Chile: Can the Constitutional Plebiscite Lead to a New Social Contract?

By Peter M. Siavelis*

An agreement between the Chilean government and opposition to hold a referendum in April on whether to scrap the current Constitution — legacy of the Augusto Pinochet dictatorship — has helped reduce tensions throughout the country and signaled that stakeholders are willing to compromise in order to reestablish Chile as a model of stability in a tumultuous region.

  • The most significant, violent, and deadly protests since the end of the Pinochet era exploded in Chile on October 20, after several years of simmering protests and social discontent. The protests, accompanied by looting, attacks on property and infrastructure, and 23 deaths, represented a turning point. Widely billed in the press as sparked by opposition to increased transport fees, this social mobilization represents a much wider demand for a fundamental rewriting of Chile’s prevailing social contract. It shocked the international community and Chileans alike, challenging the idea that Chile was a model of peace and economic development in a regional sea of economic crisis and social conflict.
  • The initial response of center-right President Sebastián Piñera’s government only created more conflict. Calling protestors delinquents and terrorists, and contending the country was at war with itself, he conjured uncomfortable parallels with the dictatorship. Widespread evidence of human rights abuses by police and security forces reinforced these parallels.

Piñera eventually bowed to public and elite pressure and announced a set of immediate reforms, including boosting the minimum wage and pension payments, cutting the price of medicines, lowering public transportation costs, slashing electricity prices, implementing higher taxes for the rich, and reducing the salary of members of congress, who are the highest paid in the region. For the longer term, Piñera acquiesced — one month after the initial explosion of protests — to a process to potentially scrap Chile’s 1980 Constitution, which was also the target of protesters’ ire. The agreement, dubbed acuerdo por la paz y una nueva constitución, grew from intense negotiations between the government and political parties. It was approved in Congress by a wide margin (127 in favor, 18 against, and 5 abstentions).

  • The legislation establishes that on April 26 a nationwide plebiscite will ask Chileans whether they want a new constitution and how it is to be drafted, with two simple questions: if the voter wants a new constitution, and, if so, if the voter prefers a “Constitutional Convention” or a “Mixed Constitutional Convention.” The former will entail a constituent assembly of citizens elected by the population, and the latter a body of one-half members of Parliament and one-half private citizens.
  • Most polling shows over 80 percent of Chileans in favor of a new constitution, and a large majority of those preferring a constitutional convention — an indication of the low regard in which Chilean politicians are held by the public. Whatever mechanism is eventually used, a second plebiscite will be held at a date to be determined for ratification of the new constitution.

The agreement left elements of both sides dissatisfied. The right grudgingly accepted the arrangement, but its more extreme elements remained concerned that a Constitutional Convention will establish social guarantees similar to those of Venezuelan Chavismo and undermine social peace and Chile’s development. More progressive signatories of the agreement added their support, thrilled at the prospects of doing away with the authoritarian constitution, but were concerned it did not go far enough to offer guarantees of gender parity or reserve representation for Indigenous groups and independents.  The Communist Party and a smattering of small parties refused to sign because they wanted deeper reforms.

For now, the immediate reforms and the acuerdo have calmed the pace and tenor of protests, and most accounts point to a peaceful plebiscite in April. This constitutional moment is a big one for Chile. Given the government’s recognition of the severity of the crisis, there is no reason to doubt its sincerity to make the plebiscite go smoothly and provide a framework for moving peaceably forward. If the plebiscite is successful, Chileans will achieve what was nowhere on the horizon only months ago: a definitive end to the Pinochet constitution, one of the dictatorship’s most objectionable legacies. This change will be followed by a reconfiguration of Chile’s fundamental social pact and reforms to its extreme form of neoliberalism, which has created staggering economic and social inequality at the root of these protests. However, for Chile to reestablish its status as model of economic development and social peace, it will have to walk a careful line between reform between competing interests and reestablish some sense of order and predictability after what undoubtedly has been Chile’s most significant social convulsion since the end of the dictatorship. The strength of Chile’s democratic institutions and its political class — which is fundamentally different than others in the region in terms of political skill, respect for the rule of law, and relative probity enhances the possibilities that the country will be able to walk this line.  

January 9, 2020

* Peter M. Siavelis is Chair and Professor in the Department of Politics and International Affairs, and Associate Director of the Latin American and Latino Studies Program at Wake Forest University. His most recent edited book on Chile, with Kirsten Sehnbruch, is Democratic Chile: The Politics and Policies of a Historic Coalition.

