Mexican Gov. Enrique Pena Nieto answers reporters' questions at the National Press Club in Washington (Molly Reilly/Courtesy Reuters).
It seems the campaign book so popular in the United States has headed south of the border. After a recent tour through Washington, DC, and New York, former governor and likely PRI presidential candidate Enrique Peña Nieto just released Mexico, the Great Hope. An efficient state for democracy with results.
Arguing that the successive PAN administrations have left the country worse for the wear, Peña Nieto lays out his vision for a government based on guaranteeing citizens’ basic rights (such as security), getting the economy growing at its full potential, and reaffirming Mexico’s leadership as an emerging power on the world stage. He calls for a number of economic reforms, including opening Petróleos Mexicanos (PEMEX) to private investment (still maintaining state ownership), as well as widening the tax base and simplifying the tax code. On security, he favors a more comprehensive strategy geared first and foremost to reducing the violence.
Most of his positions are quite sensible. Mexico needs to (and is already starting to) focus on lowering the escalating levels of violence, as opposed to concentrating on taking down drug kingpins. Economically, opening up PEMEX would increase foreign investment and improve Mexico’s overall competitiveness, boosting jobs and growth in the process. Reforming the tax code would also go a long way to enhancing and diversifying government revenues and hopefully make it easier to start up businesses. But these two reforms are also politically difficult — having been on the legislative table for years now, and repeatedly stymied by Peña Nieto’s own party. If he wins, perhaps the former governor will be Mexico’s equivalent of a “Nixon in China” – able to change the dynamics precisely because of his party’s ties to PEMEX’s union – but that remains to be seen.
Much will also depend on the United States. For Mexico to reach its economic potential, the United States will have to grow as well, as the economies today are indelibly intertwined. A U.S. immigration reform – if it happens — also could change things for Mexico. For all its big vision, the book makes clear that there is much that needs to happen during the next presidential term in Mexico to fulfill this “great hope.”
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
The Council on Foreign Relations just released a great conversation on the Latin American lessons for the European debt crisis. With panelists Adam Lerrick, Chairman of Sovereign Debt Solutions Limited, Ernesto Zedillo, former President of Mexico (1994-2000) and William R. Rhodes, President and Chief Executive Officer of William R. Rhodes Global Advisers (and head of Citibank during the 1980s), and moderated by Roger Altman, Founder and Chairman of Evercore Partners, it provides wide-ranging insights on the issues the European Union faces.
Though a different time and place, much is reminiscent of the early 1980s in Latin America. Over a year later, Europe can barely contain, much less resolve its problems. Contagion is a growing threat, with worries over the last six months about Ireland, Portugal, Spain, and most recently Italy. The IMF struggles to play its traditional role – establishing the rules of the game, evaluating Greece’s progress, and (so far) certifying its compliance. The ever mounting costs of dithering too are there.
But, as the Europeans will quickly remind you, there are big differences that matter (though perhaps not the ones they are emphasizing – such as levels of development, culture, and institutional strength). The problem is, if anything, much worse today in Europe than it was in Latin America in the 1980s – debt to GDP ratios in Greece (160-170% of GDP) – Italy (roughly 120%) and Belgium (90-100%) are higher. Markets too are much more interconnected than thirty years ago, making it both harder to resolve problems, and more painful globally if you don’t. And with the Euro, Greece or others can’t devalue their way back to growth – a viable option for Latin American nations.
Latin America’s “lost decade” of the 1980s also holds cautionary tales for Europe. In searching for solutions the powers that be — governments, banks, the private sector, and the IMF — have to devise a plan that provides some sort of hope for the people that must live with it, otherwise it will be doomed to fail. They also can’t – or at least shouldn’t — wait seven years to resolve the problem, the time between the Mexican default and the launch of the Brady plan.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
Shoppers carry an electronic item outside a store in Caracas (Jorge Silva/Courtesy Reuters).
As journalists, policymakers, and activists of various stripes and interests focus on the rise of the global middle class, scholars struggle with how exactly to define this category of people worldwide. The method matters, as differences can make one exceedingly optimistic or pessimistic as to today’s reality, tomorrow’s promise, and of what people, governments, companies, and markets should and should not be doing to encourage this growth.
One way of measuring the middle class is in relative terms, by looking at who is within the middle range of incomes in any given country. Scholars such as Lester Thurow, Nancy Birdsall and William Easterly have done this in various formats. But it is often unclear exactly what their results mean for emerging economies, where the middle of the country is not necessarily one and the same as the middle class. It is also hard to use this approach comparatively, as the “central” income range differs widely from country to country.
Another approach is to use absolute thresholds, which has the advantage of getting at attributes that are more universally acknowledged as middle class. The question here becomes how to define this “fixed band.” The most expansive calculation – used by Martin Ravallion at the World Bank — classifies a middle class person as anyone who makes between $2 and $13 a day in PPP terms. Intended to measure the expansion of the middle in emerging markets, this definition includes those who have just made it across the World Bank $2 poverty line. By this measure, China and India have made incredible strides over the past fifteen years, developing a true middle class. But to those in advanced Western economies many of these people would almost certainly be considered abjectly poor, questioning the comparative value, and universality of this scale.
