***Remarks delivered at AS/COA's panel discussion hosted at the Carnegie Endowment for International Peace on November 13***
Charles Dickens could have been referring to Latin America and the Caribbean situation when he penned that these were the best of times and the worst of times.
I think it is important for the next US Administration and its allies in the Congress to understand the complexities of the political economy and the economic policy being developed in the region and not be blinded by old stereotypes that too often color relations between the United States and Latin America.
So first, why do I say it is the best of times? Well, the average annual rate of GDP growth across the region between 2002 and 2007 was 5.5 percent, the highest registered in a five-year period in the last quarter-century.
This healthy growth has taken place against a backdrop of relatively low inflation—6.86 percent on average—and responsible macroeconomic policies in many of the region’s nations, which now boast considerable current-account and budgetary surpluses.
Foreign borrowing in Latin America and the Caribbean amounts to 22 percent of the region’s output, exactly half the percentage it was in 2002. And by 2007, foreign reserves stockpiled by the region’s governments added up to an estimated 460 billion dollars, up from $165 billion in 2002.
Not surprisingly, the private sector in many of these countries has also registered robust growth. In the Forbes listing of the 2,000 largest global corporations, 20 hail from Brazil, another 20 from Mexico and 14 from Chile. If that doesn’t sound too impressive, bear in mind that India and China each claim 30 on that list. And if not long ago it was seen as an exceptional novelty for Latin companies to be listed in New York, shares of 38 Brazilian, and 20 Mexican corporations now trade on U.S. exchanges.
Beyond all these figures, the best of times is reflected in the deepening roots of democracy in much of the continent. It isn’t simply a matter of holding elections—the rule of law is being strengthened across the region.
You see it in many countries where governments act responsibly, where you see a more vibrant civil society, backed up by more independent judiciaries. The progress isn’t the same in all countries, but the trend has been positive, and it is one we must not take for granted.
Too often in Washington, the hurried “what’s up in Latin America” question is treated as if the hemisphere were simply a sports arena for a monolithic left to face off against a monolithic right, with the ensuing score providing a shorthand for whether Washington should be alarmed or content.
This audience knows this is an absurdly simplistic, caricature-like view, but I’m afraid that it is one that is far too prevalent in this town and in the national media. And it is a type of gross generalization that is not employed to analyze political developments in other parts of the world. Part of the Latin American complexity is that each country, understandably, is playing out its own history.
Brazil and Chile, among others in the region, exemplify a new model of responsible governments that are balancing their progressive social agendas with prudent fiscal policies, constructive relations with Washington and a respect for the rule of law. It is no accident that these are the ones best prepared to weather the current financial storm.
The fact that South America’s largest country is now in a period in which parties from the left and right can peacefully alternate in power without major drama is part of the good news out of the region; the best of times indeed.
So why may this also be the worst of times? What’s the bad news? Well, here we need to talk about both immediate challenges and longer-term challenges.
In the first instance, the unfolding global financial crisis is threatening the achievements of the last decade, after some initial wishful thinking that perhaps large emerging markets had become decoupled or de-linked from problems in U.S. and European credit markets.
The current crisis is slashing the region’s income, as commodity prices plummet in response to slumping global demand. The price of oil has declined by 40 percent from its summertime peak; copper has retreated back to its January 2007 value; soybean prices are down 40 percent from its peak last February. And so on.
Meanwhile, as global credit tightens, large companies that have enjoyed access to external financing must now turn to domestic markets for funding. This combined with the demands of governments facing sudden budget shortfalls could crowd small and medium-sized businesses out of credit markets, depriving these engines of growth of needed capital.
Moreover, Latin America and the Caribbean face other problems originated far away from the region. First, local currencies are under important stress and domestic policies to maintain the exchange rate are suffering from tensions abroad.
The banking system, even if in a better position than in other regions, may suffer from contagion as foreign financial institutions have a large presence in the region, increasing its exposure to the crisis, as these banks could start to repatriate capitals to their home countries.
Also, Latin America is exposed to the crowding out effect of debt proliferation. As developed economies are likely to largely issue debt for the public expenditure counter cycle policies, Latin American countries will have to upgrade the interest rate of its own debt bonds.
Then there are the longer-term challenges facing the region, which have been the focus of the IDB. Even when the economic headlines were all positive, there was reason to question whether the gains were shared widely enough, and to worry about the sustainability of the region’s development.
So the bank, which will turn a half-century in 2009, is trying to be nimble and innovative in broadening and deepening the region’s development. We have programs that focus not just on building new schools, but on improving the quality of education in existing schools.
We are backing alternative energy projects that are environmentally sound and don’t crowd out food production; we have launched what we call “Opportunities for the Majority” to provide financing to private sector companies that deliver quality, affordable products to low-income consumers. These issues of long-term sustainable development must be a central concern of the next U.S. administration as well.
