Here are some excerpts from my interview with Mexico Today about how the rise of the middle class – now a majority of the population – is transforming the economic reality on the ground in Mexico.
To watch on YouTube, click here.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
Peña Nieto, outgoing Institutional Revolutionary Party governor in the State of Mexico, is silhouetted against the national flag before delivering his sixth and final state report in Toluca (Courtesy Reuters).
I had the pleasure of speaking at and moderating a panel last Thursday at the Council of the Americas/Americas Society with Claudio X. González, Chairman of the Board of Kimberly-Clark de Mexico and on the board of a number of top Mexican corporations, as well as Alberto Ardura, Managing Director and Head of Capital Markets for Latin America at Deutsche Bank. Some of the most interesting issues raised were the relationship between security and the economy, and the future of the energy sector.
Overall, the political and economic outlook was quite positive, despite the formidable challenges the next administration will face. Mr. González highlighted that Mexico presents something of a paradox – despite increasing insecurity, the economy is picking up. He credited this in large part to orthodox economic policies that have kept deficits and inflation low, leading to GDP growth in the realm of 4-5 percent (outpacing current market estimates). Mr. Ardura echoed this view, saying that the fifteen plus years of fiscally responsible policies have made Mexico’s economy the healthiest in the hemisphere, with some of the best macroeconomic fundamentals in the world (certainly among emerging markets).
Still, both panelists remained concerned about Mexico’s future competitiveness and growth. Despite its macroeconomic prowess, it has fallen behind Brazil, Peru, Colombia, and even less orthodox Argentina. The main holdups are security, the closed energy sector, education, and the concentration within so many sectors of the Mexican economy. They felt that if the government could tackle a few of these major issues, it could pick up the speed of annual growth to five or six percent — transforming Mexico in the process.
The speakers were quite optimistic about the PRI, both on its ability to get things done if it wins the presidency (particularly if it wins a majority in Congress, ending legislative gridlock), and on substance — especially the possibility of opening the energy sector.
But some in the audience doubted the positive momentum, particularly the veracity of the new, more modern PRI that looks set to capture Los Pinos next July. Many (at the podium and in the audience) remained skeptical about whether the “dinosaurs” of the party would stand down, allowing these more comprehensive reforms to strengthen Mexico’s public institutions and jump-start its economy.
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.
First lady Michelle Obama attends a Hispanic Heritage event at Lamb Public Charter School in Washington (Yuri Gripas/Courtesy Reuters).
At last week’s Republican presidential debate a member of the audience provocatively reminded the candidates that not all of the Latinos in the United States are illegal, and then asked them, “What is the message from you guys to our Latino community?” Nearly everyone on stage dodged the question, saying that they didn’t have a specific message for Hispanic voters because “they want virtually exactly what everyone else wants” such as a healthy economy and access to affordable health insurance. That may be true, but the exchange raises the broader issue of whether the Republicans can connect with the growing number of American citizens with links back to Latin America.
Finding a good answer to this question is more important than ever. Some 50.5 million people – or one in six Americans – fall under this moniker. In every single state of the union, the Latino population grew over the past decade – including in swing states such Florida, Iowa, Virginia, Georgia and North Carolina.
What the presidential frontrunners have done quite vocally is attack one another for “soft” immigration stances and lashed out against “illegals”. Herman Cain ratcheted up the rhetoric to an all time high, suggesting electrifying the border fence and killing anyone who tried to cross into the United States from Mexico. A wave of harsh immigration laws – requiring police to check the immigration status of anyone they suspect is undocumented, punishing landlords that rent to those without papers, and even checking immigration status at schools — have passed in states including Arizona, Georgia, and Alabama. With the economy in the doldrums and unemployment near historic highs, blaming illegal immigrants for many of America’s ills has gained traction, particularly within the Republican Party. Though technically not directed at U.S. Latinos, many feel the rising hostility targets them all the same.
While it may be awhile until the full economic effects of these laws are clear (a recent study by the Council of the Americas suggests that the restrictive laws hurt rather than help local employment), the political impact is more immediate. How the polarization will play out in the primaries –will it further energize a strongly anti-immigrant conservative base, or mobilize Latino and other pro-immigrant groups (along the lines of the coalition that defeated an English-only bill in Nashville, Tennessee in 2009) – remains to be seen. But in the general national election, it is hard to imagine how it helps its proponents.
At the Western Republican Leadership Conference/CNN debate Rick Santorum was the only Republican presidential candidate who seemed to recognize what other prominent party leaders (such as Karl Rove and Jeb Bush) have been saying now for awhile: the Republicans cannot afford to alienate this huge and growing demographic. They also don’t have to. The Republican Party has the opportunity to connect with Latinos on a number of issues, including family values, faith-based views, and an emphasis on entrepreneurship and small businesses. But if Rick Santorum is the only Republican hopeful that understands the importance of reaching out to Latinos, then the party is in trouble. President Obama won a whopping 67 percent of the Latino vote in 2008, and preliminary counts suggest that this demographic will only be more important this time around. History suggests that minorities, while often punching below their electoral weight, tend to turn out for national presidential (as opposed to midterm) elections. In 2012, they will represent over a third of the voting age population — an all time high. To compete, the Republicans have to come up with a better answer, or they risk losing America’s fastest growing electorate.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
A view of the San Alberto gas plant (David Mercado/Courtesy Reuters).
Last December, Argentina’s major oil and gas company YPF discovered some 4.5 trillion cubic feet of unconventional gas in the southwest province of Neuquén. The find has the potential to totally transform the country’s (and the region’s) energy future. It pushes Argentina’s shale gas reserves to 774 trillion cubic feet — making it the third largest provider of natural gas in the world, after the United States and China. If exploited it would easily cover domestic demand for gas for the foreseeable future and end the recurring and unpopular gas crises that force factories to shut down at times during the winter months. Argentina would become energy self-sufficient for the first time in nearly a decade.
But there are challenges to get the gas out of the ground. First, Argentina’s shortage of water may stand in the way of accessing natural gas reserves. The process of drilling to extract shale gas uses up to 6 million gallons of water per day for every well drilled, and experts say it will take 38 billion gallons of water to capture natural gas trapped underneath the Vaca Muerta, or “Dead Cow” basin.
Another challenge is the government’s oil and gas pricing regime, which has been a major disincentive to investment in recent years. Heavy regulations hold prices down to $2.00-$2.50 per cubic foot of regulated gas — nowhere near the breakeven price needed to make development worthwhile. Argentina has set up a two-tier system under its “Gas Plus” program — allowing gas produced by new investment to be sold at much higher prices – in some cases more than double the rate in the domestic market. This has brought in more than a billion dollars from the likes of Exxon, AES and Apache. But these differential prices show how transitory Argentine rules can be. To attract the huge amounts of capital needed to truly develop these gas finds in the coming years, the Argentine government will have to convince investors that the rules won’t change with the political winds.
If this happens, it will transform regional gas markets. Bolivia will be the biggest loser. As the region’s current top energy provider, its economy today depends on fueling neighboring Argentina and Brazil. By developing its own gas reserves, Argentina takes away not just a vital customer but also potential foreign direct investment – leaving Bolivia’s economic development model in jeopardy.
Another — much more indirect — loser is Mexico. The fact that investors are more interested in Argentina — known for playing fast and loose with property rights and contracts — than in Mexico, which is ranked Latin America’s most business friendly economy, shows how hamstrung Mexico’s energy sector remains. Without further changes to the system to open up outside funding for exploration and production projects, Mexico risks becoming a spectator on the energy sidelines, with huge ramifications for its overall economy as a result.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
The Senate Foreign Relations Committee recently released a report penned by Carl Meacham titled “Latin American Governments Need to ‘Friend’ Social Media and Technology,” calling on U.S. policymakers to recognize and harness the growing power of social media in Latin America. Some of its most interesting findings include:
– Latin Americans are second only to North Americans in terms of social networking — for those that access the Internet, 8 in 10 use social media.
