Regionalism in the Time of Coronavirus: The Only Way Forward?

By Leslie Elliott Armijo*

Coronavirus Latin America

Map of the COVID-19 outbreak in Latin America as of 30 April 2020/ Pharexia/ Wikimedia Commons (modified)

To overcome the multiple challenges of the COVID‑19 crisis, Latin America’s leaders will need to build regional cooperation around pragmatic solutions – an elusive goal for countries with a legacy of disunity and weak collaboration. The coronavirus has hit at a moment of economic vulnerability. Regional growth averaged only 1.9 percent in 2010-19, worse than in the “lost decade” of the debt-crisis 1980s (2.2 percent). Labor productivity, which in 1960 was almost 250 percent of the world average, has fallen steadily in every subsequent decade, and in 2019 sat at a mere 90 percent of the global mean. Persistent squabbling among Latin countries has meant that major global trading states, including the United States and more recently China, could dictate the terms of bilateral trade and investment agreements in ways that favored these larger powers.

  • In negotiating global trade, Latin America and the Caribbean have shown little shared identity or cohesion, whether as a region or as sub-regions. As of late 2018, as global value chains coalesced around three regional hubs – China/East Asia, U.S./North America, and Germany/European Union – Mexico, Central America, and the Caribbean were linked to the U.S. but lacked bargaining power to seize more advantageous positions vis-à-vis the United States. South America has deindustrialized since the turn of the century, returning to its historic role of commodity exporter to all three hubs. Intra-regional trade as of 2017 was only 22 percent of all Latin American trade and had fallen since 2013.
  • This is a shaky foundation from which to face the health and economic challenges of COVID‑19. The IMF’s scenario, which assumes an optimistic return to business mostly-as-usual in the third quarter, predicts a contraction of GDP in 2020 of 5.2 percent in the region, driven by brutal collapses in the two largest economies, Brazil and Mexico, of -5.5 and -6.6 percent respectively. The extra-regional markets for Latin America’s exports certainly will shrink due to both short-term reasons of global depression and longer-term ones of enhanced economic nationalism abroad. Remittances and tourists from the U.S. and elsewhere will not return to their previous numbers for a long time.

A coronavirus-solidarity virtual summit last month showed that some regional leaders realize the need for joint action. Nine of 12 South American presidents participated, although Brazilian President Jair Bolsonaro – who has made intemperate and dismissive remarks about his fellow leaders – gave his seat at the video conference to his foreign minister, Ernesto Araújo.

  • Argentine President Alberto Fernández participated despite Bolsonaro’s snub (including on previous occasions) and his previously chilly relations with the sponsoring body, PROSUR, founded in 2019 by center-right Presidents Iván Duque of Colombia and Sebastián Piñera of Chile as an explicit counter to the pre-existing regional body, UNASUR, which leaned left during the presidency of Bolivia’s Evo Morales (now in exile in Argentina). In so doing, Fernández demonstrated the pragmatism and understanding that Latin American and Caribbean leaders often eschew: if you want to solve policy challenges, you must maintain dialogue with people with whom you disagree.

If there is any light at the end of this tunnel, it could be psychological, as crises tend to focus minds. The disruption in international relations beyond Latin America probably will accelerate the move away from the post-Cold War “unipolar moment” and fuel domestic economic nationalism that will shake up the three major global trading hubs – a reorganization in which the region could redefine its place. In this scenario the best defense for Latin America is a strong offense. As Alicia Bárcena, Executive Secretary of the UN’s Economic Commission on Latin America and the Caribbean (CEPAL), said recently, the region’s resilience likely depends on “investment in strengthening regional production chains” to create “complementarities in production structures and regional integration.”

  • Diplomacy enables states to share knowledge and engage in collective action to meet real cross-border challenges, including those of the current crisis. Regional solidarity does not require headquarters buildings, formal treaties, and summit pageantry, nor even similar domestic political systems. The considerable achievements of the loose, informal clubs known as the G7, the G20, and the BRICS prove the value of cooperative models that need not boast costly institutional scaffolding. The Association of Southeast Asian Nations (ASEAN), formed in 1967 by 10 countries that were at least as mutually suspicious of one another as they were of China, provides another lesson about somewhat effective regional cooperation that Latin America would do well to note.