On the more restrictive end, a study by Branko Milanovic and Shlomo Yitzaki sets the the upper and lower bounds of the global middle at the average incomes of Brazil ($4,000 in 2000 PPP terms) and Italy ($17,000) as, and counts anyone earning between $12 and $50 a day as middle class. These may not be the right threshold incomes either, however, particularly because this bottom line leaves out the millions in India and China who earn less than $12 a day and yet still, as households, lead quite comfortable middle class lifestyles. This definition puts Mexico’s middle at less than half the population, in contrast to those that count Mexico as now majority middle class.
Finally, a Brookings report by Cárdenas, Kharas and Henao takes a slightly different approach to the issue. Based on an earlier study by Kharas, they use the poverty line in Portugal and Italy – the lowest among advanced European countries – as the lower limit and twice the average income in Luxembourg, the richest European nation, as the upper limit of the global middle. As the authors note, their calculation “excludes those who are considered poor in the poorest advanced countries and those who are considered rich in the richest advanced country.”
Source: Cárdenas et al., "Latin America's Global Middle Class," Brookings (2011).
By this definition, the Latin American countries with the largest middle classes are Mexico (60%), Uruguay (56%), and Argentina (53%), while Bolivia (13%), Honduras (16%) and Paraguay (19%) fall on the lower end of the spectrum. As a whole, the region cannot be called middle class, but it is moving in the right direction, and may qualify in the near future. The model predicts that by 2030 over half of Latin American countries will have a majority middle class. It contrasts with China and India in this regard, where, despite great progress, a true middle class as a substantial percentage of the overall population is still decades away.
Recognizing the enormous expansion of the middle class in Latin America and worldwide does not deny the destitute poverty in which hundreds of millions, even billions, still live. But ignoring the progress of recent years also has its perils for the poor. Better measuring and understanding the rise of the global middle is vital precisely because it suggests paths for those still less fortunate to follow.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
Young people rest on a sidewalk as a man cleans in Mexico City (Henry Romero/Courtesy Reuters).
An OECD report released this September shows that seven million young Mexicans between the ages of fifteen and twenty-nine are neither in school nor in the labor force. Among OECD countries, Mexico has the third largest “inactive” youth population, behind only Turkey and Israel. Mexico has been increasingly concerned about the security implications of the vast number of these “idle” youths — dubbed “Ni-Nis” (Neither-Nors). NiNis are thought to be especially vulnerable to recruitment by organized criminal groups, acting as lookouts, dealers, smugglers, or even hit-men.
Overall, the number of NiNis has decreased by more than 10 percent since 1990, questioning at first glance the ties to rising violence. But a more detailed breakdown of this rootless youth suggests these worries aren’t totally misplaced. Most of the decline reflects the changing prospects for young women – who are much more likely to work or study today than they were twenty years ago. For urban men – the population most likely to be recruited by gangs and organized crime groups – not as much has changed, as their share of the total NiNi population has only decreased by one percent over the past two decades.
A recent study conducted by investigators from CIDE and the Colegio de México shows too that NiNis are concentrated in Central and Northern states — including some of Mexico’s most violent ones. The largest proportion of inactive youths are in Chihuahua, Durango, San Luis Potosí, Guerrero and Zacatecas (and in cities such as Ciudad Juarez). In municipalities in these five states the numbers have remained stubbornly high over the last twenty years. Also, while NiNis aren’t concentrated in the poorest states, they do come predominantly from poorer families. Seven in ten NiNis come from households earning below the national average. Their parents are also less educated than the average Mexican, suggesting a vicious cycle as they too spend less time in school than their occupied counterparts.
Some factors are working in Mexico’s favor. Demographics should lessen the challenge a bit – as going forward each year fewer youths will hit the streets. A rebounding economy can help too – as unemployment levels fairly strongly affect the number of (particularly male) NiNis. But Mexico’s government and society still will have to find ways to engage these young people, to help them see beyond the next few years and offer them real alternatives to a life of crime.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
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.
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.
Source: Corporación Latinobarómetro, Informe Anual 2010 (Santiago de Chile, December 2010).
Steven Levitsky’s recent article in the Journal of Democracy explains why Humala won the Peruvian elections last summer. He points to a mix of campaign particulars — most importantly the divisions within the center-right – Humala’s effective shift from the left to the center, and most fundamentally, state weakness (which tends to push voters toward anti-establishment candidates). The Peruvian state has always been weak – as Hillel Soifer’s work has shown.
This weakness means Humala faces a huge challenge — and not just from the Lima-based political and economic establishment that voted against him. As the graph above shows, Peruvians in generally have little faith in their government, their parties, their political institutions in general. This hints at Humala’s bigger problem. He has few tools – especially outside of the country’s larger urban centers – to do much to drastically improve Peruvians’ standard of living. Even if economic growth continues and can pay for it, delivering social programs, better schools, and safer streets will require building a stronger state (almost from scratch) – quite a tall order.
Still, Humala is off to a decent start – he appointed a “market-friendly” cabinet that pleased even Alan Garcia, then raised the minimum wage without upsetting the economic elite too much, and most recently passed a prior consultation law many years in the making. Whether he can build and strengthen the Peruvian state will define his presidency. If he can’t, it will lead to Levitsky’s most likely scenario – a mediocre government.
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.
Campaign 2012: Latin America 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 [...]
Mexico’s Underground Economy and Illicit Money Outflows 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 [...]