– While broadband access is limited but increasing (expected to surpass 30% by 2014) some 36% of Latin Americans Internet access of some form. And, 90 percent of Latin Americans have cell phones – so the potential to expand is large.
– Facebook claims 100 million Latin American users, led by Brazil, and then Mexico, Colombia, Argentina and Venezuela.
– Some governments – most notably Colombia – are investing millions to expand Internet use, seeing it as an important driver of economic growth.
Overall it is an interesting and fairly positive technological look at the region. While Latin America falls behind Asia in terms of access to the Internet, the region’s citizens are more socially connected – at least as measured by Facebook, Twitter, and the like. These connections have had and can have broader political and economic impacts than just catching up with family and friends. Social networking has already played big roles in Colombia, with a Facebook-led series of marches against the FARC in 2008 that spread throughout the country (and as far as New York and Chicago), and in Mexico, where twitter updates on drug violence give people vital information the local press and governments are no longer able or willing to provide. Some even see the arrival of social media to Latin America as a great democratizer – helping open up governments (like in the Arab Spring) and media monopolies.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
Free trade agreements with Colombia, Panama and South Korea finally passed, after four plus years of delay. My colleague Ted Alden talks about the consequences for the U.S. job market and for the Obama administration’s trade and investment strategy.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
Members of Venezuela's militia and supporters of Venezuela's President Chavez attend a ceremony in Caracas (Jorge Silva/Courtesy Reuters).
Today, chances are Hugo Chávez will face off against Henrique Capriles Radonski in the 2012 October presidential elections. The 39-year-old former mayor of Caracas’s Baruta Municipality (2000-2008) and current Miranda state Governor is leading the opposition candidates, and polling just 2 percentage points below Chávez. He is a lawyer who entered politics at the age of 26 to become the youngest member of the Chamber of Deputies until it was dissolved in 1999.
Capriles appeals to the non-Chavista Left. Following in Lula’s Brazilian footsteps, he has poured money into education and social programs, drawing strong support among the lower classes as well as from a growing contingent of independent voters put off by the Chávez-centered polarization of Venezuelan politics. Comfortable among slum dwellers and businessmen alike – and unafraid to don Chávez’s signature Veneuelan flag jacket– the young candidate has won hearts and minds with his intensity and obvious passion. He has also attracted Chávez’s ire. In 2004, he was arrested for “trespassing, intimidation and ‘violating international principles’” for his involvement in a protest outside the Cuban embassy in the wake of the 2002 attempted coup. The charges were eventually thrown out and two months after leaving prison he was reelected to his post as mayor with 80 percent of the vote.
Yet while a rising star, he faces three major challenges. The first is the divisions within Venezuela’s anti-Chávez opposition. There are other worthy competitors — Leopoldo López, the former Mayor of Chacao Municipality and Pablo Pérez, another young and dynamic governor of the state of Zulia. While one of these — probably Pérez — may give him a run for the nomination, the real test will be whether the opposition can remain united. In the past, their divisions have weakened them perhaps as much as any moves Chávez has made.
The opposition’s track record has gotten a lot better. In the 2008 regional elections they were able to come together, winning governorships in 5 of Venezuela’s 22 states (including the two most populous, Miranda and Zulia). The 2010 Congressional run was their best showing yet. By uniting behind candidates chosen either by consensus or in local primaries, they managed to win the popular vote (52%) — though only 40% of the legislature due to gerrymandering. Signs look good for this coming year, as last month the three major opposition parties signed a pact promising to support the winner in February’s primary.
A second challenge is Chávez’s electoral machinations. While the ballot box itself has not yet been in question, the Chávez administration has repeatedly tilted the electoral playing field — arresting prominent opposition leaders, silencing independent media outlets, and undercutting autonomous institutions such as the National Electoral Council (CNE). The meddling for 2012 has already started, beginning with moving up the election date from December to October 2012. This is likely just the first of many measures to take the wind out of opposition sails.