El Salvador: Draft Budget Confirms Structural Problems in Public Finance

By ICEFI and CLALS*

US banknote lot

U.S. Banknote Lot/ Creative Commons/ https://www.pxfuel.com/en/free-photo-jqchd

The budget that President Nayib Bukele submitted to El Salvador’s Legislative Assembly in September increases much-needed social spending appropriate for the country’s current socio-economic context, but it lacks clear objectives and benchmarks — and fails to address ongoing structural problems in public finance.

  • The proposed budget is based on revenues of US$5.466 billion, 92.7 percent of which will come from taxes. In gross terms — without considering tax rebates — that amounts to a tax burden of 18.2 percent of GDP, just below the 18.3 percent that ICEFI estimates for 2019. In net terms, the budget claims taxes will reach 18.1 percent of GDP (compared to 17.7 percent in 2019), but that figure is not realistic: it estimates tax refunds of only $16.5 million — compared to $117.4 million for the January-August period of this year. This error threatens to undermine serious Legislative debate.

Spending in the proposed 2020 budget reaches $5.774 billion — equal to 20.8 percent of GDP, compared to 22.3 percent estimated for 2019. Some areas that are already struggling, such as environmental programs, face significant cuts, while others will experience modest decreases and increases.

  • According to the draft, Central Government operating costs will decrease by 1.8 percent of GDP, driven by cuts in contracting of services and purchase of goods as well as in current transfers. Capital expenditures, on the other hand, will increase 0.3 percent over 2019 — that is, about 3.3 percent of GDP.
  • The Central Government’s spending on social development is slated to grow to its highest level in decades — about 10.5 percent of GDP ($2.921 billion), compared to 9.7 percent this year. The main beneficiaries of the increase will be municipal governments, pension systems, trusts for social security, and health care. With some 800,000 children and adolescents lacking schools to attend, the proposed increase in the education budget — from 3.73 percent (in 2019) to 3.75 percent — is minimal.

The budget anticipates a slight increase in the federal deficit. The non-financial public sector, including trusts to cover social security obligations, will experience a deficit of 3.1 percent of GDP (compared to the 2.7 percent that ICEFI estimates for 2019) — pushing total public debt to 70 percent of GDP. That’s less than the 70.7 percent estimated for 2019, but ICEFI cautions that the decline could easily evaporate as the government faces growing demands over the course of the year. Either way, debt servicing will remain the most significant item in the 2020 budget, reaching $1.102 billion (4 percent of GDP).

The perennial challenge that El Salvador’s leaders like their counterparts throughout the region  face is how to stimulate economic growth and reduce inequalities to make the state more democratic and effective. But this budget, if implemented as drafted, will achieve neither goal in politically significant ways. The fiscal data underscore that the fundamental structural problems low revenues, inadequate public spending, and high fiscal deficits and public debt remain unaddressed.

  • The increase in capital spending, while positive, is insufficient to have its desired impact of driving economic growth. ICEFI’s analysis indicates that the jump in social spending is certainly warranted by the growing unhappiness in various social sectors, but also falls far short of what’s needed to reverse ongoing negative trends. The cuts in environmental protection from a minuscule 0.07 percent of GDP (2019) to 0.05 percent seem outright foolish for a country that has already shown vulnerabilities, which could aggravate existing economic and social conditions. Rather than taking on the serious challenges El Salvador and its economy face, the 2020 draft budget kicks the can down the road, without credible expectation that the task will be easier in the future.

December 9, 2019

* The Instituto Centroamericano de Estudios Fiscales conducts in-depth research and analysis on the region’s economies. Data and charts supporting this article can be found by clicking here. This is the third in a series of summaries of its analyses on Central American countries.

U.S.-Central America: Suspending Aid Won’t Help

By Joseph Wiltberger*

Honduran President Juan Orlando Hernández, U.S. Vice President Joe Biden, Guatemalan President Jimmy Morales, and El Salvador President Salvador Sánchez Cerén during a Northern Triangle meeting on January 14, 2016

Honduran President Juan Orlando Hernández, U.S. Vice President Joe Biden, Guatemalan President Jimmy Morales, and El Salvador President Salvador Sánchez Cerén during a Northern Triangle meeting on January 14, 2016 / https://commons.wikimedia.org/wiki/File:Reuni%C3%B3n_Tri%C3%A1ngulo_Norte_con_Vicepresidente_Biden2.jpg / Creative Commons

President Trump’s recent announcement to cut off U.S. aid to Guatemala, Honduras, and El Salvador – intended to pressure those governments to stop migrant caravans headed for the U.S.-Mexico border – would suspend and divert an estimated $700 million dollars in funds directed mainly to regional security and economic programs with mixed impacts on migration. A comprehensive impact evaluation of recent U.S. aid to the region has not yet been conducted, so the consequences of this move are open to debate. While some of the aid may help those vulnerable to migration, other allocations to the three countries may be counterproductive to slowing migration.

