A customs officer is handed a passport by a motorist at the San Ysidro border crossing (Fred Greaves/Courtesy Reuters).
The U.S. debates over Mexico’s drug war increasingly focus on spillover violence. Border state governors Rick Perry and Jan Brewer insist that Mexican cartels are hitting their states hard, portraying the border as a lawless “war zone” in which the drug cartels and illegal Mexicans incite “terror and mayhem” on a daily basis. In stark contrast, Customs and Border Protection (CBP) Commissioner Alan Bersin and Homeland Security Secretary Janet Napolitano contend that the border has never been safer.
The statistics bear out the latter position. A recent study based on FBI figures shows that violent crime in cities within 50 miles of the border is consistently lower than state and national averages. The robbery rate in the Texas border region, for example, remained at least 30 percent lower than the state average for every year in the past decade. The data also show that the number of kidnapping cases in border areas dropped by more than half since 2009. This doesn’t mean that bad things don’t happen – they do. But they happen less frequently along the border, on average, than in other parts of the United States. Despite local politicians’ concerns and rhetoric, the border is more secure than in the past, and in fact safer than the rest of the country.
But the downward trend in border violence does not mean that the Mexican drug war hasn’t had spillover effects on the United States. Among the most troubling is corruption. Local newspapers recount the stories of public officials engaged in foul play; from the South Texas county Sheriff Conrado Cantú, who took bribes from drug traffickers, to Columbus, New Mexico Mayor Eddie Espinoza, charged with operating a gun smuggling ring in connection with Mexican cartels. Available data also show a rise in corruption within the ranks of the border patrol. Since the reopening of the Homeland Security Bureau’s internal affairs unit in 2003 – in and of itself a reflection of the increased risk of corruption within the agency – cases of corruption against law enforcement officials on the border have more than doubled. Tales of CBP agents turning a blind eye to, and sometimes actively aiding drug traffickers smuggling narcotics, arms and migrants across the border abound.
The increase in corruption reflects the lure of drug money and the CBP’s institutional weaknesses. Doubling the border patrol’s numbers in less than a decade made it more vulnerable to corruption, diluting the once highly disciplined force with less experienced and committed newcomers. The border patrol administers lie detector tests to only 10 percent of applicants, more than half of which fail — raising serious concerns about the capability, and even intentions, of many of its new hires.
Other spillover effects are positive for the United States – namely increasing economic activity. Seemingly every day new restaurants, stores, and private schools are opening in border towns, serving clients that once traveled further south. Many attribute Texas’ strong real estate market to the influx of Mexican citizens eager for greater peace and stability. In the spring of 2008, when foreclosures hit record highs across the United States, real estate agents in El Paso reported steady sales of houses and apartments worth more than $100,000. The President of the Greater El Paso Association of Realtors, Dan Olivas, attributed the stability of the El Paso market to “a substantial number of people from Juarez coming over to buy properties for security reasons, for fear of kidnappings, extortion, and cartel violence.” This El Paso trend has continued, and spread more broadly.
Not only do Mexicans buy homes, but many are bringing their businesses north. Immigration consultants say inquiries from Mexicans for EB-5 investor visas – which cost $500,000, and require that applicants’ create at least 10 jobs in the U.S. within two years – have doubled in recent years. Mexico has quickly risen the ranks to become one of the top recipients of these visas.
Mexico’s drug war is indeed affecting the United States – but mostly in ways that politicians overlook, misunderstand, or (more cynically) choose not to recognize. The current policy prescriptions – a higher and longer border wall, more boots on the ground and predator drones overhead – won’t slow seeping corruption, nor bolster the beneficial economic ties. Unfortunately, the wrong diagnosis means also the wrong policy prescriptions, hurting both countries in the process.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
It is becoming increasingly possible that 2011 will be the year that Mexico truly began opening its closed economy. Though political reform seems to have failed and efforts to centralize Mexico’s many police forces stalled, the political system has taken important steps in the last several months that could establish a more open and level economic playing field. What is most interesting, and perhaps hopeful, about these developments is that all three branches of government are throwing their weight behind freer markets.
First, in mid-April, the executive branch through the regulatory Federal Competition Commission, or CFC issued the largest fine for monopolistic behavior in Mexico’s history. As I discussed in an earlier post, Telcel was slapped with a $1 billion penalty for inordinately high interconnection fees. What’s more, the fine marked the second sanction against the telecommunication giant – one more strike, and the government is legally allowed to break up Telcel for good.
The legislature was the next to flex its muscles against domestic conglomerates. Following on the heels of the Telcel ruling, both houses of the senate unanimously approved a number of changes to anti-trust laws designed to foster competition. The reform put in place harsher punishments for those found guilty of monopolistic practices, who can now be fined up to 10 percent of their profits and in the most serious cases (price fixing falls under this umbrella) face 10 years in jail. They also awarded more power to the CFC, including the right to conduct unannounced raids of companies under investigation.
Now the judiciary is jumping into the fray. Pushed by business groups, the public prosecutor’s office launched last month a criminal investigation into Héctor Osuna, former vice-president of the telecom regulator COFETEL, and his colleagues. Investigators suspect that COFETEL executives engaged in back door legal maneuvering to grant Telmex (owned by Carlos Slim) access to the television market on unfair grounds. Specifically, they believe that Osuna intentionally delayed ruling on Telmex’s request for a television concession past the specified deadline – despite his own admission that “for us there was never evidence that [Telmex] had complied with its requirements” — which technically counted as a tacit approval of the request. The result of the investigation is not just vital for Telmex, which would gain substantially by entering the television market, but also for the judicial branch, whose scorecard against national giants hangs in the balance (though the courts have defended more open markets before, notably in 2007 when the Supreme Court struck down a media law that stifled competition).
To be sure, these recent actions are mostly directed at the business interests of just one individual — Carlos Slim. On the other hand, if used more broadly, the new legislation and legal precedents could be real game changers for the Mexican economy. Either way, this is the first time we have seen such a serious full court press for more open markets and sectors in Mexico — and all three branches of government deserve credit for that.
It is becoming increasingly possible that 2011 will be the year that Mexico truly began opening its closed economy. Though political reform seems to have failed and efforts to centralize Mexico’s many police forces stalled, the political system has taken important steps in the last several months that could establish a more open and level economic playing field. What is most interesting, and perhaps hopeful, about these developments is that all three branches of government are throwing their weight behind freer markets.
First, in mid-April, the executive branch through the regulatory Federal Competition Commission, or CFC issued the largest fine for monopolistic behavior in Mexico’s history. As I discussed in an earlier post, Telcel was slapped with a $1 billion penalty for inordinately high interconnection fees. What’s more, the fine marked the second sanction against the telecommunication giant – one more strike, and the government is legally allowed to break up Telcel for good.
The legislature was the next to flex its muscles against domestic conglomerates. Following on the heels of the Telcel ruling, both houses of the senate unanimously approved a number of changes to anti-trust laws designed to foster competition. The reform put in place harsher punishments for those found guilty of monopolistic practices, who can now be fined up to 10 percent of their profits and in the most serious cases (price fixing falls under this umbrella) face 10 years in jail. They also awarded more power to the CFC, including the right to conduct unannounced raids of companies under investigation.
Now the judiciary is jumping into the fray. Pushed by business groups, the public prosecutor’s office launched last month a criminal investigation into Héctor Osuna, former vice-president of the telecom regulator COFETEL, and his colleagues. Investigators suspect that COFETEL executives engaged in back door legal maneuvering to grant Telmex (owned by Carlos Slim) access to the television market on unfair grounds. Specifically, they believe that Osuna intentionally delayed ruling on Telmex’s request for a television concession past the specified deadline – despite his own admission that “for us there was never evidence that [Telmex] had complied with its requirements” — which technically counted as a tacit approval of the request. The result of the investigation is not just vital for Telmex, which would gain substantially by entering the television market, but also for the judicial branch, whose scorecard against national giants hangs in the balance (though the courts have defended more open markets before, notably in 2007 when the Supreme Court struck down a media law that stifled competition).
To be sure, these recent actions are mostly directed at the business interests of just one individual — Carlos Slim. On the other hand, if used more broadly, the new legislation and legal precedents could be real game changers for the Mexican economy. Either way, this is the first time we have seen such a serious full court press for more open markets and sectors in Mexico — and all three branches of government deserve credit for that.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
A worker at a luxury cowboy boot factory works on pairs of boots in the central city of Leon (Courtesy Reuters).
An IMF report published this week lauds the Mexican economy’s health, and credits robust fundamentals and good policy choices for its success in weathering the storm of global economic crisis. With even more positive news, a recent study by the Mexican government shows that FDI is still pouring in despite violence, and is actually going to the most dangerous areas. But this doesn’t mean that violence is not having an effect on the economy. In this Americas Quarterly article, Dora Beszterczey and I argue that violence actually has the greatest economic impact on small and medium sized companies, not the multinationals and domestic conglomerates that receive FDI inflows. At this local level there are signs that heightened violence is taking its toll, increasingly forcing entrepreneurs to pack their bags in search of a safer business environment.
There are a number of interesting profiles of Peru’s new drug chief Ricardo Soberón in the news this week. As I talked about in the past, security issues related to drug trafficking and organized crime will be a huge challenge for Humala. While El Comercio harshly criticizes the choice, Soberón’s academic bonafides and more inclusive approach (he favors eradicating rural poverty before coca plantations, and wants to engage the coca growers movement in the national dialogue about drug policy) may enable the new Peruvian administration to balance their promises of social inclusion with a more comprehensive security policy. For those interested in a more sweeping view of drug policy in the history of U.S.-Peru relations, Paul Gootenberg’s book Andean Cocaine: the Making of a Global Drug is well worth a read.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
Miner Gomez celebrates as he arrives on the surface as the ninth to be rescued in Chile (Ho New/Courtesy Reuters).
Today is the one year anniversary of the collapse that buried 33 Chilean miners deep underground for more than two months. Their rescue inspired a jolt of nationalistic pride in Chile, and not a little media fanfare, but now many of the survivors find themselves worse off than before the ordeal. Despite, and in some cases because of their fame (sure to increase with the production of a movie based on their tale), almost half of the 33 are unemployed, and some are back working underground to make ends meet.
Sebastián Piñera’s high hasn’t lasted either – recent polls show his ratings slipped to 31 percent last month, a far cry from his 63 percent approval rate in October 2010. Even the Economist is down on Piñera at this point, criticizing the billionaire for creating ties between government and the private sector that are often too close for comfort.
Dilma Rousseff recently unveiled the “Bigger Brazil Plan”, or “Plano Brasil Maior”, a program designed to make Brazil more competitive and stimulate investment in the face of an increasingly overvalued real and the influx of inexpensive goods from abroad. Some question whether the bill will have any positive effect in the long-run, arguing that the $16 billion in tax cuts for manufacturers will be offset by higher sales taxes, needed to finance recent government spending sprees.
For those that haven’t seen it, this Los Angeles Times four-part series on the Sinaloa cartel is an illuminating profile of the more average citizens involved, the way the business works, and one particular DEA attempt to take down a cartel.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
Coca leaf farmer John Basilio harvests coca leaves in Tingo Maria, Peru (Mariana Bazo/Courtesy Reuters).
As Peruvian President Elect Ollanta Humala prepares to take office at the end of the month, the worries focus on his economic policies. Will he be another Chavez, nationalizing industries, or a Lula, balancing market friendly macroeconomic policies with broader social programs? The fears have led to a rollercoaster month in the stock market, which sank a record-breaking 12.5 percent the day after Humala’s election, only to bounce back one day later. Rumors of Humala’s plans for the mining industry, private pension funds, and even the free trade agreement with Peru and Colombia abound.
Receiving less attention is how Humala will manage security issues— and particularly narco-trafficking. According to this year’s United Nations Office on Drugs and Crime (UNODC) World Drug Report, Peru is now virtually tied with Colombia as the largest supplier of cocaine in the world. And with skyrocketing cultivation come the more nefarious elements of organized crime. Evidence suggests Mexican cartels are working with local criminal groups and some say moving into Peru themselves, spurring a precipitous rise in drug-related violence in recent years.
Throughout the campaign Humala promised voters a tough on crime, or ‘mano dura,’ approach. He talked about centralizing anti-drug strategies into one agency — a High Commission on Drugs. More controversially, he supported a role for local militias in the fight against narco-traffickers. Recently he met with Colombian President Juan Manuel Santos to talk about bilateral counternarcotics cooperation.
On the other hand, the former lieutenant colonel maintains a close political relationship with Peru’s community of coca growers, and his Nationalist Party incorporates prominent leaders of the so-called ‘cocalero’ movement within its ranks. Humala has repeatedly pledged to respect the rights of peasant cultivators of coca leaf, and has opposed forced coca eradication. During the campaign he moderated his original platform, which eschewed a drug policy “subordinated to external interests”, and called for greater collaboration between the U.S. and Peru on security issues. But, Humala’s party recently announced its desire to appoint a representative of the coca grower’s movement to the National Commission for the Development of Life without Drugs (Devida) – the government’s principal anti-drug agency — in an effort to, as one official put it, establish an “open dialogue” with this community.
Humala owes his election to Peru’s rural poor, and it is this constituency that stands to lose the most (at least in the short to medium term) from a hard-line counternarcotics program. Most of Peru’s coca farmers are entirely dependent on the crop as their only source of sustainable income, even as they remain poor. For example, in the Ene-Apurimac valley (responsible for nearly a third of Peru’s coca cultivation), roughly 80% of the population is poor and half live in conditions of extreme poverty.
Though successful anti-poverty and anti-drug campaigns are not mutually exclusive, achieving both sets of aims will be no easy feat for Peru’s incoming president. As Wall Street waits to see how the recent elections will affect Peru’s economic trajectory, domestic and international communities should also be looking toward Humala’s initial security programs, and how he will balance the fight against drugs with his long-standing commitment to improving the lot of Peru’s poor.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
A resident rides a tricycle past the head of a bullet train outside an exhibition for the Seventh World Congress on High Speed Rail in Beijing (Jason Lee/Courtesy Reuters).
China’s recurring 10 percent annual average growth rate has won it predominantly accolades (and not a little envy); making it the global economic powerhouse it is today. But as Brazil nears these numbers – growing 7.5 percent in 2010 — it is the naysayers and doubters that have come to the fore. Even the government has labored to reassure investors and the public that it is working hard to “slow down” growth: Finance Minister Guido Mantega assured last week that “[Brazil] will grow moderately” due to proactive measures to raise interests rates and cut public spending.
Why the stark contrast?
One reason is the source of economic growth. China’s has been primarily investment led. From 2000-2008 China invested an average of 41 percent of GDP, a ratio more than double that of Brazil (and other countries such as the United States). In 2009, in the depths of the worldwide global downturn, investment soared to almost 50 percent of GDP, much dedicated to infrastructure. Thousands of factories, millions of miles of road, new ports, high speed railway lines, and airports have sprung up over the past decade. The country is now populated by entirely new cities and manufacturing centers that then drive growth.
Brazil, by comparison, invests less than 19 percent of GDP a year. Infrastructure is notoriously bad – which some economists estimate will curtail future growth by nearly 1 percent a year. Instead, consumption fuels Brazil’s recent rise. In 2009 a whopping 84 percent of GDP was consumption – compared to 17 percent in the United States and just 13 percent in China. Brazil now ranks at the top of the list of the world’s best shoppers led by booming credit, the expansion of foreign and domestic retailers, and the now 100 million strong middle class. The current over reliance on consumption leads economists and policymakers alike to worry about overheating.
Furthermore, China’s transformative growth has been mostly self-funded. It leads the world in internal domestic savings, which has risen steadily since the turn of the 21st century and in 2007 topped 54 percent of GDP, dwarfing the 23 percent average rate of OECD countries. Brazil’s internal savings rate, meanwhile, is only 15 percent, making it more reliant on foreign investment (both long term FDI and more worryingly shorter term portfolio or “hot money” flows) to fund needed investment. Even with these inflows, the savings available don’t approximate those China wields, limiting the potential pace of growth.
But another real and important reason for the discrepancy is that Brazil is already a much more developed economy. Brazil’s per capita income is more than double China’s – $8,230 vs. $3,650 in 2009. Its mortality rates, education rates and urban development rates all top China’s. The basic health improvements, spread of education, and urbanization behind much of China’s growth occurred in Brazil from 1967-1979, when it too grew at rates of almost 9 percent a year.
This current growth differential between China and Brazil isn’t a permanent status quo. China’s per capita income has now already risen, and much of the “easy” productivity gains are behind it. Some China observers point to the growing speculative real estate bubble, the rapid aging of its population, and a less than open government as further obstacles to sustainable high growth. Brazil, in turn, has many advantages – a sizable and diversified economy, low government debt and healthy banks. But going forward, for Brazil to grow quickly (and sustainably) it must increase its productivity (and not rely on just high commodity prices and consumption). This will depend on more investment, better education, and other structural reforms. If these changes happen, then the skeptics should fade, and a true second “Brazilian miracle” will be possible.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations
Fans outside Johannesburg's Soccer City stadium before Mexico and Brazil World Cup game (Siphiwe Sibeko / Courtesy Reuters).
The conventional U.S. wisdom today is that Mexico is a problem, and Brazil is an opportunity. The reality is that while Mexico faces serious challenges, the United States shouldn’t count it out. And, while Brazil does present real promise, there are serious issues it has yet to take on.
Economically, these two countries are not as drastically different as current analyses suggest. Yes, Brazil has had six years of consistent high growth. In large part, these were the dividends from macroeconomic reforms begun in the mid-1990s under President Cardoso and reinforced and deepened by President Lula (in fact, the pick up in growth coincided with the start of Lula’s second term, when domestic money finally believed his centrist promises).
By comparison, Mexico embarked on a similar reform process ten years earlier and earned its macroeconomic dividend in the 1990s, when Brazil was still struggling to rein in hyperinflation. Looking at per capita growth rates over the last twenty years (not just the last 7 or 8), Mexico and Brazil actually look fairly similar (with annual average per capita growth of 2.25% and 2.5% respectively).
While both countries have now solidified a range of necessary macro reforms, they face somewhat similar long term challenges. Both desperately need to invest in infrastructure, in education, and to find ways to reduce stark inequalities. Both too are now thriving democracies – a plus on so many levels, but not for pushing through big comprehensive reforms.
There are of course big differences – but those don’t necessarily cut just in Brazil’s favor. Brazil is a bigger market, has ever increasing oil finds, and is a complement to China’s rise – all positive. But it is also a more bloated state, stands in a much worse place vis-à-vis inequality and infrastructure, and faces worrisome inflationary and exchange rate pressures that threaten to undermine its recent gains.
Mexico is already a more export and manufacturing-led economy. And while Obama (and others) made much of the potential of US-Brazil trade during his March visit, the reality is that the United States already depends on Mexico as its second largest export market – earning some $163 bn last year compared to $35 bn with Brazil.
Mexico is also a much more friendly business environment. According the World Bank’s Doing Business index, Mexico ranks 35th globally – and the highest in Latin America — while Brazil is a woeful 127th (out of a total of 183 countries). On the downside, Mexico lacks widespread credit (which is much more available in Brazil), suffers from too many monopolies and oligopolies, and so far competes with (rather than complements) China’s rise.
The upshot is that there is no clear “winner” in terms of future potential or peril. So what drives the misguided conventional wisdom? A recent paper by Roberto Newell, founder of the Mexican Institute for Competitiveness (IMCO), provides a partial answer. Analyzing the Mexico coverage in the New York Times and Wall Street Journal since the late 1980s, he shows the increasingly negative tone and focus of the main U.S. papers of record. While political and economic news dominated both papers in the 1990s (in large part due to NAFTA), in recent years crime and the border have taken over the new cycle. Economic and political news – much of it good – rarely merit a mention, much less a sustained focus.
Without doing a similar in depth study, anecdotal readings of Brazil in the U.S. media shows the reverse – an almost ebullient focus on economics and politics, with relatively few stories on crime (even though Brazil’s 25 per 100,000 inhabitants murder rate far exceeds Mexico’s 14).
This negative shift isn’t because that is the only news coming out of Mexico. Yes Mexico’s security situation is grave, but it isn’t Mexico’s only story. As the brief comparison above shows, there are many economic and political strengths (and weaknesses) in both countries. Newell lays out many more of Mexico’s advantages and advances vis-à-vis the much touted BRICs, which include Brazil.
This skewed coverage hits both countries – though Mexico the hardest. For Brazil, it encourages the “hot money” flowing in, further aggravating the underlying economic weaknesses. For Mexico, the resoundingly negative take may, somewhat paradoxically, make it harder to address the security challenge. To see through necessary changes, Mexicans need some sense of optimism and can-do spirit, as well as a sense of what can be lost – and that is so much of what Mexico has gained.
Thousands of commuters pack the Se metro subway station in Sao Paulo (Paulo Whitaker / Courtesy Reuters).
Two recent studies look at the rise of Latin America’s middle class. The first, by ECLAC (Economic Commission for Latin America and the Caribbean), shows that nearly across the board, the share of Latin America’s middle has expanded (the exceptions being Argentina, where it shrank and Colombia, where it held steady). The second study from Brookings places Latin America in a global comparison and looks toward the future. Here, they define the middle class on global terms, as those that earn enough to be above the poverty line in the two advanced European countries with the lowest poverty lines (Portugal and Italy) and earn less than double the median income of Luxemburg (the richest advanced country). Again the Latin American metrics are impressive. Using 2005 numbers, it finds the middle class now comprises over half of the population in four countries: Mexico (61 percent), Uruguay (56), Argentina (52), and Costa Rica (52). Data since then show that Brazil too has crossed this threshold. Impressive too are the results of their simulations for the future – even in their more conservative estimates, most Latin American countries will become solidly middle class over the next two decades (the current leaders overwhelmingly so).
Three interesting points come out of these studies. First, it reaffirms Latin America’s increasingly positive economic story. In addition to exports, Latin American countries can increasingly rely on domestic consumption to fuel economic growth and advance well-being.
Second, on these metrics Latin American nations far outpace China and India. While the absolute numbers of the middle class in these Asian giants are substantial, as a percentage of the overall population they remain miniscule – a paltry 3.8 percent in China and 2.5 percent in India. And they aren’t likely to catch up any time soon. Even in the best case scenarios this gap won’t close for two decades. This vast difference – and the structural ramifications for these economies – grants Latin America a potential competitive edge in today’s globalized world.
Finally, if the old truism holds, the rising middle class should be good for democracy. Preliminary evidence suggests that this is indeed the case. The expansion of the middle class and of democracy have coincided in most places in the region. But more telling than this correlation, policies favored by the middle – health care, security, education, and general economic openness – are increasingly on the political agenda, suggesting that the votes of this group matter. These dual trends hold out the hope that an expanding middle can provide both more resources to the state (through increased tax intakes) and demand greater accountability and transparency of their respective governments, deepening democracy in the process.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
Plans for a $340 million overhaul of Rio de Janeiro's iconic Maracana stadium are among those behind schedule for the World Cup (Sergio Moraes / Courtesy Reuters).
The UN Economic Commission for Latin America and the Caribbean (ECLAC) released its report on foreign direct investment (FDI), with generally good news for Latin America. While 2010 investment worldwide was fairly flat (and fell in developed economies), it soared forty percent in the region – reaching nearly $113 billion. Of the just over a trillion in worldwide flows, Latin America captured a tenth of the total (and over twenty percent of that invested in emerging economies).
These investments were divided between natural resources, domestic market players, and outsourcing venues. Within the region the biggest winners were Brazil (nearly doubling to $48.5 billion), followed by Mexico ($17.7 billion) and Chile ($15.1 billion). And, according to ECLAC, the trend is set to continue – it expects FDI to the region to rise a further fifteen to twenty-five percent in 2011.
A few interesting trends jump out of the data. One is the geographic pull of the Southern Cone. While investment in Mexico and Central America increased, the real upswing occurred in South America—almost four times as much. Brazil and Chile gained the most, but Peru, Bolivia and Argentina all saw large inflows. Only in the Caribbean did FDI actually fall.
You also see quite stark differences in the type of investment. In South America nearly a majority of FDI poured into natural resources—oil, gas, copper, iron, and soya. Further north, a greater share of the money went into manufacturing. There the biggest winners were Mexico, Panama, Costa Rica, and the Dominican Republic – all countries with free trade agreements with the United States (NAFTA and CAFTA). These trends, if they continue, suggest long-term structural economic differences may develop between the north and the south of the hemisphere.
The report also provides some context for the much-touted (and in some quarters much feared) rise in Chinese investment. It has indeed increased: last year China invested twice as much in Latin America as it did over the previous two decades combined. Directed almost solely at natural resources, it is also geographically concentrated, with most going to just three countries – Brazil, Argentina and Peru.
But the data reveals that China is still just the third largest investor — behind the U.S. and the Netherlands (the latter’s investment bumped up significantly last year due to Heineken’s acquisition of Mexico’s FEMSA brewery). Interestingly, China trails the combined Latin American investment in the region. Taken together, multilatina outlays hit a record $43 billion – almost triple China’s $15 billion contribution. These investments were more apt to go into financial services, retail, and utilities – value-added activities with more positive trickle down effects for the broader economy. This suggests Latin American nations should be more enthusiastic about trade missions from their neighbors than from China.
The report also hints at the hurdles the region continues to face. The proportion of investment in high tech fell far short of its global competitors—only eight percent compared to fifty-two percent among the Asian Tigers—and limited mostly to Brazil and Mexico. The region has a lot to do to upgrade educational systems and its workforce in general to change this balance.
And, with the exception of perhaps some smaller island economies, FDI isn’t going to be the ticket to the big time. It can’t make up for domestic savings and investment. In the end, growth will have to come from home. Nevertheless, these flows can provide a leg up if these nations can translate this investment into productive growth.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
An employee arranges cotton in a textile factory in Bello, Antioquia province, Colombia (Albeiro Lopera / Courtesy Reuters).
In Washington the final negotiations for the three long-awaited free trade agreements (FTA) seem complete. Initially penned by the Bush administration in 2007, the South Korea, Colombia, and Panama FTAs languished for over three years due to Democratic (and some Republican) concerns over labor and human rights, environmental standards and tax haven laws.
These agreements are now finally on their way to approval. Most expect them to pass before the end of the year – perhaps even by the summer. For South Korea, the main issues over Korean cars and U.S. beef have been resolved. For Colombia, an agreement on better protections and enforcement of labor rights (while still with its critics) has been enough to overcome the final hurdles. For Panama, a tax information sharing agreement sealed the deal. Sent together (as Republicans insisted), the package will also restart Trade Adjustment Assistance —which expired in February— easing the costs for the “losers” from free trade.
There is in fact a lot that all sides can support in the final result. The trade agreement with Colombia should boost U.S. exports by over $1 billion a year (up from $12 billion last year), benefiting small and medium-sized companies as well as large agribusiness ventures (exporting grain and cotton) and flagship corporations such as Caterpillar, GE and WalMart. It will end the previously required yearly renewal process for trade privileges, locking in protections for companies in both countries to plan – and invest – for future production and trade. Likewise, the Korea pact should add over $10 billion annually in U.S. exports, opening up markets for farm products as well as financial, engineering and other service companies.
These trade agreements should boost manufacturing jobs. For instance, Caterpillar’s exports to Latin America are exploding – up nearly 60% in the last year. Manufacturing jobs making bulldozers, trucks and excavators in Peoria, Illinois, increasingly depend on trade to places such as Panama and Colombia. The boost in trade to Korea should also protect and/or add thousands of jobs.
Even with this belated success, free trade supporters shouldn’t start celebrating just yet. This last week marked the (likely) death of the World Trade Organization’s (WTO) Doha Round. After ten long years, the deepening rifts between not just developed and developing nations, but many within those blocks now look insurmountable. While some talk of make-or-break negotiations this week in Geneva, many nations have already moved on to Plan B, negotiating bilateral and regional trade deals. Indeed, the Europeans and others already are pursuing active policies in this direction.
At first glance, it would seem the United States will move in this direction as well. The Obama administration has staked economic growth on increasing trade, pledging in the State of the Union to “double exports over the next five years.” The current U.S. Congress is the most trade friendly in at least five years – indeed, trade remains one of the only areas where Congressional representatives seem to have any inclination to reach across the aisles.
Yet the lessons learned for potential trade partners from the Korea, Colombia, and Panama deals is that the United States – though tempting as the largest world market – is a fickle partner. Future trade deals will likely become more —not less— onerous to negotiate and complete. A real trade agenda will require more than a few feelers across the political aisle— an unlikely prospect today. And, without “fast track” authority (that would allow the President to negotiate a deal that will then be voted up or down without amendments), Obama today (and whoever is in office come 2012) can’t credibly negotiate with other nations. As the worldwide momentum shifts to bilateral and regional deals, the United States is going to find it difficult to keep up.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
