Yet these analyses neglect the situation of the region’s private sector, which may prove to be the region’s Achilles’ heel. As Latin America’s economies slow down (due to tight credit, falling commodity prices, and falling consumer demand at home and worldwide), the poor and even irresponsible financial decisions of the region’s private sector are coming into relief.

With world markets teetering in recent months, rash financial bets – outside of the core competencies of many Latin American companies – went south. Stalwart firms such as Comercial Mexicana in Mexico and Grupo Votorantim in Brazil bet against the dollar and are now paying highly for it – perhaps with their very existence. More unwise financial bets are still waiting to be uncovered. In fact, one analyst recently estimated that derivative losses from Latin America’s largest companies could reach $50-60 billion in the coming months.

Latin America’s private sector troubles are not limited to dallying in derivative markets. Particularly troubling is the huge debt piled on by businesses in recent years, including many of the region’s largest companies. This became apparent this week when Cemex, a company long touted for its responsible and successful business strategy, was unable to refinance its debt. And Cemex is not alone. Others undoubtedly will follow, as tight worldwide credit markets limit the rollover of short term debt.

The macroeconomic and fiscal responsibility of most Latin American governments in recent years is welcome. And, it does mean that the effects of the worldwide financial crisis for the region differ this time around. But while necessary for a speedy recovery, public prudence alone is not sufficient. The financial health of the private sector – the main engine for the job creation and economic growth - is equally important. Here, the emerging data is not so sanguine, and some of it is missing or unreliable. Past crises have encouraged and sometimes forced greater reporting and transparency in the public sector, but the private sector remains somewhat of a blackbox. Yet how the private sector weathers the crisis will define the region’s economic future.

The easier change in some respects is the relationship with Cuba. Obama won Florida with the support of the majority of Latinos in that state, though he lost the Cuban American vote. Since Cuban-Americans were not decisive in his victory, Obama doesn’t owe them anything. In addition, polls show that younger Cuban Americans were more likely to vote democratic, suggesting a longer term shift away from the core support for current U.S. policy. Obama said in the campaign he will quickly relax restrictions on family visits and remittances to Cuba. This could be a first step in a longer and larger policy shift toward greater opening between the two countries, and ultimately (after several bilateral steps) asking Congress to end the embargo.

These policy changes would transform U.S.-Cuba relations. But they would also reverberate throughout the region, ending what is often seen in Latin America as a hypocritical stance between U.S. rhetoric and policy realities. And, these changes are more likely to actually bring democracy to Cuba, allowing for new information and influences on the island after nearly 50 years of forced semi-isolation.

In terms of  Venezuela, Obama’s presidency will mean that the personal animosity between Presidents Bush and Chavez will no longer affect matters of state. Second, Obama’s personal profile and life story will make it much harder for Chavez to dismiss him as a “yankee imperialist.” And third, Chavez is running into problems of his own. In addition to domestic problems of rising inflation and crime, falling oil prices limit his “petrodiplomacy” with other countries in the region - lowering the decibel of his foreign policy microphone that until now has been turned against the United States.  Obama has an opportunity to redirect these relations, though here the opportunity is less clear. Even with oil prices nearer to $50 than $150 a barrel, Chavez still has significant resources to throw around. And, with domestic problems escalating, he needs a foil. The United States is an easy target, no matter who the president is. But a change on Cuba would also make much of Chavez’s anti-American rhetoric ring less true across the region, limiting its effectiveness and perhaps leading to a different bilateral dynamic down the road.

It’s time for Mexico to lead

BY Shannon O’Neil

Special to The News

November 28, 2008

As he celebrates his two-year anniversary in office, President Felipe Calderón gets mixed reviews on his domestic and foreign policy. Many point to the numerous successful reforms - pension, tax, justice, and energy - that have passed as evidence he can deftly guide serious issues through a divided Congress. These achievements do stand in stark contrast to the gridlocked Vicente Fox administration. Yet others dismiss these reforms as too little, too late, and lament the wasted potential for real change.

