Introduction
In the last century, the US has viewed Brazil as an important nation on the world stage – based on the sheer size of its territory, economy, and population, as well as its shared Western values. At times, the US has pushed for a ‘special relationship’ with Brazil, recognizing its importance for hemispheric and global stability. During World War II, the US promised support for Brazil’s development agenda and, in exchange, Brazil became the only Latin American nation to send troops to Europe’s battlefields. Although the pledged alliance faded after the war, throughout the 1950s Brazil largely supported US Cold War policies, if at somewhat of a distance. This support continued under Brazil’s military government in the 1960s. During the 1970s the US – especially Henry Kissinger – tried to reaffirm the ‘special relationship’ between the two nations, envisioning greater consultation and cooperation on an array of issues. These efforts were scuttled by a Carter administration more concerned with Brazil’s equivocal position on human rights and nuclear nonproliferation. These differences led not to conflict, but to detachment between the two governments.

By the 1980s, relations tilted further toward tensions and away from commonalities. The US disapproved of Brazilian trade policies and of its hardline stance when negotiating with the International Monetary Fund (IMF) and other creditors in the wake of the debt crisis. As the largest of all Third World debtors, Brazil repeatedly refused to pay interest on its arrears, threatening the deals US banks were negotiating with other nations. Newly democratic Brazil and the United States were also at odds over US military involvement in Central America.

By the 1990s, the debt crisis was resolved, and Brazil again became a welcome partner for the United States in the evolving post-Cold War world. Even if few concrete actions were taken, Presidents Cardoso and Clinton agreed on many matters. Some progress was made in the realm of democracy. Both the US and Brazil supported the consolidation of democracy in the region and leaned on Paraguay to reverse the attempted coup by an army commander against the elected government in 1996. Later, Brazil would prove important in pushing through the Inter-American Democratic Charter of the Organization of American States (OAS), which binds all 34 active member states to strengthen and uphold democratic institutions in the hemisphere.

Yet, as globalization became the driver behind much of US foreign policy, trade again became a sticking point between the two nations. In particular, Brazil’s reluctance to fully support the Free Trade Area of the Americas (FTAA) frustrated the Clinton administration and thwarted a closer relationship.

Generalizing five decades of foreign policy, the US rhetorically recognized Brazil’s importance, but concrete, practical initiatives or partnerships were few. This left little in the way of tangible policy outcomes between the US and Brazil. Instead, the two countries maintained a fairly warm, if distant, status quo, befitting Washington’s viewpoint that Brazil occupied an influential — but not central — role in the world pecking order.

A Turning Point in US-Brazil Relations
The urgency for bilateral relations began to change in the last decade. While blessed with natural resources, an almost 200 million-strong domestic market, and a well diversified economy (with robust agricultural, mining, manufacturing and service sectors), for decades Brazil suffered from high inflation, exchange rate instability, and low growth. This chronic economic instability meant that while viewed as geographically and geostrategically important, Brazil was seen by many in Washington, to quote General Charles de Gaulle, as ‘not a serious country’.

These reservations began to fade with the rise of Brazil’s economy. Anchored by the 1994 Plan Real, Brazil finally tamed its historically high inflation through solid macroeconomic and monetary policies and embarked on a process of privatization and other economic reforms. Put in place by President Fernando Henrique Cardoso, these initiatives were adopted and deepened by his leftist successor and current president Luiz Inácio ‘Lula’ da Silva.

By 2001, Brazil’s ascent was recognized by the financial markets. Banking giant Goldman Sachs named it one of the countries — alongside Russia, India and China (BRICs) – that could potentially eclipse the G8 in the coming decades. By the mid 2000s, Brazil’s macroeconomic instability seemed fully relegated to the past, and its economy boomed with higher commodity prices and the long awaited expansion of its own middle class.

At the same time, climbing worldwide energy prices and rising concerns over climate change brought Brazil’s biofuel successes and technology to Washington’s attention. Brazil’s biofuel industry dates back to the 1970s when the military government launched an ethanol program mandating a blend of sugar cane ethanol into transportation fuel with the hope of weaning the country off its dependence on imported fossil fuels. The program gained competitive traction by the late 1980s when more than a third of the country’s motor vehicle fleet was running on pure ethanol. In the 1990s the program experienced some growing pains as a 1993 federal law increased the mandate to a 25% ethanol blend, and demand outstripped local supply. The later technological breakthrough of flex-fuel vehicles restored widespread confidence (and investment) in ethanol, allowing motorists to switch to any blend of gasoline and ethanol at anytime.