The third, less analyzed challenge is Chávez’s health. At first brush his potential inability to run for reelection should boost the opposition’s chances. But it could make it all the much harder. Left without a popular candidate, hard-line Chavistas might pull the plug on elections all together. Hugo’s brother Adán has already suggested as much, saying recently, “It would be inexcusable to limit ourselves [PSUV] to only the electoral and not see other forms of struggle, including the armed struggle.” Instead of opening up Venezuela’s political system, Chávez’s absence might put an end to Venezuela’s democratic trappings altogether.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
Police pay became a hot topic of discussion over the past two weeks with the release of a Mexican government report breaking down police salary by state. The disparities are stark — with police officers in Tamaulipas earning monthly salary of just $268, while their counterparts in Aguascalientes bring home about $1,342 a month.
An obvious question is how does this affect crime and violence? The answer is less obvious. Overall, the data shows no straightforward correlation. Patrick Corcoran lays out many other factors that affect public safety, including each officer’s moral compass, the chances of getting caught the severity of the punishment. Daniel Sabet’s study on corruption within the Tijuana police makes this point, laying out the complicated calculus behind an officer’s decision to fall in (or not) with the bad guys.
Still, the graph below of police salary vs. homicide rate by state suggests that police pay does matter. While we see a lot of variation at the low and the middle end of the scale, high salaries and low violence are strongly correlated. The top nine payers– including states that are in drug traffickers’ line of fire (e.g. Baja California) – have relatively few murders per capita. While not the only and last word, this should encourage lagging state governments to rethink their spending priorities.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
Andean protesters shout slogans against the government in Lima (Enrique Castro-Mendivil/Courtesy Reuters).
Last month Peruvian President Ollanta Humala signed the popular consultation law, approved unanimously by Congress in August. This new law will require all public and private investors to consult local indigenous groups if and when their activities may affect their communities or ancestral lands. This is an important democratic step forward, reaching out to citizens who have for years been left out of the political process. In Latin America more broadly, incorporating indigenous communities into politics is a key challenge for consolidating democracy. But these types of laws also have their dangers, specifically potentially negative effects on investment and economic growth. Peru is only the latest of the Andean countries to take on the so-called “indigenous question” — trying to balance economic development with greater social inclusion.
Of its neighbors, Colombia has the longest history and the best track record. It incorporated indigenous consultation into the 1991 Constitution, and then created a Division of Indigenous Affairs in the Ministry of the Interior, as well as offices of indigenous affairs within each of its military commands. To be sure, things haven’t gone perfectly – for instance some indigenous groups accuse President Santos of ignoring their interests in the latest national development plan. But overall Colombia has been successful, enabling a greater voice for all of its citizens while also attracting billions in investment in oil production, coal mining, and other industries.
More cautionary tales come from Bolivia and Ecuador. Both nations have large indigenous populations which historically have been socially and politically marginalized, and excluded from the economic benefits of resource extraction — often by foreign companies — taking place on their land. As these groups have increasingly organized and mobilized, their distrust and animosity has led to conflicts, violence, and the fall of more than one democratically elected government.
Current Presidents Evo Morales of Bolivia, and Rafael Correa of Ecuador have both struggled to balance inclusion with economic development. Morales has perhaps gone the farthest in providing a voice for indigenous groups within the new Constitution, but in return has seen foreign investment plummet. Since Morales’s election in 2006 Bolivia’s natural gas output has stagnated, and proven reserves have shrunk by about a third. In Ecuador, Correa began with the backing of the Confederation of Indigenous Nationalities of Ecuador (CONAIE), but is now at odds with the country’s largest indigenous organization, backing away from many of their demands regarding new mining projects.
While Peru’s indigenous communities have yet to organize politically, there is a growing discontent among these masses, which took a toll on the previous government’s popularity and led to several uprisings around natural resources extraction. The most violent of these – known as the “Baguazo” – occurred during the summer of 2009 in the Amazonian province of Bagua, where 22 indigenous protesters and 12 police officers died in clashes over mining projects in the area.
For Peru, it remains to be seen whether Humala can channel these pent up frustrations positively into the political process without scaring off investment. As the Ecuadorean and Bolivian examples show, more than just rhetoric — or leftist credentials — are needed. But if the new government can pull off this delicate balance, it will help support continued fast paced economic growth.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