This ambivalence is not limited to national politics. While much lower in profile, Calderón´s foreign policy elicits both praise and dismissals. It shines in comparison to Fox´s, which left Mexico’s relations with Venezuela and Cuba in tatters and U.S. relations weakened by recriminations on both sides. But as in the domestic arena, many worry Calderón is wasting the opportunity to fundamentally transform Mexico’s role on the world stage.

Upon entering Los Pinos, Calderón quickly moved to repair broken bilateral fences. In his first year, he returned Mexican ambassadors to both Venezuela and Cuba, taking the first necessary steps to re-engage with all of Latin America. He followed up with visits to Argentina and Chile, and received Presidents Tabaré Vázquez of Uruguay and Luiz Inacio Lula da Silva of Brazil at home. Through these renewed ties, his government pushed to increase trade and to further energy partnerships - all important for Mexico´s future. This new hemispheric camaraderie permitted Mexico´s successful U.N. Security Council seat bid, providing Calderón a new international platform in 2009.

While at times seeming almost desperate to ignore his northern neighbor - during his first trip there as head of state in April he even bypassed Washington - Calderón’s administration has actually made more concrete headway with the United States than many of his predecessors. The harsh realities of his “get tough” domestic agenda, and the increasing worries of U.S. policy-makers about drug-related violence in Mexico, have facilitated this newfound cooperation.

Negotiations with President George W. Bush culminated in the three-year package known as the Mérida Initiative, which provides $400 million in the first year for the fight against the drug cartels. Just as important, these discussions changed the terms of the drug war debate, getting the United States to at least grudgingly accept some responsibility in the violence and to promise to stem the flow of illegal guns and money into Mexico.

QUIET CONFIDENCE

On other bilateral issues, Calderón has been notably silent. Coming on Fox’s burned heels, he has virtually ignored U.S.-bound migration in his discussions with the U.S. president. Calls for better treatment of Mexico’s citizens abroad, and for economic development and job creation at home to stem the steady human flow outward, have been geared almost exclusively to his domestic audience. On NAFTA, too, the administration has been uncommonly reticent, particularly amid calls by U.S. democrats for its renegotiation.

Two years in, Calderón’s foreign policy has promoted better Latin American relations, and assuaged past rifts with the United States. Not bad - but not visionary. As the 13th-largest economy in the world, and according to The Economist, soon to break into the ranks of the top 10, Mexico has been decidedly quiet on the international front. It is time for Mexico to lead.

The current financial crisis provides an unprecedented opportunity. Given its own tortuous history with financial upheaval (and more than one near-death experience of its banking sector), Mexico has quite a lot of wisdom to share. And since the exclusive G-7 has given way to the G-20 in worldwide negotiations, Mexico now has a seat at the table.

Other countries understand this. Brazil is the most obvious example, and one to be emulated rather than envied. Its steady and confident leadership on the world stage (backed by good macroeconomic policies and solid domestic economic growth), seduces not just international businesses and investors, but also worldwide diplomats. Having the world’s ear, Brazil´s eminence has become a self-fulfilling prophecy. In contrast, Mexico´s more timid foreign policy stance leaves it out of the game.

In the coming months, we will likely see a narrowing of the Mexican government’s domestic policy agenda. The unfortunate combination of escalating criminal violence, the almost certain National Action Party losses in next year´s midterm elections, and the deepening of the global financial crisis will prove too much for an ambitious reform program in the second half of the president´s term. But this unlucky trifecta for the home front opens the opportunity for a more aggressive foreign policy approach. Mexico should turn outward in earnest, building on the solid blocks of support developed so far by Mexico´s diplomats. With now two years of distance from Fox´s unfortunate travails, the arrival of a new administration in Washington provides an opening for the Calderón government to shift Mexico´s foreign policy course. Through the U.N. Security Council seat, its OECD and G-20 membership, and its intricate economic, security, social, and cultural ties with what is still the most powerful world economy and government, Mexico has a chance to shape the international agenda. It is an opportunity Calderón should not waste.

About the writer: Shannon O’Neil is Douglas Dillon Fellow for Latin America Studies at the Council on Foreign Relations in New York.

