Foreign Affairs Article in Spanish
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.
Why Venezuela’s referendum is the least of Hugo Chávez’s Worries
This Sunday Venezuelan voters will go to the polls to decide whether elected officials, including President Hugo Chávez, can run for re-election indefinitely. Chávez has thrown the full force of the government behind the yes vote, while the opposition and student movement have brought hundreds of thousands into the streets for the “no.” Many inside Venezuela and abroad believe this referendum could be the last straw, breaking Venezuela’s fragile and imperfect democracy if passed. Overlooked by optimists and pessimists alike is the real decider of Venezuela’s political future – the economy.
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. [ Read More ]
The Other Shoe Dropping? Latin America’s Private Sector Debt
As the world financial crisis hits Latin America, it is easy to equate it to the repeated financial crises that hit the region in 1982, 1995, and 2001. In these past episodes, irresponsible fiscal policies by Latin America’s governments often led to and then exacerbated the region’s financial troubles. But this time around, as many analysts rightly point out, Latin American countries face the global crisis with much sounder economic policies in place, including fiscal balances (and even surpluses), lower debt levels, and high international reserves. The quite different public economic fundamentals fuel predictions – by the UN’s Economic Commission for Latin America and the IMF among others – that the region will weather the crisis with only a few scratches.
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 and the Financial Crisis
Here is a piece I authored with my colleagues at the Council on Foreign Relations on the effects of the world financial crisis in Latin America. It originally appeared here.
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.
The Venezuelan President’s Trip to China
In late September Venezuelan President Chavez traveled to China. This is what I had to say about this for PBS’s new show WorldFocus.
U.S.-Latin America Relations: A New Direction for a New Reality
After taking a 3 plus month maternity hiatus, I am back and will be posting regularly again.
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.
Future U.S. Policy Toward Latin America
As the primaries proceed, little attention had been paid to Latin America. Given the de facto integration of the Hemisphere through migration, trade, and other links, it is high time that U.S. foreign policy focus more attention on Latin America.
In this interview I lay out four main areas the next administration should focus on to reframe and redirect policy toward the region. These include: energy, public security, migration, and poverty and inequality. It is a tall order, but any progress on these fronts would be welcome after the recent years of neglect.
Visiting Bolivia (part II)
Everyone in Bolivia is focusing on the shift toward “participatory democracy,” from the previous “representative democracy.” Some embrace this change enthusiastically, while others view it warily. What is clear is that the traditional political parties have disintegrated here, as they have in many other countries in the Andean region, including Peru, Ecuador, and Venezuela.
It is also clear that new political parties are unlikely to arise anytime soon. Due to exclusion and corruption, the old system has been completely discredited. The MAS, which backs Evo Morales, is proud of its alternative organizational framework, based on linking various social movements and associations rather than forming a political party.
So where does this leave representation? Bolivia is institutionalizing a cycle which begins with protest marches, followed by negotiations with the government, and then ends in promises/governmental actions. These cycles are not necessarily new, as they played a key role in demand making in recent years. In fact, the inability of the governments of Sanchez de Lozada and Carlos Mesa to fulfill promises made during the negotiation phase led in large part to their downfall.
But with the election of Evo Morales, these dynamics have changed in meaning. Rather than arising from the opposition, these protesters and their organizations are now part of the ruling MAS, institutionalizing this protest cycle as the main means of interest intermediation. And, the nature of demands has changed. And rather than focusing on big issues of political and social inclusion, or of national redistribution of resources, these protests tend to focus on specific group or individual needs. For instance, this week the marches in La Paz involved teachers and sellers of used clothes, each wanting an improvement in their own economic situation.
This transformation of interest intermediation – due to the decline in political parties – concentrates power in the Executive branch, and in Evo Morales. Other moves by the government – including the undermining of the judiciary – have added to this effect. What Evo does with this power remains to be seen. It may allow him to address historic injustices and issues by bypassing old elite and interest group issues. But, it may also lead to new patronage networks, inefficiency, corruption, and in the end renewed frustration by those wanting to see real change in Bolivia.
The Return of Inflation
The one area of real triumph for market-oriented reforms in Latin America was inflation. Unlike the uneven record on poverty, inequality, and economic volatility, structural adjustment and austerity programs of the early 1990s ended high and hyper inflation. These programs brought the Latin American average from 235% per year in the early 1990s to less than 8% by the turn of the century. Low and steady inflation has been a crucial element for attracting both foreign and domestic investment, increasing economic production, and encouraging the economic growth of the last several years.
But heterdox economic policies – reminiscent of Sarney’s Brazil, Alfonsin’s Argentina, and Garcia’s Peru (the first time around) – have reemerged. In both Argentina and Venezuela, the Kirchner and Chavez governments are using wage and price controls on basic goods as key parts of economic policy. Venezuela has gone a step further to reintroduce public control and management of “key” industries, including telecommunications, oil, and now perhaps steel and the banking sector. These policies are bringing back worries of inflation and leading to shortages in basic goods.
Venezuela’s inflation for 2006 topped 17%, the highest in Latin America. Most expect it to surpass 20% this year. Argentina too has seen increasing inflation, from a negative rate in the late 1990s to 10% last year. As worrisome, Kirchner fired the head of the national statistics agency, INDEC, briefly replacing her with a more malleable political appointee until public clamor forced the promotion of a INDEC senior employee.
Shortages in these economies are as important, and hamper both consumer-led and manufacturing-led growth. A recent Wall Street journal article argues that Chavez’s threat to nationalize the steel and banking industries has as much to do with the issue of shortages as with nationalism. News articles, as well as personal conversations, show that shortages and economic bottlenecks are again appearing in Argentina. These mismatches are hampering growth, not to mention the quality of life of individuals within the country.
Poverty, inequality, and equal opportunity are key issues for the future of Latin American nations. Government programs to directly improve the health care, education, and resources of the poor are important and laudable. But, these governments should not overlook the dire effects of inflation on poverty and inequality. Inflation hits the poor the hardest. They are the ones least likely to receive compensatory pay raises, and are those unable to hedge their savings in indexed accounts or abroad. High inflation will wipe out any benefits of direct assistance programs, leaving individuals certainly no better off and most likely in a much worse situation. This means that as governments are designing programs for the poor, they need to include measures to keep inflation low, be that independent monetary policy, controlled deficits, and better financial regulation. Only with this combination will governments be able to truly help those at the bottom of the pyramid.