By the turn of the 21st century, Brazil boasted the most efficient biofuel production in the world, with volumes rivaling those of the United States, and vast expanses of pasture land ready for planting more sugar cane. In February 2008, the market share of ethanol surpassed that of traditional gasoline at Brazilian pumps, proving the market viability of alternative fuels in one of the world’s largest economies. Add to this the recent discovery of significant oil fields off its coast and Brazil’s image as a global energy leader was secured.

Politically, the United States came to see Brazil’s well-grounded democracy and President Lula’s centrist even-handedness – particularly in comparison to some of its neighbors such as Venezuela – as important for US interests in the hemisphere. In addition, Presidents George W. Bush and Lula seemed to genuinely like each other, encouraging greater efforts to work together.

For Washington, Brazil’s rise came at a propitious time, one of changing policies and priorities. As the Bush administration took on two wars abroad, little bandwidth remained for policing its own hemisphere, despite what many saw as worrisome political shifts in the Andean region. The White House hoped that Brazil, as an important stakeholder and leader, would also take on the responsibility to push for stability and democracy in South America. During his visit in 2005, George W. Bush recognized Brazil as a ‘leader — …exercising its leadership across the globe’ and reassured Lula that as he ‘works for a better tomorrow, Brazil must know (it has) a strong partner in the United States’.

The US View Today
The events of the last few years and a change in the US administration make Brazil perhaps even more important than ever for US foreign policy. After the worldwide financial meltdown, the relative success of Brazil, China, and other developing economies has definitively shifted the multilateral center of global financial agreements from the G8 to the G20. This gives Brazil a permanent seat going forward in all major global macroeconomic discussions, where it has already become a vital voice in the North-South dialogue.

With climate change a priority for the Obama administration, Brazil’s perceived importance has grown, both on account of its leadership in alternative energy and its fight against deforestation. Brazil already boasts one of the most eco-friendly energy matrices in the world, with 46% of primary energy coming from renewable energies, far above the world average of 8%. In addition, as the majority owner of the planet’s largest rainforest, the Amazon, Brazil will play perhaps the central role in slowing worldwide deforestation, the leading cause of carbon emissions, ahead of the global transportation network.

While still not given as much airtime in Washington as many of its BRIC partners – China in particular – Brazil is seen as an emerging power that the United States can work with, be it on issues of global financial stability, climate change, reform of multilateral institutions (e.g.: the UN, G20, WTO, IMF) or regional security, stability and development.

Stumbling to Translate Interest into Policy
For all these reasons, many in Washington are calling yet again for a new special relationship with Brazil. While this is progress, significant limitations exist to translating growing US interest in Brazil as an emerging power into concrete policies.

On a practical level, the US-Latin America policy community has historically been biased toward Spanish-speaking Latin America. Few in Washington know Brazil well or speak Portuguese. The lack of a dedicated group of experts – both inside and outside of government – limits the constant pressure needed to keep Brazil firmly on the US foreign policy agenda. Adding to this, due to US domestic political battles it took nearly a year for President Obama to confirm his new Ambassador to Brazil. To date, this gap has severely hampered the administration’s ability to create a more dynamic engagement with Brazil.
Beyond these logistical challenges, it is still unclear how best to promote the two countries’ common interests. While they share many concerns in principle, priorities and policies are often not aligned, and at times even in conflict. In the realm of security, the United States prioritizes counterterrorism, which sits low on the list of Brazilian concerns. Regarding drug trafficking, US counter-narcotics assistance to the region often focuses on military responses, while Brazil has tended toward policing and law enforcement solutions. Add to this long-standing suspicion over US military involvement in the region, which recently resurfaced with the Colombian base agreement that granted the US military access to seven Colombian bases to combat drug trafficking and the guerrillas, or US concerns about Iranian President Mahmoud Ahmadinejad’s official visit to Brasilia in November 2009, and these differences may make it difficult to find a middle ground for deeper partnership around security issues in the hemisphere – while highlighting the need for Washington to more openly communicate with its regional partners.
The debate over free trade poses similar dilemmas. While both the US and Brazil rhetorically support the expansion of global free trade through the World Trade Organization’s Doha round and other mechanisms, their fundamental interests often diverge. Brazil wants the reduction and/or elimination of extensive US agricultural subsidies and protections, as well as tariffs on products such as ethanol. The vagaries of US domestic politics will make it difficult to deliver on these demands. The US, in turn, is suspicious of Brazilian protection of its industrial sector, and of what it sees as a weak intellectual property rights regime, and hopes Brazil is willing to change its position on services and market access.