The Washington Times

Monday, December 1, 2008

O’NEIL/CHASKEL: Pass FTA and amend Plan Colombia

Shannon O’Neil and Sebastian Chaskel

Two years ago President Bush and Colombian President Alvaro Uribe negotiated a free trade agreement (FTA). Yet when Barack Obama steps into the White House in January, it will still await congressional ratification.

Experts agree that both countries will benefit from the pact - Colombia by attracting investment and the United States by reducing tariffs on its Colombia-bound exports. As a senator and presidential candidate, Mr. Obama opposed the FTA for non-economic reasons, arguing along with House Speaker Nancy Pelosi that as long as Colombia maintains a dismal human-rights record Congress should not review the agreement. During the last campaign debate, Mr. Obama stated that Colombian “labor leaders have been targeted for assassination on a fairly consistent basis, and there have not been prosecutions.”

While true, withholding the FTA will not solve this situation. Instead, the United States can improve Colombia’s human-rights situation by bolstering economic opportunities through the FTA and more importantly by strengthening Colombia’s courts through Plan Colombia, the multi-billion dollar aid program to fight drug production and insecurity in Colombia.

Colombia has made great strides in the last decade, reducing the violence tied to the drug trade from a threat to the state itself to a serious law enforcement problem. Yet even though Colombians are now safer, political killings continue.

In 2007 at least 39 trade unionists were murdered. This year 41 have died, comprising about half of the assassinated union leaders worldwide. Perhaps more important is that impunity remains rampant. Of the nearly 500 union murders during Mr. Uribe’s presidency, only 14 perpetrators have been brought to justice. The latest news, that members of the armed forces kidnapped poor civilians and presented them as combat deaths, is one more gruesome reminder of the lack of accountability and widespread impunity enjoyed by human rights violators.

President Uribe reacted to this most recent scandal by purging the military. But he tellingly said that human-rights scandals “make us look bad,” as if the problem were simply one of perception. He also called a representative of Human Rights Watch, an organization that helped uncover the violations, an “accomplice of the FARC,” Colombia’s largest guerrilla group. These actions suggest that the Colombian government is more concerned with wooing American congressional representatives than with stopping human-rights violations.

Yet the lack of presidential will is not the only problem.

Just as detrimental is the weak capacity of Colombia’s judiciary, the branch responsible for investigating human-rights violations and prosecuting its perpetrators. Since 2006 the Colombian attorney general has valiantly tried to prioritize the top 200 union-leader cases, out of the backlog of some 2,600 assaults. But his two-plus years of work garnered only five convictions. This lack of progress shows that without strengthening Colombia’s court system, human rights will continue to suffer.

Withholding the FTA will not improve the courts’ capacity, but redirecting U.S. aid to Colombia could. As it stands, the United States gives Colombia $600 million a year to fight the drug trade. Starting in 1999, when the government was nearly toppled by drug dealers, this aid provided armament and military training, and was a key element in Colombia’s success against the drug lords. Recognizing the new, safer situation, in 2007 the Democratic Congress decreased Plan Colombia’s military component somewhat. But the aid package remains lopsided, funding predominantly military programs while largely excluding support for the country’s democratic institutions.

Nine years into Plan Colombia the country’s new Achilles heel is its civil governance, particularly its judicial branch. Using Plan Colombia to support the work of the country’s attorney general, inspector general, and ombudsman, and tying that aid to benchmark reductions in impunity, could, unlike withholding the FTA, improve human rights.

Combined with a revamped Plan Colombia, the FTA can then promote both human rights and the overall quality of life in Colombia. One of the loudest proponents for the FTA is Asocolflores, Colombia’s flower exporters association. Dependent on the U.S. market, its companies employ 200,000 Colombians. This and other export industries create jobs and opportunities that provide poor Colombians alternatives to growing coca, the plant used to make cocaine.

Real change will not come from bulletproof armor, helicopters, and tanks, but will depend on Colombia’s institutional capabilities and the economic opportunities it can offer its citizens. The United States should focus Plan Colombia on improving justice and human rights, and pass the FTA to improve economic opportunities for both countries’ citizens. President-elect Obama’s campaign promised change; our regional partners could use some, too.

Shannon O’Neil is Douglas Dillon fellow and Sebastian Chaskel is a research associate with the Latin America Studies Program at the Council on Foreign Relations.