The three countries have received around $2 billion in aid since 2015, when former U.S. Vice President Joe Biden initially committed Washington’s contribution to the Alliance for Prosperity Plan (A4P) in response to a surge in the migration of Central American families and unaccompanied minors. The A4P, a document drawn up by the Inter-American Development Bank and the three nations’ governments, has guided most of the U.S.’s strategic aid allocations to the region. The U.S. Congress allocated about $750 million in assistance in fiscal year 2016, $655 million in 2017, and $450 million in 2018. About a third of those funds have been aimed at improving citizen security through support for police, the judicial sector, and violence prevention programs. Roughly another third has been geared toward promoting economic development, and the remainder has been split mainly between anti-corruption efforts and support for military personnel through training and arms to fight drug trafficking and human smuggling.

  • NGOs working with communities susceptible to migration complain that the A4P was drafted by Central American leaders without their input, and that its framework – also reflected in U.S. aid priorities – favors elite business and political interests. It gives tax incentives to foreign investors and, opponents say, makes way for resource extraction, maquilas, and other transnational industries dependent on cheap labor and known to contribute to displacement. It directs hundreds of millions of dollars in aid to military and police forces notorious for human rights violations that are rarely prosecuted, a problem that human rights advocates warn endangers citizens and can force more migration.
  • Some of the programs aligned with the A4P, however, grasp the underlying causes of migration from these nations and show how aid can help if properly channeled. They aim to combat corruption and reduce violent crime by improving judicial systems and government transparency, and with community-based violence prevention programs. Many projects – such as initiatives to create economic, extracurricular, and educational opportunities for at-risk youth, and grassroots endeavors such as cooperatives of women and small farmers – are led by local organizations with a long-standing track record of effective local work on the ground in marginalized areas. One of the more rigorous impact evaluations to date found that USAID-funded community-based gang violence prevention programs were effective.

President Trump’s announcement to cut aid did not reflect an assessment of its effectiveness but instead appears to be a political maneuver to counter domestic political opponents who support aid and to punish the governments he believes have “set up” migrant caravans and should do more to stop them. Ending assistance doesn’t help. U.S. aid to Central America should be focused on proven ways to improve security and economic conditions and to combat corruption and guard against human rights violations – problems that drive the region’s emigration today. Cutting off aid will not stop caravans and runs contradictory to the A4P’s stated goal of addressing the root causes of migration. It is counterproductive to the current administration’s interests. Aid strategies would benefit from setting U.S. political and business interests aside to instead focus more on measures that effectively fight corruption, protect human rights, and provide support for trusted organizations proven to be effectively creating opportunities and safer communities for those most vulnerable to migration.

April 29, 2019

* Joseph Wiltberger is a cultural anthropologist. He holds appointments as Assistant Professor of Central American Studies at California State University, Northridge and as Visiting Scholar at the Center for Comparative Immigration Studies at the University of California, San Diego.

Mexico: Gambling That Austerity Will Be Enough

By Juan Carlos Moreno-Brid*

Mexico City's Paseo de La Reforma

Mexico City’s Paseo de La Reforma / Flickr / Creative Commons

While continuing to emphasize his goal of reversing neoliberalism in Mexico, President Andrés Manuel López Obrador (AMLO) is pursuing a budgetary policy with austerity – not much-needed fiscal reform – as his top priority, at least for 2019-20. In his inauguration speech last December, AMLO repeated campaign themes deriding the neoliberal policies implemented in Mexico since the mid-1980s, blaming them, as well as rampant corruption, for the country’s slow growth, rising inequality, and widespread poverty. Since then, however, the President’s speeches on economic policy and his Secretary of Finance’s main policy documents have stated that all public-sector operations will be subject to strict austerity.