Finally, assuming that Washington stays focused on developing and deepening its relationship with Brazil (a big assumption), it is unclear whether Brazil actually aspires to closer relations with the United States. It might benefit Brazil to keep the northern behemoth at arm’s length, particularly given the role the United States likely envisions for Brazil as an active regional ‘stakeholder’, shouldering greater responsibilities in the hemisphere and acting in US interests.

Conclusion
In recent years, the US view of Brazil has likely changed permanently, recognizing the nation’s importance for regional and world order. Brazil is finally seen by the United States as a genuine emerging power. The enhanced strategic dialogue and cooperative steps taken in recent years in light of this recognition has benefited both countries. Nevertheless, many areas of disengagement and even conflict remain. Whether the newly invoked ‘special relationship’ will be more multifaceted and long-lasting this time than on previous attempts remains to be seen.

Recommendations
• Brazil’s rise as an economic and global emerging power has finally been recognized by the US. To effectively leverage this interest, Washington needs to strengthen the policy community dedicated to Brazil – perhaps separately from Spanish-speaking Latin America, thus reflecting its emerging power status – in order to ensure more thorough and consistent attention to US-Brazil relations.
• Despite the potential, an ambitious ‘special relationship’ may be difficult to achieve. Too many differences in policies and priorities remain, particularly in the areas of security and trade. This is most evident in the context of regional leadership and a broader vision for the Americas.
• Bilateral relations should focus on a more permanent dialogue across multiple issue areas, thus converting growing areas of interest into concrete action and policy on a bilateral and multilateral level.
• The United States and Brazil should identify clear issues and strategies of mutual interest to start deepening the bilateral partnership and multilateral engagement. Energy and climate change, as well as global financial stability, are good starting points.
• The biofuel industry and associated technology development is an area of mutual interest that satisfies national and multilateral ambitions related to climate change. This is an obvious point of intersection between the US and Brazil where bilateral cooperation would have a global impact.

This piece was first published by the South African Institute of International Affairs and is available to download here

Along with my own views on U.S.-Latin America relations, you can find writings from Peter Hakim, President of the Inter-American Dialogue, and Amb. Paul D. Taylor, Senior Strategic Researcher at the Naval War College. Assuming Arturo Valenzuela will in fact be confirmed now that Congress is back in session, he will be soon facing the many issues we discussed – public security, sustainable energy, economic advancement, and hemispheric migration among others.

Mexico’s rise on the American foreign policy agenda should not come as a surprise. Over the last generation, deepening business, personal, cultural, and community relations have drawn the two countries closer together. Trade between them has tripled, with Mexico becoming the United States’ third-largest commercial partner. Flows of people, always part of the bilateral relationship, skyrocketed: over four million Mexican citizens have headed north in the last decade, while over a million U.S. citizens have migrated south, forming the largest nonmilitary community of American expatriates in the world. At the start of the twenty-first century, Mexico is still forging its political, economic, and social identity. It has undergone a true democratic transformation, and its three political parties now compete in clean and transparent elections. But it remains unclear whether Mexico will follow a path of growth, stability, and market-based democracy or one of instability, corruption, and crime. What is certain is that understanding Mexico — where it came from, how it got there, and where it might be headed — is vital to U.S. interests.

Politics in Mexico: The Democratic Consolidation. By Roderic Ai Camp. Oxford University Press, 2006.

In this book, now in its fifth edition, Roderic Ai Camp, one of the preeminent scholars of Mexican politics, deftly guides readers through more than 200 years of political evolution in Mexico, analyzing the events and concerns that created the Mexican state one sees today and exploring both the continuities and changes in that state’s relationship with societal organizations and interests. Camp focuses on Mexico’s extended transition to democracy, including reforms to the electoral process, the expansion of political participation, and the subsequent shifts in power among the various branches of government. Those interested in delving deeper can consult Camp’s specialized works on many of the themes presented, such as the recruitment of political leadership and popular political attitudes. But Politics in Mexico, drawing on decades of experience and innovative research, provides a comprehensive overview of the main issues and forces affecting the country today.

Mexico: Biography of Power. By Enrique Krauze. HarperCollins, 1997.