Based on this agreement on October 22, 2008, President Calderon sent two reforms to Congress to overhaul Mexico’s federal police system, combining existing forces and redrawing responsibilities. Mexico’s federal police is currently composed of two separate federal forces: the Agencia Federal de Investigacion (AFI) and the Policia Federal Preventiva (PFP). Although on the operational side both forces report to the Ministry of Public Security (SSP), on administrative issues the AFI is linked to the Attorney General’s office, the PGR. Reforming two already-existing laws, the Federal Police Law and the Federal Attorney General Office’s (Procuraduria General de la Republica, PGR) Law, the new bills would merge these two police forces into one single branch under the SSP. This should, according to the Calderon administration, clarify the different roles of the SSP and the PGR and as a result strengthen their mandates. The executive argues that the new centralized police force will make the federal police more efficient, more effective, and less corrupt.

If congress approves the reforms, the first one would transform the PFP into an autonomous new Federal Police. The second reform would reorganize the PGR and change the process of selection and training of its officials in the effort to improve its performance. In this process, the AFI would disappear. Its officers could join the new Federal Police police force, but only after they prove- by undergoing an invigorated evaluation and certification process- that they are qualified (i.e. not corrupt among other skills).

It is good to see the Mexican government taking on these serious challenges, but it is not all that clear that the reforms will improve the situation. Given that today’s PFP suffers from corruption, it is unclear how the consolidation of authority and renaming of its force will clean up the system. Mexico’s past two Presidents also revamped the federal police with great fanfare, but with few material results. The infiltration by drug traffickers into the most elite forces combating organized crime, as was revealed last month, is just the most recent reminder that Mexico’s police forces do not have adequate measures in place to stem corruption. The proposed laws don’t look to change this situation.

Furthermore, while the new police force’s greater autonomy could increase efficiency, it will also reduce its interaction with the PGR. Whether the reforms then boost the new police’s ability to investigate and procure evidence on crime is a question.

Lastly, corruption is not exclusive to the federal police forces. State and local police forces, as well as the army and other government agencies (which are now all involved in the battle against organized crime) are all contaminated with corruption. The federal police accounts for less than 5 percent of Mexico’s total police presence. Therefore, although at this point almost any change is welcome, the Mexican government must address the dire situation of local police forces. It also needs to tackle the impunity (due to malfunctioning court systems) that allows corruption to flourish. Though seemingly insurmountable, cleaning up all these links in the “rule of law” chain are necessary to turn back the tide of organized crime, and better the lives of ordinary Mexican citizens.

Latin America: Not So Insulated After All

Latin America Studies Program, Council on Foreign Relations

Tuesday, November 18, 2008; 9:24 AM

In recent years, commentators and policymakers alike have praised Latin America for its growing financial independence and maturity. Fiscal discipline, high commodity prices, and sustained economic growth brought down external debt levels, built international reserves, and strengthened government and corporate balance sheets, placing the region on firmer economic footing. When crisis hit U.S. financial markets, many at first assumed that Latin America’s increasing openness and growing trade with China and India would cushion the impact of a U.S. slowdown. In September 2008, President Luiz Inácio Lula da Silva of Brazil boasted, “People ask me about the crisis, and I answer, go ask Bush. It is his crisis, not mine.”

Yet the widely touted financial “decoupling” between the United States and Latin America (and emerging economies in general) was a myth. Contrary to initial expectations, the spiraling worldwide credit crisis is hitting Latin American nations hard. The region may be free of subprime mortgages, but plummeting access to cross-border financing is stifling lending and investment. In Brazil, the state-owned oil company Petrobras has announced delays in the exploration of its new deepwater oil finds. In Peru, funding for two iron-ore projects has also been delayed. As in the United States, once-boisterous consumer demand across the region is waning. After several quarters of robust private consumption growth, demand has weakened in Brazil, Mexico, and other countries, and overall consumer spending may stall in the coming quarters. With both firms and families holding back, future economic growth remains uncertain.

