may not alter the availability and price of drugs (current policies haven’t done this either), it would they suggest reduce the effects on the larger community and population – whether here in the United States or in places such as Mexico.
For the past three decades Washington has spent the bulk (an average of two thirds) of anti-drug resources on supply side solutions. Even as the U.S. drug control budget expanded by more than 50 percent in recent years, expenditures for demand side policies remained stagnant, growing less than one percent per year over the past decade. Realizing that there is no easy solution on either side of the border, it is time to rethink these strategies, keeping in mind the brief successes and unfortunate failures of the last four decades.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
Plans for a $340 million overhaul of Rio de Janeiro's iconic Maracana stadium are among those behind schedule for the World Cup (Sergio Moraes / Courtesy Reuters).
The UN Economic Commission for Latin America and the Caribbean (ECLAC) released its report on foreign direct investment (FDI), with generally good news for Latin America. While 2010 investment worldwide was fairly flat (and fell in developed economies), it soared forty percent in the region – reaching nearly $113 billion. Of the just over a trillion in worldwide flows, Latin America captured a tenth of the total (and over twenty percent of that invested in emerging economies).
These investments were divided between natural resources, domestic market players, and outsourcing venues. Within the region the biggest winners were Brazil (nearly doubling to $48.5 billion), followed by Mexico ($17.7 billion) and Chile ($15.1 billion). And, according to ECLAC, the trend is set to continue – it expects FDI to the region to rise a further fifteen to twenty-five percent in 2011.
A few interesting trends jump out of the data. One is the geographic pull of the Southern Cone. While investment in Mexico and Central America increased, the real upswing occurred in South America—almost four times as much. Brazil and Chile gained the most, but Peru, Bolivia and Argentina all saw large inflows. Only in the Caribbean did FDI actually fall.
You also see quite stark differences in the type of investment. In South America nearly a majority of FDI poured into natural resources—oil, gas, copper, iron, and soya. Further north, a greater share of the money went into manufacturing. There the biggest winners were Mexico, Panama, Costa Rica, and the Dominican Republic – all countries with free trade agreements with the United States (NAFTA and CAFTA). These trends, if they continue, suggest long-term structural economic differences may develop between the north and the south of the hemisphere.
The report also provides some context for the much-touted (and in some quarters much feared) rise in Chinese investment. It has indeed increased: last year China invested twice as much in Latin America as it did over the previous two decades combined. Directed almost solely at natural resources, it is also geographically concentrated, with most going to just three countries – Brazil, Argentina and Peru.
But the data reveals that China is still just the third largest investor — behind the U.S. and the Netherlands (the latter’s investment bumped up significantly last year due to Heineken’s acquisition of Mexico’s FEMSA brewery). Interestingly, China trails the combined Latin American investment in the region. Taken together, multilatina outlays hit a record $43 billion – almost triple China’s $15 billion contribution. These investments were more apt to go into financial services, retail, and utilities – value-added activities with more positive trickle down effects for the broader economy. This suggests Latin American nations should be more enthusiastic about trade missions from their neighbors than from China.
The report also hints at the hurdles the region continues to face. The proportion of investment in high tech fell far short of its global competitors—only eight percent compared to fifty-two percent among the Asian Tigers—and limited mostly to Brazil and Mexico. The region has a lot to do to upgrade educational systems and its workforce in general to change this balance.
And, with the exception of perhaps some smaller island economies, FDI isn’t going to be the ticket to the big time. It can’t make up for domestic savings and investment. In the end, growth will have to come from home. Nevertheless, these flows can provide a leg up if these nations can translate this investment into productive growth.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
A trader checks a newspaper at the Santiago Stock Exchange (Ivan Alvarado/Courtesy Reuters).
Much is made of ALBA, the Bolivarian Alliance for the Americas, a pact backed by Hugo Chávez and Fidel Castro to integrate the region based on “21st Century Socialism,” and incorporating neighbors such as Bolivia and Ecuador among others. Over the past five years, Venezuela has spent some $60 billion to back the project. In concrete terms the achievements so far are fairly limited: sponsoring some 75,000 health workers and subsidizing electricity within the participating countries. This has been undoubtedly helpful to hundreds of thousands, perhaps even millions of individuals, but it is not a comprehensive economic, political, or social model by any means. Instead, many of ALBA’s member countries continue to straddle the ideological fence, remaining open to trade with other regional groupings, as well as with the United States and China.
Substantive integration efforts are in fact taking shape elsewhere in Latin America – just without the fanfare. Several of the region’s fastest growing democracies — Mexico, Peru, Colombia, and Chile — will sign a free trade accord on May 2. Connecting two hundred million people, 10,000 miles of Pacific coastline, and over $1.4 trillion of GDP—triple that of ALBA and rivaling the Brazilian economy—the group aims to ease the flow of goods, capital and people to create a common and more powerful front for exports to Asia. The pact brings together Chile and Peru’s strengths in commodities with Colombia’s energy and Mexico’s services and manufacturing. It should help Colombia, whose free trade agreement with the U.S. remains in limbo, and open up Mexico to finally profit from — instead of just compete with — China.
Additionally, Bogotá, Lima, and Santiago are combining their stock exchanges into the Mercado Integrado Latinoamericano (MILA). MILA will become the largest stock exchange in Latin America, surpassing Brazil’s Bovespa and Mexico’s BMV. The economies of scale should increase liquidity to the region’s expanding – and increasingly diverse — private sector.
With far less rhetoric, these recent efforts will likely transform the way many of the hemisphere’s nations interact with each other in day to day business. It may in fact lead to a new economic model, one based on “21st century markets,” finally enabling the integration Latin American leaders have long sought.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations
