What Will Trump Do About NAFTA?

By Malcolm Fairbrother*

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U.S. President-elect Donald Trump and the flag of the North American Free Trade Agreement (NAFTA). / Flickr and Wikimedia / Creative Commons / Modified

Despite his campaign rhetoric repeatedly attacking the North American Free Trade Agreement, U.S. President-elect Donald Trump probably won’t touch it, except in superficial ways.  He has called NAFTA the “worst trade deal ever,” and promised to pull the U.S. out unless Mexico and Canada agree to renegotiate it.  Last week, he suggested renegotiation of NAFTA will include provisions for Mexico to repay the U.S. government for the wall he wants to build along the border.

Dismantling or even significantly rewriting the accord is unlikely for a couple reasons:

  • First, the billionaires, chief executives, and friends he is choosing for his cabinet are hardly people inclined to dismantle an agreement whose contents largely reflect what American business wanted from the U.S.-Mexico relationship when NAFTA was being negotiated in the early 1990s. Corporate preferences weighed heavily against any big deviation from the status quo after the last political transition in Washington, in 2008.  Barack Obama too said that “NAFTA was a mistake,” though his criticisms were a little different.  He railed against lobbyists’ disproportionate influence over trade policy, and promised big changes to international trade agreements, including better protections for workers and the environment.  Even so, he didn’t touch NAFTA, and the Transatlantic Trade and Investment Partnership (TTIP) and the Trans-Pacific Partnership (TPP) he negotiated included – like NAFTA – shady provisions for investor-state dispute settlement.
  • It would be near-impossible, or least massively expensive, to get what Trump seems to want most: a big drop in imports from Mexico. In his eyes this would make NAFTA a better deal for America, though of course serious economists disagree.  Realistically, reopening the agreement would be very messy, and if he tried to throw up massive new trade barriers business leaders would strongly object.  NAFTA could include some additional measures to make it easier for goods and/or people to get around among the NAFTA countries, but that’s not what Trump has promised.

His economic nationalism makes the Republican Party establishment squirm, but it’s clear it also helped Trump win several Midwestern states, tipping the electoral college in his favor.  Insofar as agreements like NAFTA entrench rules friendly to business, and generate market efficiencies and economies whose benefits accumulate in the hands of the few, voter hostility is no mystery.  But economics is only part of the reason.  The bigger issue is what the backlash against globalization – embodied also by Brexit and the rise of neo-nationalist parties in Europe – means more broadly.  The average Democratic voter has a lower income than the average Republican voter, but Democrats are more supportive of trade agreements because they are more internationalist, more open to other cultures, younger, more educated, and more urban.  Throughout his presidency, Trump will therefore be squeezed between his working class rhetoric – appealing to the distrustful – and his business class milieu.  He is an extreme case of the politicians’ mercantilist thinking on trade, wherein exports are good and imports are bad, and “trade deals” like NAFTA are somehow like deals in the business world, where it’s possible to out-negotiate someone.  The reality is that this thinking – which flies in the face of basic economics – doesn’t point to any clear course of action.  This is why Trump won’t actually do much about NAFTA.

January 10, 2017

* Malcolm Fairbrother is social science researcher and teacher/mentor in the School of Geographical Sciences at the University of Bristol (UK).  This article is adapted from a recent blog post for the American Sociological Association.

China, Latin America, and the New Globalization

By Andrés Serbin*

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Chinese President Xi Jinping received a medal of honor from the Peruvian Congress during his tour of South America last month, which included the Asian-Pacific Economic Cooperation summit in Lima. / Ministerio de Relaciones Exteriores, Peru / Flickr / Creative Commons

In Latin America and elsewhere, the world is undergoing tectonic movements that indicate the birth of a new world order with new rules of play.  For much of the past decade, dynamism in world commerce and finance has been shifting from the Atlantic basin to the Pacific.  While the international economy has shown fragility and the developed economies – particularly the European Union and the United States – have shown slow growth since the crisis of 2008, China and the emerging economies of the Asian-Pacific region have experienced sustained growth.  China, now the second biggest economy in the world, has been the driver of that growth and, according to most projections, is poised to overtake the United States as the biggest.  After several centuries in which power has been concentrated in the West, the emergence of new powers in a multi-polar world will naturally bring about changes in the norms and rules governing the international agenda.

In Latin America and other regions, there is growing awareness of this process – with China and its own version of globalization at its center.  The region has witnessed the paralysis of the Transatlantic Trade and Investment Partnership (TTIP) between the EU and the United States as well as U.S. President-elect Donald Trump’s declaration that he will withdraw the United States from the Trans-Pacific Partnership (TPP) as part of a broader anti-globalization policy.  Trump’s announcement drew two different reactions from participants from TPP country leaders at the Asian-Pacific Economic Cooperation summit in Lima late last month.  One was the express decision to proceed with TPP even without the United States, and the other was a clear receptivity to Chinese President Xi Jinping’s invitation that they join regional economic groups that he is pushing – the Regional Comprehensive Economic Partnership (RCEP) and the Free Trade Area of the Asia-Pacific (FTAAP).

  • Both agreements explicitly exclude the United States and abandon norms customarily pushed in free trade by the West. They emphasize reducing tariffs and give no consideration to labor and environmental regulations and non-tariff measures.
  • They complement China’s “one belt, one road” initiative, a modern-day revitalization of the Silk Road creating trade links between China’s western regions with Russia, Central Asia, and eventually to Europe, developing land and maritime routes along the way. The Shanghai Cooperation Organization (SCO) – an economic and security pact linking China, Russia, four Central Asian nations, and now welcoming India and Pakistan – is explicitly linked to RCEP.

Washington’s pending rejection of TPP eliminates a central part of President Obama’s “pivot” strategy to counter China’s rapidly expanding influence in Southeast Asia and the South China Sea, but it also has implications for Latin America and the Caribbean as China moves in rapidly to fill the void left by U.S. withdrawal.  While President-elect Trump has pledged to “renegotiate” NAFTA – which he called “probably the worst trade deal ever agreed to in the history of the world” – China last month presented to Latin America a detailed document proposing a new era in relations with “comprehensive cooperation” in all areas and reaffirming a “strategic association” with the region.  In sharp contrast with the new U.S. President’s views of Latin America, Beijing calls Latin America and the Caribbean “a land full of vitality and hope,” praises the region’s “major role in safeguarding world peace and development,” and calls it “a rising force in the global landscape.”  While some analysts suggest that globalization is slowing if not ending, these developments more strongly indicate that it is rather taking on a new form within a new world order that clashes with the visions and values of the West.  We appear to be transitioning into a world that is genuinely multi-polar with globalization under new rules.

December 13, 2016

* Andrés Serbin is the president of the Coordinadora Regional de Investigaciones Económicas y Sociales (CRIES), a Latin American think tank.  This article is adapted from an essay in Perfil, based in Buenos Aires.

Does Trade Incentivize Educational Achievement?

By Raymundo Miguel Campos Vázquez, Luis-Felipe López-Calva, and Nora Lustig*

Female student walking by building

A student walks around Preparatoria Vasconcelos Tecate. / Gabriel Flores Romero / Flickr / Creative Commons

Mexico’s experience with free trade has challenged one of the tenets of faith economists know well from reading early in their careers David Ricardo’s Principles of Political Economy and Taxation: that “the pursuit of individual advantage is admirably connected with the universal good of the whole” and that “[trade] distributes labor most effectively and most economically.”  Under this principle, “wine shall be made in France and Portugal; corn shall be grown in America and Poland; and hardware and other goods shall be manufactured in England.”  Mexico reminds us that while these benefits exist in the abstract, there are trade-offs to be faced—that there are, potentially, social and individual costs induced by trade liberalization.

In a recently published paper entitled “Endogenous Skill Acquisition and Export Manufacturing in Mexico,” MIT economics professor David Atkin shows the ways in which individual people experience trade and how it affects their decision-making – sometimes in ways that may not necessarily be socially desirable.  It analyzes a time period (1986-2000) during which Mexico underwent major economic transformations, including a rapid process of trade liberalization after 1989 and the introduction of the North American Free Trade Agreement (NAFTA) in 1994.  Analyzing data for more than 2,300 municipalities in the country, the paper tells us that young Mexicans at the time faced a very basic decision: to stay in school and continue studying or to drop out and look for a job (among the many being created in the export-oriented manufacturing sector), most of which did not require more than a high school education.  Atkin found that, on average, for every 25 new jobs created in the manufacturing sector, one student would drop out after 9th grade.  (The World Development Report 2008 on Agriculture for Development had raised the question about “missing” individuals in this age group, but in relation to migration.)

  • While trade brought positive effects including a higher demand for low skilled workers and an eventual increase in their wages – consistent with David Ricardo’s basic notion – Atkin concluded that in Mexico it had the socially undesirable effect of preventing, or slowing down, the accumulation of human capital. The reduction in human capital investment is a trade-off which can have negative effects on the economy as a whole.
  • Factors other than free trade might explain this effect. First, young students may drop out if the returns to schooling are not high enough to compensate for the additional investment.  Second, a lack of access to credit and insurance for relatively poorer households might make it impossible for aspiring students to finance their investment and obtain higher returns by continuing to tertiary education or to cope with shocks and avoid abandoning school.  Finally, the result could be driven by a lack of availability of information about actual returns to investment in education, which could lead to myopic decision-making.

The movement of capital toward locations with lower labor costs is an expected, and intended, result of an agreement such as NAFTA, pursuing higher export competitiveness at the regional level.  David Ricardo would have said that TVs and automobiles shall be made in Mexico, while software shall be made in Silicon Valley.  What completes the story, however, is that because of distortions like the ones mentioned above – low educational quality, under-developed credit markets, or weak information that skews decision-making – free trade might lead to socially undesirable consequences.  And it did in the case of Mexico, as Atkin convincingly shows in his paper.  It seems that when Ricardo gets to the tropics, the world gets more complex.

November 7, 2016

* Raymundo Miguel Campos Vázquez teaches at the Centro de Estudios Económicos at el Colegio de México, and is currently conducting research at the University of California, Berkeley.  Luis-Felipe López-Calva is Lead Economist and Co-Director of the World Development Report 2017 on Governance and the Law.  Nora Lustig is Professor of Latin American Economics at Tulane University.

Brexit: Limited Implications for Latin America

By Arturo C. Porzecanski*

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Photo Credit: Elionas2 / Pixabay / Creative Commons

The June 23rd British referendum result – a 52-to-48 percent vote to leave the European Union (EU) – has roiled the world’s leading financial markets, but contrary to many opinions issued in the referendum’s wake, the economic and financial implications of Brexit for Latin America have been either mild or favorable.  Hard line Brexit statements made earlier this month by UK Prime Minister Theresa May, and various rebukes from policymakers on the Continent, have had financial-market repercussions for the pound.  Most notably, sterling has fallen sharply, and it is now down more than 15 percent from its high on the day of the fateful vote, plummeting to three-decade lows against the dollar.

  • The market reaction initially led to a mostly regional (UK and Europe) correction in stock prices. Even this was short-lived: for example, the FTSE 250, an index of domestically focused UK firms, at first dropped by 14 percent but recovered fully by early August – and has since been trading above the pre-referendum level.  Moreover, the UK recession many feared did not materialize, at least not during 3Q16.
  • Financial markets priced in fairly quickly the conclusion that the Brexit shock would lead to greater dovishness among the world’s major central banks. Most relevant to Latin America and the emerging markets (EM) generally, the Brexit helped to persuade the U.S. Federal Reserve to delay its tightening until at least the end of 2016.  While Latin America’s trade and investment ties to Europe are not insignificant, the region’s major economies are far more dependent on the health of the U.S. economy and on the mood in the U.S. financial markets, and secondarily on trends in China.
  • If the UK and the Eurozone had stumbled and were headed for a recession, however, one likely casualty of Brexit would have been a noticeable drop in world commodity prices, with strong implications for the major economies of Latin America. While commodity prices have softened somewhat (non-oil commodities have averaged 2¼ percent lower since the Brexit vote, and oil has traded 7½ percent below), confirmed expectations of loose monetary conditions in the U.S. and Europe during 3Q16 have more than compensated.  This is why most EM stocks, bonds and currencies have rallied, with the parade led by the Brazilian Real (BRL), so far the best-performing of 24 EM currencies tracked by Bloomberg (up about 20 percent year-to-date).

The medium-term implications of Brexit for Latin America will depend on how much “noise” emanates from London, Brussels and other European capitals during the negotiation process (likely, 2Q17-2Q19).  Prime Minister May has now made three statements that define her bargaining position: Article 50 (exit) negotiations will begin by next March; the imposition of migration controls on EU citizens coming to the UK is non-negotiable; and the UK will no longer be under the jurisdiction of the European Court of Justice.  The latter two points mean that Britain cannot remain a member of the single market, and is therefore committed to forging a customized free-trade agreement with the EU, which could sow uncertainty and thus depress economic growth in Europe and beyond.

The most probable scenario – slow and halting Brexit negotiations, with progress hard to achieve until close to the end (in 2019) – will encourage uncertainty and speculation among economic agents and thus will be a drag on economic growth especially in the UK, and much less so in the rest of the EU.  However, it need not generate the kinds of waves that will reach, never mind derail, Latin America’s economic trajectory.  It is much more likely that what does or does not happen in Buenos Aires, Brasilia, Caracas or Mexico City, and above all in Washington, DC – courtesy of the Fed, the White House, and the U.S. Congress, in that order – will overshadow just about any headlines generated by the Brexit negotiations in Europe.  There is room for Latin America to clock higher GDP growth numbers in the years ahead when compared to the disappointing regional averages of 1 percent growth in 2014, zero growth in 2015, and a contraction of about -0.6 percent in the current year (as per IMF estimates).  This assumes that the Fed’s tightening is gradual (namely, no more than 0.25 percent increases in the Fed’s target rate per trimester) and that the UK’s divorce proceedings are not overly hostile.  This scenario foresees that creditworthy governments, banks and corporations in Latin America will retain access to the international capital markets on reasonable terms, despite some initial retraction in investor interest ahead of, and right after, the resumption of the Fed tightening cycle.

 October 17, 2016

*Dr. Porzecanski is Distinguished Economist in Residence at American University and Director of the International Economic Relations Program at its School of International Service.

Cuba: Time to Move Ahead with Reforms

By Ricardo Torres*

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Oil drums and a tobacco curing hut near Viñales, Cuba / Adams Jones / Flickr / Creative Commons

The economic challenges that Cuba currently faces probably do not signal the beginning of a new Período Especial – the profound crisis Cuba experienced in the 1990s – but they are a painful reminder of the country’s chronic structural problem: the inability to generate enough hard currency to develop the economy and the failure of efforts to overcome that obstacle so far.  The immediate predicament was caused by a combination of internal and external factors, including the Venezuelan crisis and the low prices for certain Cuban exports.  (Ironically, oil byproducts from a refinery in Cienfuegos, which Cuba jointly owns with Venezuela’s PDVSA, have become a leading export.)  Venezuela is affecting income from services that Cuba sells there (in particular that of medical doctors) as well as a drop in the supply of oil products, which has covered about a half of Cuba’s needs.  This has placed extreme stress on Cuba’s external finances and forced a significant economic adjustment.  The government has imposed restrictions on energy consumption and a reduction in imports and investments – with important recessionary effects on an economy that desperately needs growth.  The energy rationing has fueled fears that the country could repeat the deep shortages of the early 1990s and again experience one of the most powerful symbols of that period: blackouts.

The situation is serious, but a crisis on the scale of the Special Period does not appear to be on the horizon.  Cuba today has a more diversified economy and produces a significant portion of its own energy, and the majority of the population has other sources of income to cushion themselves during bad times.  Most creditors and suppliers have shown confidence in their ability to move ahead.  In July, important contracts were announced for French companies to expand and operate Havana’s airport, which has been overwhelmed by the increase of international visitors (one of the few bright spots in the economy this year) in tandem with the improvement in relations with the United States.  Early this month, Cuban officials made presentations to firms from around the world on the government’s timely interest in renewable energy.  They emphasized the great opportunities that exist, not just current problems.

Once again, a close partner’s difficulties have put Cuba in a bind – too many times in too short a period.  Moreover, these problems arise at a politically sensitive moment.  Cubans are discussing the new model and development strategy through 2030, and – while Cubans are expecting results after six years of reform – President Raúl Castro has little time remaining in office.  The current complications can further delay essential monetary and exchange reforms.  Cuba needs to fix its foreign trade to supply oxygen for dynamic activities, such as its booming private sector.  Its development potential can’t rely just on its mystique as la Perla del Caribe.  Today’s challenges are an opportunity to remove the obstacles to changes that already have been announced, such as by accelerating the heretofore slow and ineffective implementation of agreed policies on foreign investment.  Some multilateral financial institutions can help, but Havana’s recent agreement with the Corporación Andina de Fomento (CAF), while a positive signal, is not enough.  The short-term answer is clear:  Only a combination of structural measures can guarantee that this latest economic crunch will be the last.

September 12, 2016

*Ricardo Torres is a professor at the Centro de Estudios de la Economía Cubana at the University of Havana and a former CLALS Research Fellow.

Can Latin America Escape the Middle-Income Trap?

By Rick Doner and Ben Ross Schneider*

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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.

Cuba: Implications of U.S. Tourism

By Emma Fawcett*

Tourists on beach in Cuba

Photo Credit: Emmanuel Huybrechts / Wikimedia / Creative Commons

U.S. regulations still technically ban tourist travel to Cuba by U.S. citizens, but the Obama Administration’s policies have already spurred significant growth in visitor arrivals to the island – with implications for Cuba and its Caribbean neighbors.  Over the last year, Cuba has experienced a 17 percent increase in total visitors, and a 75 percent increase in arrivals from the United States since Washington expanded the categories of permitted travel and, according to observers, relaxed enforcement.  An agreement to begin commercial airline operations between the two countries promises even more travel.  Other elements of the embargo continue to complicate U.S. travel: most U.S.-issued credit cards still do not work on the island; phone and internet connections are limited; and visitors often face persistent shortages of food items, consumer goods, and hotel rooms.  But the surge almost certainly will continue.

The onslaught of U.S. tourists challenges the Cuban tourism industry’s capacity.  Cuba has one the lowest rates of return visits (less than 10 percent) in the Caribbean; on the other islands, 50 percent to 80 percent of tourists make a return visit.  It has serious weaknesses:

  • While Cuba’s unique appeal may draw in millions of first-time visitors, the still relatively poor quality of service apparently discourages tourists from making the island a regular vacation spot. Sustaining arrivals requires higher marketing costs.  Average spending per visitor, moreover, has been on a fairly steady decline since 2008.
  • About 70 percent of Cuba’s tourists come for sun-and-beach tourism – a sector under state control – but private microenterprises have already demonstrated more agility in responding to demand than the state-owned hotels or joint ventures. The government reported last year that 8,000 rooms in casas particulares, or bed-and-breakfasts in Cubans’ homes, were for rent, and the number is growing steadily.
  • Cuba’s “forbidden fruit” factor may have a limited shelf life as visitors sense the imminent end to Castroism and the arrival of McDonalds, Starbucks, and their ilk. Questions remain about how long Cuba’s current environmental protections will continue when tourist arrivals increase.  Nicknamed the “Accidental Eden,” Cuba is the most biodiverse country in the Caribbean because of low population density and limited industrialization.  But rising visitor arrivals (and the effects of climate change) are likely to increase beach erosion and biodiversity loss.

Ministers of tourism in the other Caribbean countries have downplayed fears about competition from Cuba, but their optimism is sure to be tested.  A successful Cuban tourism sector could conceivably spur region-wide increases in visitor arrivals, but it could also cause other Caribbean countries to lose significant market share.  The official Communist Party newspaper, Granma, has suggested the government’s goal is to almost triple tourist arrivals to 10 million per year.  President Danilo Medina of the Dominican Republic, the most visited country in the region (at about 5.5 million tourists a year), has also set a goal of reaching 10 million arrivals by 2022 – setting that country to go in head-to-head competition with Cuba.  Jamaica, the third most visited country in the region, has instead pursued a multi-destination agreement with Cuba, designed to encourage island-hopping and capitalize on Cuba’s continued growth.  Previous attempts at regional marketing and multi-destination initiatives have had mixed success.  But as Cuba’s tourism sector continues to expand, Caribbean leaders – in what is already the most tourism-dependent region in the world – undoubtedly sense that Cuba is back in the game and could very well change rules under which this key industry has operated for the past six decades.

July 25, 2016

*Emma Fawcett is a PhD candidate in International Relations at American University.  Her doctoral thesis focuses on the political economy of tourism and development in four Caribbean case studies: Haiti, Dominican Republic, Cuba, and the Mexican Caribbean.

Can Latin America Achieve Fiscally Sustainable and Egalitarian Social Citizenship?

By Fernando Filgueira*

Uncertain Future

Photo Credit: Jan Tik / Flickr / Creative Commons

Latin America is undergoing a profound transformation of its social policies and of the very concept of social citizenship, but the outcome of this process is far from certain.  Electoral democracy, urbanization, increased educational attainment, and increased exposure to new and broader consumption patterns have destroyed the political foundations for conservative modernization.  The turn of the century has witnessed advances in social outcomes and public policies that for the first time provide a true window of opportunity for achieving more productive and egalitarian societies.

  • Decreasing poverty, lower income inequality, improved and expanded employment, and access to transfers and services to popular sectors were made possible by five critical factors: booming prices for Latin American commodities fueled economic growth and employment; stable prices – a positive legacy of the Washington Consensus era – meant that wages and transfers were not undermined by inflation; increased state fiscal capacity and commitment to social policy enabled a doubling in 15 years of real social per-capita expenditure; a demographic dividend, when combined (the young and the elderly) dependency ratios are lowest as a percentage of the population; and improved education access, completion, and credentials, which facilitated enhanced opportunity and increased productivity.

Yet these five advantages will lose steam in the next couple of decades.  Growth will wither as the commodity boom ends and expansionary monetary policy is limited.  Most Latin American economies are facing increased inflationary pressures. Existing tax structures and in some cases productivity levels will not permit social expenditure to increase at the rate of the last 15 years.  The easy phase of the demographic transition (when dependency rates are going down) is or will be over in most countries towards 2025.  Some countries in the region will face the European dilemma of an aging population, but they will do so with a lower GDP per-capita, weaker fiscal capacities of states, and a significantly more unequal income distribution.  While the soft targets of expanded education – primary school and expansion of lower middle school – have been achieved, the tough ones remain: extended coverage in early childhood, completion of high school, quality improvement, and true reduction of inequality of outcome in learning.

  • Five fault lines in Latin American social regimes make these problems a major threat to the sustainability of both social and economic development. A) Women’s incorporation into the labor market remains low (50 percent) and is highly stratified.  B) The absence of a robust state-led care system for early childhood and the persistence of a patriarchal distribution of care burdens undermines a route to development that is both more efficient and egalitarian.  C) Stark contrasts between insiders and outsiders in informal and formal labor markets and access to social protection and cash transfer  systems contribute to an expansionary monetary and fiscal policy that mainly benefits insiders unwilling to be taxed for redistributional public and collective goods and insurance. D) The region’s middle class and new emergent class, moreover, are not willing to increase taxation, since they do not perceive the quality of public goods and collective social services as adequate. And E) the pattern of fertility shows some of the worst patterns in social terms, including that most biological reproduction is left to the poor: Latin American governments do not equalize opportunity early on and through the educational system – which in the most unequal region of the world with diminishing but non-convergent fertility rates – leads to a productivity failure since underinvesting in the poor is underinvesting in the frontier of productivity enhancement.

These challenges will condition the possibility of a new social citizenship and a social investment model based on robust public goods, expansion of merit goods, and universality of entitlements.  It is not enough that elites are no longer able to control the political and economic game through status enclosure and authoritarianism.  In order to craft truly universal social policies conducive to providing inclusion for all, societies must confront narrow corporatism and restricted targeting – and the political economy they sustain.  Contributory models based on formal wages and targeted social policies based on need will not disappear, but they have to take a back seat to a model of basic universalism where access to quality public and collective goods is truly universal, and entitlements in transfers and services are not dependent on need or labor formality.  There have been important advances, such as a marked increase in non-contributory systems of cash transfers in terms of pensions and child-family transfers, but the commodity boom and the rise of the emergent and middle classes that drove them are not permanent.  A coalition that is willing to forgo private spending power in order to enhance quality of life through collective services is needed.  Such a coalition is made conceivable by these political, economic, and social epochal changes, but it is by no means guaranteed.  If reforms do not make it a reality, the promise will be shattered, and the pendulum between failed populism, with state-led “Robin Hood” incorporation attempts, and a technocratic closure of democracy and state bashing, will remain the central and tragic dynamic of the region.**

July 18, 2016

*Fernando Filgueira is a Senior Resarcher at the Centro de Información y Estudios del Uruguay (CIESU) and Collaborating Researcher the Economic Commission for Latin America and the Caribbean.  He is a member of the International Panel for Social Progress led by Amartya Sen.

**Read the full version of this essay, which is based on research done for the Economic Commission for Latin America and the Caribbean (ECLAC) and for EUROsociAL on social policy, labor dynamics, and demographic change.

Brazil: Sacrificing Anti-Poverty Success?

By Hayley Jones*

Bolsa Familia

Photo Credit: Senado Federal / Flickr / Creative Commons

Brazil’s flagship antipoverty program, the Bolsa Família, faces an uncertain future as the government of Interim President Michel Temer confronts adverse economic and political circumstances.  The program, which provides direct cash benefits to poor households on the condition that children fulfill education and health-related targets, was an important factor in Brazil’s progress on poverty and inequality since the early 2000s – between 2001 and 2013 the poverty headcount ratio declined from 24.7 percent to 8.9 percent, and the Gini coefficient declined from 59.3 to 52.9.  The Bolsa Família (formerly called Bolsa Escola) was a pioneer in the use of cash transfers in social policy in the 1990s.  The idea is enticingly simple: the cash allows families to meet immediate needs, while the education and health conditions ensure poor children are better equipped to lift themselves out of poverty in the long run.  Under Presidents Lula and Dilma, the Partido dos Trabalhadores (PT) put the policy at the heart of its platform, and reaped advantages at the polls with the expansion of coverage and benefits.  The program now reaches about one-quarter of the population.

The social gains made in part thanks to the Bolsa Família may now be at risk.  Brazil has been hit hard by the collapse of commodity and oil prices over the last two years and is currently experiencing what is predicted to be the country’s worst recession since the 1930s.  GDP fell by roughly 4 percent in 2015 and is expected to do the same in 2016.  The deep political crisis gripping the country since earlier this year further threatens the program.  Temer, his party (PMDB), and Finance Minister Henrique Meirelles have stressed the need to cut spending to reduce the deficit.  While many areas of social spending, such as pensions and education, are protected in the budget under the 1988 Constitution,  the Bolsa Família is not.  With the large political constituency benefitting from the program, there is likely little appetite in the interim government to ax the program altogether.  In fact, at the end of June Temer announced a 12.5 percent increase to the Bolsa Família – more than the 9 percent promised by Dilma – to compensate for inflation.  But he also emphasized that benefits should be temporary and that there is a need to focus on exit doors from the program.  Social Development Minister, Osmar Terra, has suggested that the program could be made more efficient and costs cut by 10 percent.

Temer may not be entirely wrong to highlight the need for exit strategies, but they should be exit strategies from poverty rather than from the Bolsa Família itself.  There is so far little evidence that it has done much to change the life trajectories of poor young people that would allow them to move out of poverty. The emphasis on increased school enrollment and attendance as transformative obscures much deeper problems, including poor school progression and completion rates in low-quality schools, a lack of educational infrastructure and resources, poorly trained teachers, and outdated curricula, among others.  If Temer is serious about moving beneficiaries out of poverty and the program, priority will have to be given to correcting regressive spending in public education (which prioritizes higher over basic education); better aligning curricula with labor market demand; and addressing the poor job opportunities for low- and semi-skilled workers. Economic realities and the rhetoric on efficiency and exit strategies do not bode well for such changes.  Under Temer, the Bolsa Família seems likely be limited to a policy tool for risk insurance and meeting basic needs rather than a platform for extending the social gains of the last decade.

July 12, 2016

*Hayley Jones is a DPhil (PhD) Candidate in the Department of International Development at the University of Oxford, United Kingdom.  Her thesis examines long-term poverty reduction in the Bolsa Família program.

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