  • They have indicated that 1) there will be no fiscal reform in the first three years of the administration; 2) fiscal revenue will not increase this or next year as a proportion of GDP; and 3) in this period, the public sector will not incur additional debt. In other words, the implementation of AMLO’s proposed social and economic programs will depend on the availability of public revenues subject to the strict constraint of no additional resources through public borrowing or any tax reform. The government has made sharp cuts to government personnel and wages and eliminated various public entities, including ones created to attract foreign investment and tourism.

At the same time, AMLO plans to change the composition of public expenditures significantly to accommodate his top-priority projects, among them Jóvenes Construyendo el Futuro (a massive transfer of $180 per capita for an ambitious, and, in many ways, welcome apprentice program for up to 2.3 million youngsters); Sembrando Vida (planting a million trees); Adultos Mayores; and investment to put in place a Maya Train, building from scratch a new crude oil refinery in Dos Bocas, and revamping an airport in Santa Lucía.

More in line with AMLO’s stated intention of overturning neoliberalism, what Mexico really needs is a profound fiscal reform – strengthening public revenues, modernizing public investment strategies, and strengthening its development banks – to foster growth and equality with long-term debt sustainability and greater countercyclical capacity. It is a paradox that the new government chose to commit itself to a severely austere budget, reflected in cuts in public expenditures and an increased primary fiscal surplus.

  • The decision to refrain from tax reform, coupled with drastic austerity, imposes acute limits on the new administration’s ability to strengthen and modernize infrastructure, reduce income inequality through fiscal tools, or strengthen its capacity to act in a countercyclical way – not to mention alleviate major lags in the socioeconomic conditions of the poor population. The IMF, OECD, World Bank, ECLAC, the Centro de Investigación Económica y Presupuestaria (CIEP), Grupo Nuevo Curso de Desarrollo (UNAM), and many local think tanks have systematically underlined that Mexico’s tax revenues as a proportion of GDP are extremely low. According to the estimates of UNAM, CIEP, and others, those revenues are at least six percentage points short of what is needed to meet long-standing needs in infrastructure, health, pensions, education, and overall social security and protection concerns. By reducing the bureaucratic apparatus and public-sector wages virtually across the board, the administration runs the risk of further weakening the state’s technical capabilities in some key areas of public policy and thus undermining its ability to correct course.
  • The underlying reasons for the new government’s commitment to austerity seem to be more political than economic. It has stated that a significant amount of resources can be freed up by abating the rampant corruption, and it apparently believes that before implementing fiscal reform, the government must prove to the citizens that it can deliver efficiently, effectively, and with honesty. Whether there will be sufficient achievements in terms of economic growth and inclusion and in eliminating impunity to convince the middle and upper classes to accept a progressive fiscal reform three years from now is an open question, but the answer will determine Mexico’s economic growth path and progress in the reduction of inequality, poverty, and corruption, and perhaps too its social stability and the viability of its democracy in the future.

April 16, 2019

*Juan Carlos Moreno-Brid is a professor of economics at the Universidad Nacional Autónoma de México (UNAM).

Laudato Si:  Support for the Indigenous of the Amazon Benefits Us All

By Birgit Weiler*

Group of men and women stand behind a banner

Members of the Awajún community mobilize in Peru. / Andina Archivo / Creative Commons

Issuing his Laudato Si encyclical in 2015, Pope Francis put himself on the side of Latin America’s original peoples in protecting the environment in their ancestral lands, in what will be a long struggle to counteract climate change and safeguard the earth.  Laudato Si emphasized that different religions, including the indigenous peoples’, can make “rich contributions … towards an integral ecology.”  Francis wrote:  “Given the complexity of the ecological crisis and its multiple causes, we need to realize that the solutions will not emerge from just one way of interpreting and transforming reality.  Respect must also be shown for the various cultural riches of different peoples … their interior life and spirituality.”   He spoke of their wisdom especially in dealing with the earth and all the living beings.

  • For the Awajún and Wampis in Amazonas Department in northern Peru, their cosmovisión (world view) and traditional religion are an important source of inspiration and endurance in their struggle for safeguarding their living space. In the integral vision of the world they share with other indigenous peoples, all living beings – not only human beings – are considered agents within a single big energy.  Everything is connected – similar to the “integral ecology” mentioned in Laudato Si.
  • Highlighting the urgent need of a “bold cultural revolution,” the encyclical implicitly embraces the indigenous people’s concept of “Buen Vivir,” an alternative way of life based on respect for the earth and on living in relationships of interconnectedness and interdependence. This demands a change in lifestyle reducing significantly our negative impact on our planet; caring for the integrity of the ecosystems and of human life; and a real change in our way of understanding and practicing economy, “progress,” and “development.”

Governments have been slow to respond to these calls – which threaten to disrupt longstanding arrangements between the extraction industry, regulators, and legislators – but there have been some significant public signs of progress.  Last March, for example, the Fourth Constitutional Court in Lima declared that the Awajún and Wampis have the right to approve oil exploration in their ancestral lands, particularly an area known as “Lot 116.”  The court ordered exploration activities to cease and withdraw from the region until full consultation with local indigenous groups was completed.  In another case, in the Iquitos–Pucallpa region, a court ordered that the state consult with respect the indigenous people’s right to a full consultation, forcing the government to step back and begin the process anew.

 Despite this halting progress, the environment and cultures that Laudato Si reveres are under constant and, in some cases, worsening threat.  Illegal deforestation of precious tropical lumber is reaching alarming levels.  An explosion in new oil palm farms, the construction of hydroelectric power stations, and the expansion of roads and other infrastructure to facilitate extractive industries are all inflicting permanent damage.  Scientists have repeatedly pointed out that the ecosystems of the Amazon won’t be able to bear much longer the devastating impact of these activities.  As the Pope wrote, loss of the region’s tropical forests – the biggest lung of our world – and the vanquishing of peoples like the Awajún and Wampis would be a tragic loss for us all.

October 11, 2017

* Birgit Weiler is Director of the Area of Research at the University Antonio Ruiz de Montoya in Lima; collaborates closely with the Vicariate of Jaén (Catholic Church) and with the Awajún and Wampis; and contributes to CLALS’s project on religion and climate change.

Can Latin America Escape the Middle-Income Trap?

By Rick Doner and Ben Ross Schneider*

challenges logo (revised)2

Photo Credit: Inter-American Development Bank / CLALS / Edited 

Most literature on the “middle-income trap,” widely understood as a core obstacle to sustained development in Latin America, focuses solely on economic dynamics and understates the importance and challenges of political coalition-building.  That literature, largely generated by economists in academe and international financial institutions, argues convincingly that in Latin America, as well as Southeast Asia, once countries achieve some degree of success in economic development, they get stuck.  They are unable to compete with low-cost producers in traditional sectors – initial development success brings higher wages and other costs – while they also have failed to gain the capacity to compete with developed economies in frontier industries, where technological capabilities and productivity levels are far higher.  These analysts stress that Argentina, Brazil, Chile and Mexico – or for that matter Indonesia, Malaysia and Thailand – need to build on their achievements over the past half century in order to make the leap into the ranks of the world’s most prosperous nations.  They highlight the trap’s proximate origins in productivity slowdowns and recommend policy solutions that focus on improving human capital through investment in education and vocational training.  But identifying problems and potential solutions does not explain why leaders fail to adopt the solutions.  In other words, it’s not clear from existing writings why the trap is actually a trap.

The literature does not acknowledge that fundamental political obstacles, especially lack of effective demand and pressure for these solutions, are at the heart of the problem.  As is evident from the history of failed programs to improve education and R&D, political will to invest in such public goods is in short supply.  Politicians are rarely willing to forgo the short-term political benefits of satisfying entrenched interest groups for the long-term developmental benefits of creating institutions capable of helping the broader citizenry to upgrade its capacity for technology absorption.  A core reason for this lack of political will is the weakness of the societal constituencies that might demand the necessary policies and effective institutions.  Our research indicates that relations among key societal actors in middle-income countries are less amenable to building the consensus that economists advocate. In a recent article, we argue that the same conditions that facilitated or accompanied movement to middle-income status – such as foreign investment, low-skilled and low-paid work, inequality, and informality – have generated political cleavages that impede upgrading policies and the construction of institutions necessary to implement them.  This fragmentation is why the trap is a trap. Three lines of fragmentation are key:

  • Big business is divided between foreign and domestic firms. The former can undertake productivity-improving measures in-house and/or at their home headquarters, whereas local firms tend to focus in non-tradeable services and commodities whose demand for better training and R&D is lower than in manufacturing.
  • Labor is fractured between formal and large, growing informal sectors. Enjoying longer job tenure and on-the-job training for specific skills, formal workers have little interest in broader skills development.  Informal workers, on the other hand, constantly shift jobs and would prefer investments in vocational institutions offering general training.
  • These societies remain overall less equal and, as is now well known, inequality undermines the will and capacity to provide broad public goods such as quality universal education and support for technology development.