April 30, 2020

* Leslie Elliott Armijo is an associate professor at the School for International Studies, Simon Fraser University, Vancouver. Her most recent book, coauthored with C. Roberts and S.A. Katada, is The BRICS and Collective Financial Statecraft (Oxford University Press, 2018).

COVID-19 in the Caribbean: So Open, so Vulnerable

By Bert Hoffmann*

rows of empty beach chairs in Jamaica

Beach in Jamaica/ Marc Veraart/ Flickr/ Creative Commons License (not modified)

In the Caribbean, the COVID-19 crisis hits some of the world’s most open, specialized economies, forcing the region to rethink its development model. Eleven of the world’s 20 most tourism-dependent nations are in the Caribbean. The collapse of this sector leaves the import-dependent island states extremely vulnerable beyond the immediate health crisis and beyond the social and economic fallout from the current “shelter in place” rules and lock-down measures.

  • For most Caribbean nations, tourism is by far the most important economic activity. In small states like Barbados, St. Lucia, Antigua and Barbuda, and the Bahamas, tourism makes up more than 40 percent of GDP. In bigger countries like Jamaica, it accounts for more than half of exports and employs almost a third of the workforce. Many in the tourism industry cling to hopes of a speedy recovery, but this is not likely. Travelers’ confidence in cruise ships and exotic flight destinations will not fully rebound before vaccinations against the virus become readily available. Not only the low season this summer is lost, but also much of the crucial winter season.
  • The pandemic is also going to slash remittances from Caribbean emigrants. Most states have sizeable diaspora communities, and money transfers from abroad are a vital part of their economies. Unlike in the aftermath of hurricanes, migrants in the United States, Europe, or neighboring islands are affected by the same crisis. Many will also cancel visits “home.”

Current social policy measures may be able to mitigate some of the hardship, but foreign exchange buffers are hardly sufficient to maintain these on such a scale over a long time. Largely agricultural countries decades ago, most of the region today imports more than half the food they consume – seven CARICOM countries even more than 80 percent. With global supply chains and food production in the United States disrupted, imported food prices will rise. Reviving local farm tradition passes from a “romantic” niche concern to being a key issue of social policy.

  • In the Caribbean’s non-sovereign territories, the crisis underscores their population’s dependence on the welfare systems of the United States, France, the UK, and the Netherlands. At the same time, it casts a spotlight on persisting inequalities. Puerto Rico, for instance, has only one-fourth of intensive care unit beds per capita than the U.S. mainland, despite its much higher share of elderly residents.

The coronavirus crisis is bringing to the fore a number of long-term challenges for the Caribbean. If left solely to the logic of comparative advantages, the region’s world market integration tends to be one of specialization, not diversification. The downside is a high vulnerability to external shocks. In recent years, “resilience” became part of the vocabulary of Caribbean policymakers in the context of climate change, not to face global economic or health shocks. The current crisis demands thinking of “resilience” as a development goal in an even broader sense.

  • The pandemic also highlights the extent to which the Trump Administration takes the United States out of the game of soft policy approaches, and China finds a field left wide open. Beijing’s shipments of medical supplies and protective wear are a small investment, but they have a big impact in countries of some 100,000 inhabitants. Taiwan is also providing face masks and soft loans to those that still recognize it diplomatically. In contrast, what Washington seems to care about more than anything else is that the Caribbean nations should not accept Cuban doctors in to fight the disease.

April 20, 2020

* Bert Hoffmann is a Lead Researcher at the German Institute for Global and Area Studies (GIGA) and professor of political science at the Free University of Berlin’s Latin American Institute.

Cuba: Dealing with the Global Pandemic

By Ricardo Torres*

Cuban nurses carrying the Cuban flag

COVID-19 Response: Over 100 Cuban Nurses Arrive Barbados / Flickr / Public Domain

Cuba faces a “perfect storm” – a global health crisis – that poses the latest in a long list of challenges to its government, but a systematic destabilization of the country is highly unlikely, if not remote, for now. The COVID‑19 pandemic has caused an unprecedented disruption to the world economy, the devastating effects of which no country has escaped. The Cuban economy is critically dependent on tourism and remittances, two areas that have been deeply affected. Those countries from which visitors and cash flow to Cuba are greatest – the United States, Canada, Western Europe, and China – have been hit hard.

  • The shock is compounded by a drop in Cuba’s average annual growth from 2.7 percent in 2010‑15 to 1.4 percent in 2016‑19. The causes of that decline include the economic crisis in Venezuela; the cancellation of medical services agreements in Bolivia, Brazil, and Ecuador; the end of the international tourism bonanza; and the effect of new U.S. sanctions. Washington’s actions have complicated trade, foreign investment, and travel. The measures have limited remittances, reduced Cuba’s ability to import fuel, and clamped down on foreign firms operating in Cuba, such as through the first application of Title III of the “Helms-Burton Act.”
  • Another factor has been the disappointing results of Cuba’s internal economic reform, which has been wrapped up in political contradictions and a lack of clarity of its objectives. One costly flaw in these circumstances has been the government’s inability to stimulate industries that provide essential products, particularly food. Combined with the international challenges, including fresh, tough sanctions by the United States, this problem has contributed to a situation in which the Cuban people face growing shortages of all kinds of products, including food, medicines, and fuel.

The government’s response to COVID‑19 has evolved from caution to the gradual imposition of increasingly radical measures.

  • In mounting a medical response, the centralization and verticality of the Cuban model allows authorities to adapt plans and resources in the face of new priorities. The Cuban health system, for example, is known for its national coverage and access to resources (including 848 doctors and 5.5 beds per 100,000 inhabitants), and it has experience dealing with epidemics. Decisions have been taken around the concept of epidemiological vigilance, including closing the borders on April 2 and bolstering research, although the inability to carry out massive testing has been a weakness. The government has also guaranteed workers’ income and employment, except for parts of the private sector and informal economy, and expanded food-rationing to a broader list of products.

The economic impact in the medium term should not be underestimated. GDP growth will enter negative territory. Financial problems will surely deepen. Shortages of an array of basic necessities are going to worsen. Restructuring of foreign debt is necessary.

  • Internally, Cuban policymakers are going to have to take into consideration the new socioeconomic structure of the country and the need to focus support where it’s needed most. The crisis provides a good opportunity to give substance to longstanding rhetoric about improving agricultural production. Greater flexibility in regulating private businesses is also an obvious policy option. Accelerating and broadening digital access throughout society should also be a priority under the wisdom of “not putting off till tomorrow what can be done today.”

The Cuban Government is not presiding over a terminal crisis, however. Even considering the system’s weaknesses before the pandemic, this perfect storm is not its responsibility. For the medical challenge, Cuba is prepared and probably will overcome some of the criticisms made abroad about its medical missions, as brigades of Cuban doctors deploy to 19 countries. The country’s biotechnology industry also stands to make advances. It’s too early to say whether Cuba will be able to profit from these opportunities, but Havana may benefit from its willingness and ability to be a responsible international partner.

  • Washington’s policies also put it in sharp contrast with China, which continues to provide help during these difficult times. If the pandemic has made anything clear in Cubans’ minds, it’s that the United States is disqualifying itself as a positive force for change on the island.

April 17, 2020

*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.

 

Latin America: The Massive Challenge of COVID-19

By Carlos Malamud and Rogelio Núñez*

Bolsonaro & AMLO

Presidents Bolsonaro of Brazil and López Obrador of Mexico have been criticized for downplaying coronavirus concerns// Left: Palacio del Planalto/ Flickr/ Creative Commons (modified)// Right: PresidenciaMX/ Wikimedia Commons (modified)

Latin America has had several advantages as the COVID-19 virus has moved in – including the chance to learn the lessons of Asia and Europe – but it faces it with fundamentally weaker tools: under-resourced health infrastructures, slowing economies dependent on declining commodity prices, comparatively little ability to increase public spending, and politically weakened governments. The WHO numbers are rising and will grow steadily owing both to accelerating infection rates and more widespread testing.

Most governments have taken strong actions, including closing borders, imposing quarantines, and closing schools, but leaders face huge challenges. In many countries, their inability for years to respond to the growing social demands of the emerging middle classes, especially regarding health care, education, and other social services, have already led to major social unrest and incumbent weakness.

  • They’re going to confront the virus with grave institutional problems, including corruption and lack of financing, and a lack of popular goodwill. The worst are Venezuela, Nicaragua, and Haiti (a failed state), but Brazil and Mexico will be most deeply affected. Brazil already has a high infection rate, and Mexico’s will grow as well.
  • In Latin America’s presidential systems, most presidents have put their personal imprint on national policies. Their measures to slow the spread of the virus have faced little backlash. Brazilian President Jair Bolsonaro and Mexican President Andrés Manuel López Obrador have gone out of their way to appear oblivious to the scientific indicators that their countries could face catastrophe. Especially for politically vulnerable presidents – Chilean President Sebastian Piñera has a 10 percent approval rating – the virus entails great personal political risk.
  • Making things worse, regional organizations such as the South America Defense Council (part of UNASUR), the Pan-American Health Organization (PAHO), and the OAS have not yet provided effective international coordination. PAHO is sending “support teams” with unspecified mandates and no new resources. The Central American presidents have met digitally to coordinate strategies.

Failure of the early control measures could have dire health consequences. Health services are vulnerable and easily overwhelmed. The delayed arrival of the virus has given health officials time to prepare, and the best hospitals are in urban centers with greatest need. But the region has several Achilles’ heels, especially the shortage of facilities and resources.

  • “Universal coverage” is actually only “partial” in all but Costa Rica and Uruguay, according to a London School of Economics study. Some countries improved their preparedness in the wake of outbreaks of chikungunya, zika, dengue, and other contagious diseases, but most still lack the laboratories and field facilities to slow a virus of COVID-19’s scope.
  • Most seriously, many of the health systems lack the infrastructure to identify, treat, and isolate patients enough to slow the spread of such a highly contagious disease. The lack of efficient isolation facilities, coupled with shortages of trained personnel and essential supplies and equipment, leave the region – despite its short-term preparations – vulnerable to an outbreak much larger than in Asia, Europe and the United States.

Market crashes and likely recession in Asia, Europe, and the United States are causing collapse of the prices of Latin American exports and a series of profound pressures on economic growth in the region. Our colleague Federico Steinberg notes that the difference between a “soft-impact” scenario and a catastrophic one will depend on whether the virus is brought under control in the second quarter of the year.

  • Many observers believe the impact will be less severe in Latin America than Asia, but that assumes reasonable success keeping the crisis relatively short. Some decline is inevitable, however, because China, Europe, and the United States’ recovery will take time. Among the sobering predictions is that of the EU’s Director for Economic and Financial Affairs, who on March 13 said the EU and Eurozone will enter a recession this year with growth “considerably below zero,” but his reference to a good chance of a “normal” bounce back next year may be optimistic.
  • Experts expect food exports to suffer more and longer than energy and mineral exports, although the drop in oil prices to 1980s levels will squeeze Venezuela, Ecuador, Mexico, Colombia, Brazil and Argentina hard. New oil exploration in Brazil and fracking in Argentina has halted.

Most Latin American leaders are not oblivious to the trials ahead. On March 15, Colombian President Iván Duque said the virus will be “especially difficult for the Latin American countries” and “can overwhelm us.” The crisis requires the region to bring its principal comparative advantages – time and the ability to analyze the successful (and failed) tactics in Asia, Europe, and the U.S. – to bear to compensate for its structural weaknesses.

  • Latin America does not have the resources or mobilizational capacity that South Korea does to carry out a massive campaign to test and treat the population, but the region can avoid total catastrophe if it expands and maintains its drastic measures, adheres to the scientific evidence, and learns from other countries’ efforts to manage the outbreak.

March 26, 2020

* Carlos Malamud is a Senior Analyst for Latin America at the Elcano Royal Institute and Professor of Latin American History at the Universidad Nacional de Educación a Distancia (UNED), Madrid. Rogelio Núñez is a Senior Fellow at the Elcano Royal Institute and Professor at El Instituto Universitario de Investigación en Estudios Latinoamericanos (IELAT), Universidad de Alcalá de Henares. This article is adapted from their recent analysis published here on the Elcano Institute website.

This post has been updated to correctly identify the President of Chile.