Capital Flight Takes Off

Rather ironically, money is flowing out of the region and seeking the safe haven of U.S. treasuries. This outflow is pressuring national currency reserves and precipitating steep declines against the U.S. dollar. The Brazilian real is down 27 percent against the dollar since July and the Mexican peso has plummeted 23 percent against the dollar since August. The trend also hammered stock markets across the region, with the Brazilian Bovespa and the Mexican Bolsa both falling 50 percent between August and November. Poor currency bets have brought to their knees economic stalwarts such as Comercial Mexicana in Mexico and Grupo Votorantim in Brazil that are nearly a century old. Concerns about bad future loans encouraged the marriage of two of Brazil’s largest banks–Banco Itau and Unibanco–forming the largest bank in Latin America.

Much of the pain is still to come. With credit scarce, investment down, and the United States and other parts of the world edging toward recession, demand for basic economic goods–commodities–is already declining. Prices for Latin American staples like wheat and corn fell over 35 percent and 30 percent respectively between August and November, while sugar slumped 20 percent until a recent uptick.

Petro-Economies Hit Twice

Oil–the most watched of Latin America’s commodity exports–has plummeted from its $147-a-barrel high three months ago. It has now fallen to below $60 a barrel. Given this volatility, the region’s endemic vulnerability to commodity price swings bodes ill for the future. Oil economies across the ideological spectrum will struggle to keep their economies afloat. The Mexican and Venezuelan governments, in particular, will suffer, as oil profits comprise 40 percent and 50 percent respectively of their public budgets. Oil at its current price level will curtail ambitious plans to cushion the impact of a U.S. recession through public infrastructure investment in Mexico, as it will hamper Venezuela’s wide-ranging petro-diplomacy. Venezuela’s capacity to borrow abroad to finance ambitious social programs may well atrophy, reinforcing the decline in President Hugo Chavez’s standing at home on the eve of local elections, scheduled for November 23.

Countries less dependent on oil income also will suffer from a global downturn. The price of soy already has fallen 40 percent since its recent peak in September and analysts anticipate further declines. As a result, economists have substantially lowered 2009 economic growth projections for Argentina, the world’s third-largest soy supplier, from 6.2 percent in January to 2.2 percent today. Chile’s dependence on copper prompts concern, too, since world prices have halved since April. Peru, second only to Chile in terms of copper production in the world, will also feel these declines. The Economist Intelligence Unit predicts Chilean economic growth will fall below 3 percent in 2008, and shaved off 1.5 percent from its estimates for Peru’s gross domestic product (GDP) growth to 5.5 percent. Even more diversified economies, such as Brazil’s, will see their first downturn in export earnings in a decade. Brazil’s growth projection for 2008 has almost halved from 4.3 percent in January to 2.4 percent in November.

Finally, countries receiving substantial remittances from their nationals abroad, such as Mexico and Central American countries, may feel pinched. Already Mexico, El Salvador, and Guatemala report significant decreases in returning funds, which support the poorer segments of their populations. Further declines could lead to worrisome increases in national poverty levels.

Reasons for Guarded Optimism

Given the region’s volatile economic history, these developments may seem nothing more than the recurrence of crises past: 1982, 1995, and 2001. But this time key differences provide some room for optimism. Latin American countries hold some of the lowest debt to GDP ratios in the world today, a sharp contrast with previous crises. Chile and Brazil, for instance, have become net creditors. Latin America’s governments now run more balanced budgets and pursue healthier fiscal policies. In April, both Peru and Brazil received investment-grade sovereign-debt ratings for the first time, joining Mexico and Chile. Lastly, Latin America now boasts a number of large “multilatinas”–multinational Latin American companies–with presences from Hudson Bay to Patagonia and beyond. Among these are Televisa, Gerdau Ameristeel, Cemex, Embraer, and Grupo Bimbo.

Still, a number of questions remain. As China, and soon the United States and perhaps other major economies, introduce massive economic stimulus packages, what might their effect be on Latin America? Could the region lose more capital absent similar domestic stimulus efforts?

The Geopolitical Dimension

Also unclear is the impact of the financial crisis on politics and political thought in the region. Despite obvious differences among Latin American governments’ approaches to the market, social policy, globalization, and the role of the state, most now believe that Washington failed to heed its own prescriptions for fiscal discipline. In the last few years, as Latin America’s left has gained in popularity and political power throughout the hemisphere, commentators have tended to group the region into “good” left governments (Brazil, Chile) and “bad” left governments (Venezuela, Bolivia). Following this superficial conceit, it may be tempting to conclude that the current financial crisis will reinforce the positions of those on the “bad” left, who will trumpet the end of market dominance. Yet after the dust settles, Latin America may also realize that weathering a global financial crisis will take more then ideology. Today, every goverment in the Western Hemisphere, including the United States, faces the same challenge: how to finance domestic programs that advance the common good, enhance global competitiveness, and ultimately deliver votes. Starting with the United States, a Western Hemisphere focused on solving problems rather than on market or political orthodoxy would be the best–if improbable–outcome, not only for the poor, but for working class sectors, middle class professionals, and economic elites as well.

While there is little in Latin America’s history to suggest that an end to political polarization is near, the region’s leaders do generally recognize what is at stake, and a political center with a global consciousness seems to be emerging, as Brazil’s leadership of the G-20 industrial and developing economies attests. The downturn also provides Latin American nations with an unexpected opportunity to demonstrate the region’s newfound fiscal prudence, creditworthiness, and accountability. If governments are able to ride out the crisis while providing for the most vulnerable populations in the region, Latin America should remain an increasingly attractive destination for investment once international funds begin to flow again. These trends would augur well for the emergence of a new financial architecture that reinforces Latin America’s path toward socially inclusive economic prosperity.

CFR Fellow Shannon O’Neil, Senior Fellow Julia Sweig, and research associates Sebastian Chaskel and Michael Bustamante all contributed to this article.

Tuesday’s results show that Latinos were crucial in many states that switched from red to blue. In 2004 56% of Florida’s Latinos (639,225) voted for George Bush, propelling him to a 5% (380,978 vote) victory. This time around, 634,500 Latinos—57%—voted for Obama, propelling him to victory with a 2.5% (204,577 votes) margin. Despite the still solid Republican vote of Florida’s Cuban-Americans, the growing non-Cuban Latinos pushed Obama over the top. Latino votes for Obama also exceeded his margin of victory in Colorado and New Mexico. In Nevada and Virginia, Latino votes also played an important, if not decisive, role in moving Nevada and Virginia into the Obama camp. All told, without the Latino vote, Obama would have won 41 fewer electoral college votes. Not a deal breaker, but this demographic helped orchestrate his electoral college landslide last Tuesday.

Nearly one out of every two new Americans is Latino, meaning this demographic could increasingly dominate the future electorate. But to do so, they have to get out the vote. While 10 million voters is a record, it means that nearly 7 million eligible Latino voters didn’t make it to the polls. That places Latino turnout at 58% - below the country’s 62%, and particularly lower than white voters’ 67% . To strengthen their political heft, and shape the issues that matter to them such as education, the cost of living, jobs, health care, and immigration, turnout will have to increase. As Latinos expand to become 30% of our population (expected by 2042) the question will be whether this population resides in the heart, rather than the margins, of American democracy.

While the world was glued to televisions waiting for the result of the U.S. elections last night, Mexico lost one of its most important leaders in its struggle against organized crime and drug trafficking. Juan Camilo Mouriño, Mexico’s Interior Minister, died along with seven others when a government plane that was carrying them to Mexico City crashed into the city’s busy Reforma Avenue in what appears to have been an accident. Among those killed was also José Luis Santiago Vasconcelos, an important presidential adviser on security and judicial reform matters, who had headed Mexico’s elite force to combat organized crime (SIEDO) and had been in charge of extraditing numerous narcotraffickers. The Interior Minister is the second most important position in Mexico’s government, comparable to the vicepresidential position in the United States, and is usually responsible for negotiating with the legislative branch. President Calderon had assigned Mouriño to spearhead the government’s efforts against organized crime and to reform Mexico’s security institutions. In an administration that has rested heavily on President Calderon’s closest confidants in its decision-making process Mouriño was probably the closest to Calderon. It is unclear who could fill Mouriño’s shoes. His death is indeed a blow to Calderon and to Mexico’s efforts against organized crime, drug trafficking, and corruption.