 Pro-growth coalitions of various types have been key to productivity improvements in now-high income East Asian countries, such as Korea and Taiwan.  The fact that these countries had stronger (and more autocratic) governments does not preclude developing or building on such coalitions in countries with messier political systems and weaker bureaucracies.  First, leaders can build on sectoral pockets of high productivity, such as aquaculture in Chile, wine in Argentina (and rubber in Malaysia).  Second, international and regional institutions can help supplement demands for skills by supporting programs that focus on technical and vocational institutions that actually meet and are linked to employers’ needs.  Third, organizations such as the ILO can promote business associations that represent the local firms for whom collective technical training and R&D are especially important.

August 22, 2016

* Rick Doner and Ben Ross Schneider teach political science at Emory University and MIT, respectively.

How Sustainable are Latin America’s Advances on Poverty and Inequality?

By Eric Hershberg

Brazil Contrasts

“Projeto Contrastes.” Photo Credit: Gabriela Sakamoto / Flickr / Creative Commons

The significant decline in poverty rates and income inequality in Latin America over the past two decades – driven by a combination of sustained economic growth and intelligently designed social policies – may slow or even be reversed as economic conditions deteriorate across much of the region.  Poverty had begun to drop in most countries even before the commodity boom accelerated growth rates in South America beginning around 2003.  The “Washington Consensus” policies of the 1990s impacted wage income and employment negatively, but other factors diminished their impact on poverty.  By overcoming profound macro-economic instability, which among other things produced hyperinflation that devastated disadvantaged sectors of the population, the economic adjustments of that period were not entirely regressive.  Moreover, a concurrent shift toward targeted social programs – which redirected subsidies away from less vulnerable segments of the population in order to protect the poorest of the poor.  By 2002, the number of people living on less than $1.90 a day had declined 4.6 per cent from where it had been at the beginning of the 1990s, according to the World Bank, while the number living on less than $3.10 stayed flat and actually rose (from 135.6 million to 138.1 million).  Performance varied across countries.  By 2012, after a strong decade of growth and a wave of progressive governments, the progress was much more impressive, with poverty dropping to 33.7 million ($1.90/day) and 72.2 million ($3.10/day).

Inequality declined also – a different challenge in the region that Kelly Hoffman and Miguel Centeno aptly labeled the “lopsided continent.”  Measured by GINI coefficients, income inequality in Latin America, which exceeded that of any other world region at the beginning of the century, grew less pronounced under governments of various ideological proclivities.  A substantial body of research shows that this was a product of two factors.

  • Investments in primary and secondary education, which accelerated during the neo-liberal years, meant lower wage premiums for those with more than basic skills: near universal attendance in secondary school reduced the significance of gaps between workers who had secondary education and those who had little schooling.
  • Innovative social policies – particularly conditional cash transfers – meant that the lower rungs of the income ladder received meaningful transfers from the state, enabling them to narrow the income gaps vis-à-vis less disadvantaged sectors. Less frequently acknowledged was the positive impact of reforms on minimum wage policies and the creation or expansion of non-contributory pensions, both of which were pushed aggressively by several governments associated with the “Left Turns.”  Non-contributory pensions were especially important since the most vulnerable of Latin American aged populations, having spent their working years toiling in the informal sector, had previously lacked any sort of retirement pension.  (Read further analysis of pension reform.)

The region’s slowdown in economic growth and the pressure on public finance brought about by the end of the commodity boom – and the infusion of cash into state coffers that it afforded – raise questions about the sustainability of these advances.  The benefits of investments in education will endure for some time.  Even if education budgets decline, the costs in terms of lower educational achievement would take years to become evident, and it is not at all certain that the funding will decline.  However, the social programs are much more vulnerable, as are the ambitious efforts to increase minimum wages and labor protections more broadly.  Should the economic contraction underway in some countries and on the horizon in others generate an increase in informality, the labor market achievements of recent years could be quickly eroded.   This would impact inequality, and it might soon exacerbate poverty as well.

