Container ship sails beneath Golden Gate Bridge en route to port in California (Robert Galbraith/Courtesy Reuters).
Today the Council on Foreign Relations is releasing its independent Task Force report, “U.S. Trade and Investment Policy.” Led by Andrew H. Card — former White House Chief of Staff under George W. Bush – and Thomas A. Daschle – former U.S. Senator and Senate Majority Leader – and directed by my CFR colleagues Edward Alden and Matthew Slaughter, the 22 members took on the increasingly thorny issue of the future of U.S. trade policy.
One of the most interesting discussions within the report is of multinational corporations. While representing less than 1 percent of all companies, they provide nearly a quarter of all private sector jobs, nearly 40 percent of all U.S. capital investment, and conduct the vast majority of research and development. These are the engines of today and tomorrow’s economy – and as such the United States needs to become much more competitive in attracting these corporations to its shores.
Another important discussion involves the increasing skepticism among the U.S. public toward trade’s benefits. The group rightly points out this has occurred not because of the general public’s lack of understanding or “ignorance”, but because of the experience of the average American worker. Over the last ten years –the time frame within which trade became a much harder sell — nearly all American workers saw their real earnings fall. U.S. based export oriented jobs – which in general pay more than domestically oriented ones – haven’t grown, even as the world economy exploded. Inequality too has grown during this time frame. And while the report rightly points out that trade was not the only, or perhaps even the deciding factor behind these shifts, it did play a role. As such, any new policy must take into account and work to enhance the widespread benefits of trade for America’s citizens.
Too often participants in policy debates come out as for or against trade, without defining for what end. Here, the Task Force usefully defines the main goals of U.S. trade and investment policies as “improving American living standards and advancing America’s broader interests.” To better meet this end it provides several concrete recommendations, including prioritizing service sector opening in ongoing trade negotiations, reforming the tax code and removing protectionist regulations on international mergers and acquisitions in order to encourage foreign investment in the United States, streamlining the WTO and creating stronger international trade enforcement mechanisms, and expanding adjustment assistance programs to provide a broader safety net for American workers.
As is often the case in trade oriented debates, Task Force members weren’t able to reach a unanimous consensus on what a better trade policy would look like, and how to get there. It is worth looking at the additional dissenting views section to get a sense of the varied perspectives on the report’s conclusions. Still, everyone did agree to the Task Force’s basic takeaway – that the administration and Congress must revise America’s trade strategy or risk losing out on the enormous potential gains of deeper global engagement. The report is well worth a read, offering insights on how the United States can emerge from the recession and financial crisis a stronger and more capable leader in the international economy.
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.
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.
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
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.
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.
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.
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.
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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.