I was asked to speak about the impact of the U.S. election on the region’s future, and it is obviously too soon to tell what it will be, other than to make the obvious point that people in Latin America tend to greet all new administrations with the hope that the region will be paid more attention to in Washington.
Barack Obama is being greeted with tremendous goodwill around the globe, but he and his team will need to be mindful that they will be presiding over a financial crisis that is affecting the livelihoods of millions of people in developing countries, countries that for once had no role in triggering this crisis. Thomas Friedman has argued that the world is flat, but this crisis makes it also appear upside down. In contrast to the financial crises of past decades, this global contagion started here and spread to emerging markets that had gotten their houses in order to avoid such future shocks.
Countries like Mexico, Brazil, and Colombia have taken many “responsible” strides in recent years, living within their means, but this credit crunch, born in the USA, is still pressuring their currencies and severely hurting their markets.
No need to engage in the blame game, but it’s important that the next administration here in Washington appreciate how this crisis is affecting other countries. All stakeholders in the global economy have a vested interest in embracing concerted action to minimize the damage of this financial contagion, but in this case there is also a political need for Washington to be sensitive and empathetic to the pain of others.
No matter where Latin America ranks on its list of priorities, the region will present the Obama administration with other four unavoidable challenges: the imminent or ongoing Cuban transition or succession; the regulation of migratory flows within the hemisphere; the quest for more secure energy supplies; and finally, the need to reform free-trade in a way that deepens rather than weakens existing covenants while assuaging domestic political concerns.
As is often the case, these challenges each provide an opportunity. The Cuba debate is well beyond the scope of this comments, but it strikes me as an opportunity for Washington to show a new willingness to deal with such challenges in a multilateral manner. It could be the canary in the mine as far as Latin nations are concerned, signaling whether the new administration is willing to engage regional processes and institutions to addressing pressing problems.
On immigration, the reform push has stalled in Washington but it remains an urgent issue, and I hope that a new spirit of pragmatism will emerge to reconcile the labor needs of developed economies with the development interests of exporting countries, in a manner that respects the human rights and dignity of migrants. Globally, the flow of cross-border migration increased by 240 percent between 1970 and 2005, but in that same period the volume of trade in goods and services increased seven-fold.
Some five percent of all Latin Americans live outside their region, as economic migrants, sending home close to $70 billion in remittances a year, while raising concerns about a costly brain drain from their countries. The trend towards temporary worker agreements between countries could provide the necessary solution to advance the interests of both north and south.
Washington’s focus on energy matters, which looks to intensify in coming years, could be the catalyst to raise Latin America’s profile among policymakers here. Latin America’s stature as a reliable oil supplier to the U.S. speaks for itself, and there will be opportunities to explore ways to expand that flow of oil.
An even greater opportunity, however, may lie in a long-term partnership to develop alternative energy sources. Indeed, as the world moves to embrace non-corn-based biofuels, Brazil could in time supplant Saudi Arabia as this country’s most important partner on energy.
The broader trade agenda will also prove a delicate challenge, as well as an opportunity, for the Obama administration. World Trade Organization talks to further liberalize trade have stalled, and there is little enthusiasm for new regional or bilateral trade pacts amidst growing skepticism about the benefits of globalization both here and in developing nations. This is a major problem that could dramatically aggravate the economic slowdown.
Tough times can’t be used as a pretext to deny the interdependence between nations, or the economic reality that the more nations exchange goods and services, the better off everyone tends to be. Trade and foreigners always make tempting political targets in down times, but responsible leaders must not stoop to that temptation.
Protectionism is not the answer to legitimate anxieties about globalization, which the US government can and should address by negotiating human rights, labor and environmental conditions to further trade expansion.
I would like to close by noting that there is ample historical precedent for those of us who are optimists by nature. Back in the 1930s, Franklin Roosevelt became president during a dire economic crisis, and he turned this nation’s back on fear; not only on fear itself, as he put it, but on fear of further engagement with the outside world.
For Latin America, that meant the Good Neighbor Policy and an era of harmonious relations. Then in 1960 a young Democrat took office in what was considered a historic milestone in this country -- the first Catholic to become president. Like Barack Obama, Kennedy didn’t have a wealth of experience in government but he inspired hope for a political renewal.
Also like Barack Obama, it wasn’t clear how much attention Kennedy would be able to devote to Latin America, given how distracted he would be by pressing crises elsewhere. And yet it was his administration that launched the Alliance for Progress, still remembered fondly throughout the region.
Latin America and the Caribbean are ready to re-engage in a mature alliance with Washington, a true partnership that is mutually beneficial as the hemisphere navigates these uncertain, turbulent times.
Thank you very much.