June 3, 2016

Increasing the Benefits of Trade Agreements

By Antoni Estevadeordal and Joaquim Tres*

Trade 1993-2016

Source: IDB (Full-sized images at bottom of page)

Latin American and Caribbean countries were major players in global trade liberalization in the 1990s but have since been held back by complex rules, infrastructural obstacles, and the poor flow of information.  The successful conclusion in 1994 of the Uruguay Round of multilateral trade negotiations and the establishment of the World Trade Organization (WTO) fueled growth and optimism in the region, but the slow progress of the Doha Round drove the region into the silent tide of regional trade agreements (RTAs), which now govern about half of world trade.  Latin American and Caribbean countries have concluded some 70 RTAs – a far cry from the handful of sub-regional customs unions and free trade areas in place in 1994.  As a result, tariffs applied by Latin American countries have dropped from an average of 40 percent to 10 percent during this period.

Despite these policy advances, Latin America and the Caribbean’s participation in international trade is still limited.  Whereas the region and the developing nations of Asia had a similar share of world trade in 1962 (around 6 percent), Latin America’s global trade share has remained relatively unchanged – and that of Developing Asia has grown to nearly three times its previous size.  Latin America registers lower levels of intra-regional trade – 18 percent – compared to 37% in Developing Asia and 61% in the European Union.  Our research indicates that Latin America and the Caribbean could close this gap through a series of measures:

  • Harmonizing the different rules of origin in the RTAs and the wide array of sanitary, phytosanitary, and technical standards that qualify market access.
  • Improving infrastructure and reducing inefficiencies at border crossings to reduce transportation and logistics costs, which amount to three times more than existing tariffs.
  • Harnessing the power of information and communications technology to reduce costs through one-stop shops and process automatization, such as the trade single windows being introduced in several countries in the region. The cost of information about consumer preferences, market demand, and foreign regulations is the first barrier that potential exporters face.
  • Simplifying and reducing administrative burdens through expedited and secure customs and other trade facilitation measures. Some experts estimate that, worldwide, some 75 percent of delays are due to inefficient processes (compared to 25 percent due to inadequate infrastructure).

The main lesson for Latin America and the Caribbean is that trade agreements are a necessary – but not sufficient – condition to achieve economic development potential.  Increasing companies’ participation in international value chains is key to unleashing trade as an engine for economic growth and poverty reduction.  Trade-driven growth in the region, much of it from South American commodities, enabled a reduction of poverty from 22 percent in 2002 to 12 percent by creating new employment opportunities and the fiscal capacity to fund poverty reduction initiatives such as conditional cash transfers (Mexico’s Programa Oportunidades, for example).  By our calculation, trade facilitation measures such as customs and border simplifications can increase Latin American and Caribbean exports by as much as 15 percent, translating into a 5 percent increase in export-supported jobs that pay almost 20 percent more than jobs at non-exporting firms.  It is within policymakers’ grasp to create the enabling environment for firms to export, especially for the small and medium-sized enterprises that may represent the next generation of exporters.

May 9, 2016

*Antoni Estevadeordal and Joaquim Tres are, respectively, the manager and principal specialist of the Integration and Trade Sector of the Inter-American Development Bank.  Click here to access the IDB’s new course on trade agreements, and here and here for related studies.

Trade 1993-2016 v2

Source: IDB

The Critical Role of Universities in Latin America’s Future

By Rodrigo Arocena*

Tec de Monterrey

University students in Monterrey, Mexico. Photo Credit: ·júbilo·haku· / Flickr / Creative Commons

As the latest commodity boom winds down, universities in Latin America can play a leading role in helping the region rebound from the resulting economic slowdown and build itself a more prosperous and equitable future.  The consequences of the boom for economic, political, and social conditions in the region are hotly (and rightly) contested.  But one inescapable conclusion is that inadequate attention was paid to raising societies’ knowledge and qualifications in the production of goods and services.  This matters greatly, because knowledge gaps and skill deficits lie at the heart of what underdevelopment means today.  If the focus in the decades following World War II was on addressing disparities in industrialization, one of the challenges now is over-specialization in productive activities with low added-value of knowledge and qualifications.  When such specialization persists, social and environmental problems are not manageable in the long term.  Differences concerning knowledge and higher education are also one of the main factors behind inequality, in both North and South.  In Latin America, traditionally considered the most unequal region in the world, inequality in recent years has been reduced in a handful of countries and so has poverty in almost all of them.  But such social progress may be jeopardized soon not only because of economic and political changes but also because of quite weak progress made expanding knowledge capabilities and applying them to collective problems.

Universities are at the heart of the solution.  In the knowledge-based and innovation-driven economies that emerged in the North during the last decades of the 20th century, universities obviously made a difference.  They were fundamental actors in the accelerated expansion of advanced education that is closely connected with that type of economy.  They generated new scientific and technological knowledge and often channeled its use into productive activities.  Even then, in the advanced economies of the North private sector firms perform a quite larger proportion of total research and development than universities.  Moreover, Northern universities are mainly oriented by market demand, meaning that actors who are already knowledge-strong obtain most of the benefits of what universities do, fostering what could be called knowledge-based inequality.  This is different from Latin America in several ways:

  • Public universities in Latin America are the main generators of new knowledge, which is why they should get priority when thinking about the future of the region’s development.
  • They are frequently well plugged into National Innovation Systems, the web of actors and institutions responsible for upgrading productivity through the generation and effective use of new knowledge.
  • They represent a continuation, although at a weakened level, of the tradition of the socially committed university forged by the Latin American University Reform Movement.

In any country of the world, knowledge democratization deserves high priority in every progressive agenda – and Latin American universities are, at least potentially, fundamental actors in this task.  Democratizing access and success in higher education, and thus trying to overcome an ancient social divide that stymies development, is key.  The task also means fostering research in all disciplines and applying it to collective problems, as has occurred with research and innovation oriented to social inclusion.  The Latin American ideal highlights merging the modern university’s two long-established missions – teaching and research – with a third one, called “extension,” which entails cooperation with external actors in knowledge generation, cultural creation, and problem-solving, with priority given to the situation of deprived sectors.  As motors for knowledge expansion, and thus for social inclusion, Latin American universities make an invaluable contribution to development and the deepening of democracy.

April 28, 2016

* Rodrigo Arocena served as Rector of the Universidad de la República, Uruguay, from 2006 to 2014.

 

Tax Reform or Governance Revolution?

By Andrew Wainer*

Photo Credit: Reuniones Anuales GBM / Flickr / Creative Commons

Photo Credit: Reuniones Anuales GBM / Flickr / Creative Commons

Taxation to fund development is becoming central to U.S. foreign assistance policy, but it would be a mistake for USAID and other foreign assistance agencies to view tax reform solely through the technical lens of financing for development.  In September, USAID Assistant Administrator Alex Thier penned an article subtitled, “Why Taxes Are Better than Aid.”  This follows the announcement in July of the Addis Tax Initiative at the UN Financing for Development Conference, where the United States and other donors pledged to double the amount of technical assistance for taxation in developing nations.  By most accounts, the potential fiscal benefit of increasing taxation –“domestic resource mobilization” (DRM) in development parlance – is huge.  The World Bank and International Monetary Fund estimate that in 2012 DRM in emerging and developing nations generated a combined $7.7 trillion.  This dwarfs average annual foreign assistance outlays, which in recent years have averaged about $135 billion.  One of many examples cited by USAID is El Salvador, where a $660 million increase in annual tax revenues has been channeled to health, education, and social services, as well as other development programs.

The issues of fair and transparent taxation are often a secondary component in discussions of DRM but – as events in Guatemala and elsewhere demonstrate – can also generate revolutionary transformations in governance.   Even as U.S. agencies emphasize the technical side of DRM assistance, organizations that monitor taxation are sparking historic citizen revolutions through revelations of governmental tax corruption.

  • The UN-sponsored International Commission against Impunity in Guatemala (CICIG) was created in 2006 to strengthen the rule of law through “investigation of crimes committed by members of illegal security forces and clandestine security structures.” But it was CICIG’s revelations of a customs tax corruption network that brought 100,000 Guatemalans into the street in a single day.  The protests led to the forced resignation and jailing of President Pérez Molina as well as a surge in citizen engagement unseen in the country’s modern history.

The intimate link between taxation and governance should be a central factor in how the U.S. government and others think about DRM.  As the OECD states, “The payment of tax and the structure of the tax system can deeply influence the relationship between government and its citizens.”  DRM should place a high premium on the governance impact of tax reform, where appropriate.  Tax reform not only increases government revenues, but as the case of Guatemala demonstrates, it can also strike at the heart of ossified structures of governance and can spark revolutionary changes in the relationship between citizens and states.   

November 12, 2015

* Andrew Wainer is the Director of Policy Research in the Public Policy and Advocacy Department of Save the Children USA.