This exhaustive history, written by one of Mexico’s best-known intellectuals, chronicles nearly two centuries of Mexican politics, from independence to the early 1990s. After identifying major themes underlying the country’s political and social identity — its colonial legacy, its mestizo population, and the early power of the church — Enrique Krauze turns to a leader-driven historical narrative, examining the lives of Mexico’s various strongmen and presidents, who, from the battlefield to the executive office, shaped Mexico’s political development. This personalized dynamic has faded with democratization, but the memory and vestiges of it remain relevant in Mexican politics today.

Opening Mexico: The Making of a Democracy. By Julia Preston and Sam Dillon. Macmillan, 2005.

Written by Julia Preston and Sam Dillon, the New York Times correspondents covering Mexico in the late 1990s, this readable narrative provides a thoughtful analysis of the country’s democratic opening. Spanning the period from the devastating 1985 earthquake in Mexico City to the 2000 presidential elections, the authors investigate the economic changes, security threats, and political intrigue crucial to understanding the shifts that occurred in Mexican politics. The book explores the many pressures on the old one-party PRI (Institutional Revolutionary Party) system, the individuals and organizations that pushed for change, and the events leading up to democracy’s final breakthrough: the election of the opposition PAN (National Action Party) presidential candidate Vicente Fox.

First Stop in the New World: Mexico City, the Capital of the Twenty-First Century. By David Lida. Riverhead, 2008.

Spanning 570 square miles and home to more than 20 million people, Mexico City is the largest metropolis in the Western Hemisphere. Even as federalism has decentralized power to Mexico’s states, the capital remains the political, cultural, and economic center of the nation. In this journalistic account, David Lida offers many telling vignettes that capture politics, culture, and life in el D.F., the federal district. He lays out the intricacies of Mexico’s economic inequalities, its sex and age discrimination, its traffic jams, and its deep-seated corruption. But he also illuminates the thriving high- and low-brow art scenes, from well-respected galleries and theaters to lucha libre (Mexico’s version of professional wrestling). Lida explores the country’s cabarets, cantinas, and street food, as well as the coexistence of traditional markets and Wal-Marts that make the city — and Mexico — what it is now.

The United States and Mexico: Between Partnership and Conflict. By Jorge I. Domínguez and Rafael Fernández de Castro. Routledge, 2001.

At the turn of the twentieth century, strongman Porfirio Díaz lamented, “Poor Mexico! So far from God, so close to the United States.” Some still share that view, but whatever the tone of bilateral relations, all would agree that Mexican politics cannot be understood in isolation from the United States. Expertly dissecting the complicated relationship of these two neighbors, Jorge Domínguez and Rafael Fernández de Castro analyze the impact of the end of the Cold War, internal changes within Mexico and the United States, and the creation and strengthening of bilateral and multilateral institutions over the last two decades. The authors show how these multiple factors led to closer ties in areas as diverse as security, the economy, and the border.

The Closing of the American Border: Terrorism, Immigration, and Security Since 9/11. By Edward Alden. Harper, 2008.

Mexico’s possible futures cannot be fully understood without a thorough comprehension of U.S. concerns over and approaches to border management. Edward Alden skillfully investigates the transformations of U.S. border policy since 9/11 — in particular, the rise of immigration enforcement as the predominant means of protecting the United States against further terrorist attacks. This shift has had strong repercussions for Mexico, because of the 2,000-mile-long border it shares with the United States, its estimated ten million citizens living in El Norte, and the deep economic and social links between many U.S. and Mexican communities. It also has had significant consequences for policymakers trying to develop more effective bilateral relations, as this mindset influences approaches to issues of organized crime, trade and economic development, and the health and safety of populations on both sides of the border.

(Photo courtesy of Flickr user kgardinger.)

For those of you who may prefer to read in Spanish, my Foreign Affairs article on Mexico has been translated and appears in the latest issue of Foreign Affairs Latinoamerica, which you can find here.

The referendum does matter. Ten years of single strong executive rule have taken a toll on the country’s democratic institutions. The referendum’s passage would open the possibility for Chávez to run again in 2012, and indeed to remain in office for decades to come. But, Chávez would still have to win reelection – and that may now prove to be the most difficult part.

High oil prices granted Chávez an extraordinary political honeymoon. Multi-year double digit economic growth, historically low unemployment, and prolific public spending on social programs fueled the adoration of previously excluded sectors of society. Skyrocketing consumption and the halving of poverty levels won the approval of the middle class.  In fact, according to the pollster Latinobarometer, Venezuelans are among the most satisfied with their democracy in the region.

Yet this situation is about to change. As international oil prices crash, so too will Venezuela’s economy. Predictions for 2009 and 2010 foresee a deep recession in the making. Unemployment will spike into the double digits. Public debt and deficit levels will surge. Inflation is already the highest in Latin America, and forecast to continue its upward climb.

On top of low oil prices, Venezuelan oil production is falling. Outside Energy Information Administration (EIA) and OPEC (of which Venezuela is a member) estimates of 2009 oil production are a third less than Venezuelan government predictions. With oil revenues funding at least half of the $80 billion federal budget, price and output declines mean hard choices. The economic party in the petrostate has come to an end, and Venezuela needs to prepare for the political hangover.

How will Chávez deal with the looming economic crisis? He is unlikely to cut back government outlays to balance his budget, especially since social spending and programs are a key part of his allure. Even the mention of raising domestic gasoline prices– currently essentially free – led to unrest and a quick public backtrack. But continuing lavish spending is also untenable for much longer, even with billions of dollars in reserves. It also fuels the inflation that hits Venezuela’s poor – and Chávez’s base – the hardest.

Venezuela has gone through this economic cycle of oil boom and bust before. In the most recent iteration – in the late 1980s and early 1990s –a popular president faced low oil prices, cut public spending, unrest ensued, deaths occurred, and a group of military officers – including then Lieutenant Colonel  Hugo Chávez – attempted a coup. This economic downturn mortally wounded the political system, opening up the space for Chávez and his “Bolivarian Revolution.”

Will Chávez fare differently? Chávez bases his legitimacy on constant voter affirmation. So far, he has mostly gotten it. He won two presidential elections, two parliamentary elections, and three referendums in the last 10 years. He lost (though closely) a 2007 referendum, and basically tied in the December 2008 regional elections against the opposition.

Pollsters now show a dead heat in the upcoming referendum. A win for the no would bolster Venezuelan democracy. But even if the referendum passes, Chávez has to win again in 2012 to stay in office. With the economy headed south, this is an increasingly doubtful proposition. If the past holds any lessons, he should be more worried about 2010 than beyond. In the Venezuelan petrostate, economics trumps politics.

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.

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.

To kick things off, here is a link to a new Independent Task Force report from the Council on Foreign Relations, titled U.S.-Latin America Relations: A New Direction for a New Reality. The Council brought together 19 individuals of various interest and expertise under the chairmanship of Charlene Barshefsky and General James T. Hill. As director of the project, I can attest to the long hours of intense and at times spirited discussion among its members.
The group decided that U.S. policy should focus on four critical areas: poverty and inequality, public security, migration, and energy integration. The main recommendations are the following:

Poverty and Inequality:

• U.S. should expand targeted assistance for poverty alleviation and institution building by fully funding the Millennium Challenge Account and developing new initiatives to reach the poor regions of the larger middle income countries. These programs should reflect the priorities of Latin American governments and also involve restructuring and integrating the programs of various U.S. government bureaucracies and multilateral institutions.
• Alongside aid, the United States should approve pending free trade agreements with Colombia and Panama and extend trade preferences to Bolivia and Ecuador to encourage productive relations with these complex countries.

Public Security:

• The United States should assist Latin American countries in strengthening their law enforcement and judicial systems. Only through strong institutions can criminal networks and drug traffickers be controlled in the long term. The United States should also focus more on the demand side of the drug equation, working closely with other large drug consuming nations, specifically those in the European Union.

Migration:

• Push through a comprehensive reform in 2009. This must deal with border security, employer responsibility, some sort of regularization of the 12 million unauthorized workers here today, and a flexible guest worker program to deal with future labor demands.

Energy Security:

• The United States should provide FDI incentives to help build energy infrastructure i the region. It should also sponsor regional and subregional working groups to forward best practices.

Finally, the task force touches briefly on 4 bilateral relations. It recommends deepening U.S. relations with Brazil to promote global trade negotiations and manage energy demands; strengthening cooperation with Mexico to stop narcotics trafficking, increase U.S. investment in energy production, and reform immigration policies; using multilateral institutions to address foreign and domestic policies of Venezuela; and opening informal and formal channels of communication with Cuba, with the eventual goal of lifting the embargo.