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.

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.

An elderly Guatemalan woman rests before leaving Bolivia from Santa Cruz (David Mercado/Courtesy Reuters).

For those of you that haven’t seen this yet — the Economist’s Americas editor Michael Reid provided a great overview of Latin America’s progress in recent years, as well as the challenges that lie ahead in his testimony before the Senate Foreign Relations Committee Sub-Committee on the Western Hemisphere two weeks ago.

The following are two, slightly less optimistic pieces – based on economics, and in particular income inequality. FOCAL recently released a policy brief authored by Guillermo Perry and Roberto Steiner on “Economic Growth and Inequality” in Latin America. Two graphs stand out here. The first, on page 3, reflects that while inequality is getting better in Latin America, the situation is still pretty abysmal, as the most equal countries in the region are still more unequal than most countries across the globe. The figure on page 5 suggests a possible explanation: Latin American countries have among the least progressive taxation systems in the world.

A World Bank study from 2008, “The Measurement of Inequality of Opportunity: Theory and an application to Latin America” gives a sense of just how much this matters in the lives of Latin Americans. Analyzing data from 6 countries in the region, it shows that up to half of differences in income are due to structural inequalities. Getting ahead in Latin America today, it seems, still depends on being born a specific race, in a particular place, and within a certain kind of family.

Lastly, CFR’s independent Task Force report “Global Brazil and U.S.-Brazil Relations” argues that the U.S. must take Brazil seriously as the newest pillar in a multipolar world.

Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.

U.S. President Barack Obama and Brazil's President Dilma Rousseff toast during lunch in Brasilia (Ho New/Courtesy Reuters).

Today the Council on Foreign Relations is releasing its independent Task Force report, “Global Brazil and U.S.-Brazil Relations”.  I sat in as an observer for the Task Force, ably led by co-chairs Samuel W. Bodman — former Secretary of Energy under George W. Bush — and James D. Wolfensohn — chairman of Citigroup’s international advisory board and former president of the World Bank Group — and directed by my CFR colleague, Julia Sweig. The project’s 30 participants hail from diverse backgrounds, some old Brazil hands and others with functional and/or wide-ranging expertise. Needless to say, the four meetings that took place over the course of a year yielded a stimulating and fruitful dialogue. Although there were some differences of opinion among Task Force members (some of which are noted in the additional comments and dissents section of the report), everyone agreed to Brazil’s rising importance.

We addressed a wide range of issues, including Brazil’s economic health, its energy agenda, its role as a dominant regional power and its relationship with the U.S. government. The report’s core recommendations focus on deepening cooperation between Brazil and the United States so that both can more effectively advance their common interests (and better manage areas where we might come into conflict). In particular, the Task Force points to Chinese monetary policy, climate change mitigation, the expansion of the biofuels industry and regional counternarcotics policy as issue areas that provide opportunities for bilateral cooperation.  It calls for Washington to better appreciate Brasilia’s increasing potential as a global strategic ally. As a sign of goodwill, the Task Force recommends a particular concrete step: fully endorsing Brazil as a permanent member of the United Nations Security Council.

The report’s most basic takeaway is that Brazil is the newest pillar in a multipolar world and must be treated as such. Slotted to become the world’s fifth largest economy within the next decade, it grew at a stunning pace of 7.5% in 2010 (whether this is sustainable remains a big question mark), and is expected to expand 4.5% this year. Unemployment and inequality — perennial concerns for the nation—have fallen. Still, Brazil’s economic outlook is not entirely rosy. In the short to medium term, rising exchange rates and inflation threaten Brazil’s growth. Decrepit infrastructure and an overwhelmed public education system threaten its longer term competitiveness. Whether Brazil can take on these myriad obstacles effectively remains to be seen.

Whatever its economic future may hold, the Task Force report is worth a full read, as it provides important insights and ideas on how both Brazil and the U.S. can manage the challenges that lie ahead, and the U.S.-Brazil relationship, for the better of both nations.

Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.

Argentina's President Cristina Fernandez de Kirchner waves as she enters Congress for the inauguration of the annual ordinary sessions in Buenos Aires (Marcos Brindicci / Courtesy Reuters).

By the end of next week, Argentina’s current president Cristina Fernández de Kirchner will have to decide whether she’s in or out of the upcoming presidential race. According to recent polls, if the Peronist leader runs, she will win reelection, likely in the first round. Nearly half of Argentines say they would vote for her if the election were today, and her overall approval ratings top 60 percent.

Her opposition is divided and as a result more easily conquered. Ricardo Alfonsín, the Unión Cívica Radical (UCR) candidate and son of former President Raúl Alfonsín, leads the pack, but his support is just under 20%.  So far he has been unable to bring other opposition figures into his fold, likely dooming his rise.

Argentine presidential races often come down not to a contest between political parties but between different factions within the Peronist party. Here Kirchner’s best-known challenger is Buenos Aires province political boss and former president Eduardo Duhalde. Once an ally, now a fierce opponent, Duhalde has the support of some breakaway Peronist factions. But with political patronage flowing (boosted by a strong economy), it will be difficult to entice many other party leaders away from the Kirchner fold.

In the end, assuming Cristina jumps in to the race, it is hers to lose. The challenge will be maintaining her current momentum through October. A bumper soya crop and a booming Brazil should help. Most expect Argentina’s economy to continue growing at a fast clip – 5 to 6 percent — over  the next four months.  Energy could pose a problem, as years of (government mandated) low prices have both increased demand and limited investment. A cold winter could expose the cracks in the system, causing a (politically challenging) energy crisis. But if Argentina can muddle through without any large shocks,  Cristina looks to remain in the Casa Rosada for another term. The markets seem to have come to this conclusion as well and are voting with their proverbial feet: capital flight increased during the first 5 months of the year.

Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.

Strips of deforested land in the Brazilian Amazon (Rickey Rogers / Courtesy Reuters).

I attended a small conference a year and a half ago in Rio de Janeiro during which one of the panels focused on climate change. With one of the cleanest energy matrices around (nearly 50 percent of its energy comes from clean and renewable sources) Brazil has certainly earned its green bona fides and leadership position in world climate change talks. Alluding to Brazil’s historical leadership, they talked mostly of Brazil’s future, and its pledge – one of the first emerging economies to do so – to voluntarily reduce its greenhouse gas emissions by 38% of business-as-usual amounts by 2020. In practical terms, this means attacking deforestation, which is responsible for some 70 percent of Brazil’s emissions today. The country’s 2008 National Plan on Climate Change pledges to cut deforestation by half by 2020.

During the conference the intense optimism of the Brazilians on their ability to reverse and reduce deforestation – and with it climate change – struck me. Granted, in 2009 the figures were impressive: a 45 percent drop in forests lost, the lowest level in over two decades.  Yet the declines coincided with falling commodity prices, easing the economic pressures to expand Brazil’s farms and ranches into the Amazon. One had to ask if commodity prices – particularly those for soya and beef – rise again, would Brazil be able to maintain its ambitious preservation plans? The Brazilian experts responded that Brazil’s government could in fact enforce the laws, whatever the countervailing financial incentives.

In their certainty about the efficacy of the state, it seems they were right. Government monitoring and enforcement has improved – so much so that Brazil’s agricultural interests have launched a full court press to change the laws. Under the current law, known as the Forest Code, farmers in the Amazon must keep  80% of their land forested. The new legislation will exempt small-scale landowners from having to replant deforested land and grant amnesty to farmers who illegally deforested land before July 2008. Brazil’s Chamber of Deputies approved the bill last week, and the Senate should pass it soon.  President Dilma Rousseff has come out against the amnesty provisions (threatening a veto), but hasn’t condemned the overall idea of opening up more forest for tilling and grazing

This showdown between Brazil’s agricultural lobby and the environmentalists is revealing in many ways, but perhaps most about the effectiveness of the government itself. Brazil’s ranchers and farmers see the need to  change rather than just skirt the law (though unlawfulness in the Amazon does continue, heartbreakingly witnessed in the recent murders of forest conservation activist José Cláudio Ribeiro da Silva, his wife, and a witness to the murders). As the politics unfold, hanging in the balance is the world’s largest forest – the Amazon – and perhaps the future of climate change.

Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.

A trader checks a newspaper at the Santiago Stock Exchange (Ivan Alvarado/Courtesy Reuters).

Much is made of ALBA, the Bolivarian Alliance for the Americas, a pact backed by Hugo Chávez and Fidel Castro to integrate the region based on “21st Century Socialism,” and incorporating neighbors such as Bolivia and Ecuador among others. Over the past five years, Venezuela has spent some $60 billion to back the project. In concrete terms the achievements so far are fairly limited: sponsoring some 75,000 health workers and subsidizing electricity within the participating countries. This has been undoubtedly helpful to hundreds of thousands, perhaps even millions of individuals, but it is not a comprehensive economic, political, or social model by any means. Instead, many of ALBA’s member countries continue to straddle the ideological fence, remaining open to trade with other regional groupings, as well as with the United States and China.

Substantive integration efforts are in fact taking shape elsewhere in Latin America – just without the fanfare. Several of the region’s fastest growing democracies — Mexico, Peru, Colombia, and Chile — will sign a free trade accord on May 2.  Connecting two hundred million people, 10,000 miles of Pacific coastline, and over $1.4 trillion of GDP—triple that of ALBA and rivaling the Brazilian economy—the group aims to ease the flow of goods, capital and people to create a common and more powerful front for exports to Asia. The pact brings together Chile and Peru’s strengths in commodities with Colombia’s energy and Mexico’s services and manufacturing. It should help Colombia, whose free trade agreement with the U.S. remains in limbo, and open up Mexico to finally profit from — instead of just compete with — China.

Additionally, Bogotá, Lima, and Santiago are combining their stock exchanges into the Mercado Integrado Latinoamericano (MILA). MILA will become the largest stock exchange in Latin America, surpassing Brazil’s Bovespa and Mexico’s BMV. The economies of scale should increase liquidity to the region’s expanding – and increasingly diverse — private sector.

With far less rhetoric, these recent efforts will likely transform the way many of the hemisphere’s nations interact with each other in day to day business. It may in fact lead to a new economic model, one based on  “21st century markets,” finally enabling the integration Latin American leaders have long sought.

Published in conjunction with Latin America’s Moment at the Council on Foreign Relations

Brazil's President Luiz Inacio Lula da Silva holds up his oil-covered hands at the Cidade Angra dos Reis offshore platform (Ho New/Courtesy Reuters).

Each day it seems Brazil finds more and more oil in the Santos Basin. Its estimated reserves almost doubled this year, totaling over 30 billion barrels (some expect them to rise as high as 50 billion barrels). This launches Brazil’s reserves to 9^th in the world, just behind Russia’s.

In the last months of the Lula administration, the government passed legislation that would make Petrobras, the state-controlled oil giant,  the operator of these new finds. It grants Petrobras at least a 30% stake in all future joint ventures, with contracts to be awarded to companies offering the largest share of output to the government. These changes, and the increasing role of the state, have led many to question whether the newfound oil may prove a curse rather than a blessing.

Brazil has a better chance than most to achieve the vaunted Norwegian model of oil exploitation, and avoid the pitfalls of the Middle East (or closer to home in Venezuela).  In large part this is due to timing. Countries such as Venezuela, Saudi Arabia, or Nigeria found oil at the start of their process of state formation. Oil let them avoid hard choices – in particular the need for a broad based economy to tax (as well as subsequent demands for representation). Brazil already has a vibrant and diversified economy, which won’t easily fade, even with the oil influx.

Second, Brazil has had significant experience in implementing national energy policies. During the 1970s, Brazil faced a situation somewhat similar to that the United States faces today – overreliance on foreign oil during years of volatile pricing. In an effort to limit its dependence, Brazil’s military government boosted hydroelectric power, and created Pro-Alcool, the National Alcohol Program. It created a now world class ethanol industry by offering low-cost loans and credit guarantees, mandating percentages in gasoline, setting government purchase prices, and guaranteeing monopolistic distribution by the state-owned energy company, Petrobras.  Forty years later, Brazil is second only to the United States in terms of ethanol production, which powers 20% of its transportation matrix. Now largely self-sufficient, its overall energy portfolio is one of the cleanest in the world. While the pre-salt finds will test this last achievement, Brazil’s history of energy management shows that it can conduct a successful long-term energy policy.

Third, the pre-salt oil is hard to get at. Buried almost four miles below the ocean surface and a mile-thick layer of salt (the reason for the name), it is relatively expensive to extract. Unlike Mexico’s Cantarell fields, which were discovered by a fisherman as the oil seeping to the surface tangled his nets, extraction will require significant technology, expertise, and management. The time and effort needed to extract may work in Brazil’s favor, boosting local human capital and technology companies rather than the reverse. It may also mean that revenues enter the domestic economy more slowly, limiting the inflationary effects on domestic prices and other areas of the economy (avoiding the so-called Dutch disease.). Brazil already faces inflationary pressure—from both industrial expansion and natural resources like timber, iron ore, and beef—but prudent use of oil revenue could help not hinder their already impressive long-term growth prospects.

Finally, and perhaps counterintuitively, Brazil’s vibrant (if messy) democracy may rescue it from a less attractive fate. Hardly immune from patronage, corruption, and the like, Brazil’s democratic politics provide a platform for a multitude of interests and a system of checks and balances between branches and levels of government. This true political back-and-forth and compromise has never fully operated in the Middle East (much to the region’s detriment), and arguably was never firmly established next door in Venezuela. This isn’t to suggest that everyone gets heard in Brazil or that special interests don’t have a louder say than others. But it does give a broader array of political and economic players a voice, something that doesn’t occur under non-democratic regimes.

Taken together this suggests that the pre-salt oil can be what the Brazilians dream about— a means to tackle the big issues of poverty and structural inequality by boosting the social safety net, improving education, investing in infrastructure, and continuing to build foreign reserves to protect against inflation. The technological investment could also spill over into the broader economy, attracting engineers, scientists, and oilfield specialists. There are some positive examples from emerging economies— most notably Chile. Under its democratic leadership, it has managed its copper reserves (making up sixteen percent of GDP and nearly half of all exports—more than enough to curse instead of bless the nation) quite admirably. Let’s hope that Brazil follows a similar path.

Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.

Brazil's President Dilma Rousseff at a meeting for the Growth Acceleration Program 2 in Brasilia (Ueslei Marcelino/Courtesy Reuters).

As Obama heads to Brazil this weekend, much has been made of the trade agenda. In the lead up briefing with the press, Deputy National Security Advisor for International Economic Affairs Michael Froman stressed that “this trip fundamentally is about the U.S. recovery, U.S. exports, and the critical relationship that Latin America plays in our economic future and jobs here in the United States.” In tow are Commerce Secretary Gary Locke, U.S. Trade Representative Ron Kirk, Treasury Secretary Timothy Geithner, and Ex-Im Bank head Fred Hochberg, among others, to push just such as agenda.

There is, indeed, great potential in this regard for the United States in Brazil. Brazil’s economy is on a roll. It took just a minor hit during the worldwide downturn, and came roaring back in 2010 – posting 7.5% GDP growth. This growth is driven not just by high commodity prices, but also by Brazil’s dramatically expanding middle class– now topping 100 million- and its ever rising consumption.

But a deeper economic bilateral relationship remains just that – potential. Of the $500 billion dollars of U.S.-Latin America trade, Brazil makes up only $50 billion (Mexico, on the other hand, accounts for over $350 billion of the total). Trade with Venezuela, despite U.S. tensions with President Hugo Chavez, is almost as much.

There are some encouraging signs. U.S. exports to Brazil have doubled over the past five years. Annual trade with Texas, Ohio and Pennsylvania reached over a billion dollars; Brazil is now South Florida’s biggest trading partner. U.S. companies have made strong inroads in the telecom and energy sectors, among others.

But to truly unleash the potential of the U.S.-Brazil economic relationship, the United States needs to move beyond the shorthand of trade. First and foremost, the United States can’t deliver on a free trade agreement with Brazil (those with Colombia and Panama continue languishing). Second, like the United States, trade is a relatively small portion of Brazilian GDP. The money is in the domestic market, as Brazil relies on internal engines of growth. Finally, Brazil is worried about its trade deficit with the United States (currently $6 billion). Pushing solely or primarily to increase exports will ruffle diplomatic ties, particularly in the face of continued high tariffs on Brazil’s potential exports to the United States, such as on ethanol and sugar.

Instead, the United States should rhetorically – and in practice- focus on foreign direct investment, and joint efforts for research and development and innovation more broadly. This will enable U.S. firms to take advantage of Brazil’s domestic growth. It will also, in the course of things, increase U.S. exports – but without the political pushback, creating a more positive sum game. There are great economic opportunities on this trip, as the White House suggests. But reframing the agenda from trade to broader economic cooperation is vital for both U.S. diplomacy and our own economic growth.

Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.

A shaman performs a ritual in front of a photograph of President Barack Obama in Lima (Mariana Bazo/Courtesy Reuters).

Between March 19 and 23, President Obama will take his first foreign trip this year – and his first ever to South America. He will kick it off in Brasilia and Rio de Janeiro, then head to Santiago, and finish up in San Salvador. The trip’s goal, as announced in his State of the Union address, is to “forge new alliances across the Americas.” Alongside the obvious meetings between presidents, in the works are business roundtables, a visit to one of Rio’s favelas, an Egyptian style speech to “all Latin Americans” in Santiago, and educational activities for his daughters, who, along with the First Lady, will accompany him.

Why these three nations?

Brazil is the obvious choice. It has grown into an economic and diplomatic powerhouse, weighing in on world issues from financial reform to climate change. Under Lula, it flexed its muscle at times to the discomfort of the United States – on nuclear proliferation and Middle East politics, U.S. bases in the region, and the Honduran standoff. With newly installed President Dilma Rousseff’s openness to deepening U.S.-Brazil ties, there are high hopes on both sides that the trip will open a new chapter in the relations between the two largest economies of the Americas.

On the table will be trade and investment, particularly on clean energy and Brazil’s infrastructure needs in the lead up to the World Cup and the Olympics games. Also up for discussion will be China and its currency, as companies in both countries struggle to compete with Chinese imports and investments.

The other two nations are less obvious stops. Important as nations with which the United States maintains strong friendly ties, they are also examples of pragmatic and progressive governments from across the ideological spectrum. Chile’s Sebastián Piñera is leading one of the region’s most prosperous and stable nations from the center-right– the first elected conservative leader since the end of the Pinochet dictatorship. Obama’s visit will put the finishing touches on a nuclear pact, and the two leaders will work on clean energy and intellectual property issues (in particular the steps to get Chile off the U.S. priority watch list for failing to protect IP rights). Both leaders are keen to discuss innovation and entrepreneurship – part of their domestic political platforms.

El Salvador’s Mauricio Funes rules from the other side of the spectrum. A reformed revolutionary, he is the United States’ strongest partner today in Central America. The presidents will focus on security– Funes presented a $900 million plan to Hillary Clinton last fall, which would quadruple U.S. commitments under the Merida Initiative to Central America – as well as issues of economic cooperation and poverty reduction. The future of the 2.5 million Salvadorans (roughly one of every four) living in the United States will also be on the table, as Funes hopes to replace the Temporary Protected Status under which most live with a path to permanent residency.

What is also interesting is who is not on the list. The President, First Lady, and family will not be stopping in Buenos Aires, Argentina; a decision said to upset President Cristina Fernández de Kirchner. Behind the scenes, many feel that the old aphorism once attributed to Brazil is perhaps now more applicable to Argentina, that it is “not a serious country.” Also not on the itinerary is Colombia, in part because Obama has no good news to bring his counterpart on the long-delayed free trade agreement.

Though timed to coincide with the 50th anniversary of the Alliance for Progress, nothing so grandiose will be in the works. Nevertheless, as the heads of state meet and talk about an array of issues, Obama has the opportunity to make a significant change. In addition to the usual bilateral and regional topics, it is important that Obama bring Latin America into his thinking about global challenges. This shift, though subtle, would be the start of a real transformation in U.S.-Latin America relations.

Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.