Guatemala: Fiscal Challenges Await New President

By ICEFI and CLALS*

Guatemalan President Alejandro Giammattei is sworn in, January 14, 2020

Guatemalan President Alejandro Giammattei is sworn in, January 14, 2020/ US Embassy Guatemala/ Flickr/ Creative Commons/ https://bit.ly/2GeHS0U

Guatemalan President Alejandro Giammattei, inaugurated on January 14, faces a deeper public finance crisis than previously estimated, putting even greater pressure on him to undertake fiscal reforms and start the slow and difficult process of fiscal stabilization and recovery.

  • The Giammattei administration has inherited a fiscal mess from former President Jimmy Morales, during whose four-year administration public spending on principal social needs didn’t surpass 8 percent of GDP (7.9 percent in 2019). Despite slow, slight growth in the education budget in 2015-2019 and a growing population, the number of students enrolled at the elementary and high school level actually contracted. Spending on health – in a country with half of its children suffering from chronic malnutrition, one of the lowest health service levels, and one of the highest infant and maternal mortality rates in the world – remained around 1 percent of GDP. The military budget under Morales, however, expanded considerably, allowing the Armed Forces to purchase weapons and a ship and to at least try repeatedly to buy military aircraft.

The fiscal situation is worsened by the persistent inability of the national tax authority (SAT) to achieve its collection goals for almost a decade, as well as by the array of amnesties and fiscal privileges approved by the National Congress in 2015-19. As a result, the Morales administration ran up fiscal deficits from 1.1 percent of GDP in 2016 to 2.5 percent in 2019 – accelerating the increase in the stock of public debt from 24.7 percent of GDP in 2017 to 27.0 percent in 2019 – Guatemala’s highest in recent history.

  • Making things worse, the debt was principally handled through issuance of Treasury Bonds sold on the national and international markets at terms – higher rates and shorter maturity periods – less favorable to the Guatemalan government. Last September Congress passed a law, supposedly to formalize cattle growers and ranchers (a sector well known for not paying taxes), that many observers say is so badly written that it opens the door to more tax fraud and even money laundering by powerful drug cartels. ICEFI and even some members of Congress note this has the potential to cause even greater revenue losses in 2020.

Budgetary pressures seem very likely to continue rising this year, further complicating the new president’s challenges. The Constitutional Court in late November ruled that the Executive Branch must correct the way it calculates the transfers that the Constitution requires the Central Government make to the municipalities, the Judiciary, the San Carlos University (Guatemala’s only public university), and the federated and non-federated sports institutions. If this ruling is confirmed, it will generate a huge increase in those organizations’ budgets, seriously exceeding the government’s current fiscal capacity by more than US$1 billion (1.2 percent of GDP).

  • ICEFI’s analysis shows that the only way for the new government to overcome the public finance crisis is to undertake far-reaching fiscal reform – revitalization of tax administration, a credible fight against corruption and tax evasion, and correcting budget priorities. For a government more inclined to pro-business and liberal economic thinking, such reforms may represent a considerable political challenge.
  • President Giammattei also inherited a difficult political situation from his predecessor, whose conflict with the UN-supported International Commission against Impunity in Guatemala (CICIG) and whose alliance with persons widely believed to be involved in corruption further undermined popular confidence in the government. The new president will be judged harshly if he fails to demonstrate early on a commitment to fight corruption, increase transparency, and make government more accountable. Accusations that he himself has been involved in corruption are already arising. He faces these tough economic and political challenges – with diminished resources, fiscal chaos, and with the previous administration’s allies considerably strengthened – at a time that Guatemala can ill afford to continue to stumble from crisis to crisis.

January 23, 2020

* 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 fourth in a series of summaries of its analyses on Central American countries. The others are here, here and here.

Honduras: Facing the Budget Challenges?

By ICEFI and CLALS*

Honduran Lempiras

Honduran Lempiras/ Alex Steffler/ Flickr/ Creative Commons

Honduras’ proposed budget for 2020 reduces support to the country’s most needy – while protecting the military and security agencies – and, particularly if the debate on priorities is not made more inclusive, risks exacerbating already high political tensions and chronic economic mismanagement. On the revenue side, the draft budget shows a drop in tax revenues from 18 percent of GDP in 2019 to 16.5 percent – which, ICEFI has found, is not justified by technical analysis of the circumstances. Government spending – excluding payment on the national debt but including transfers to funds and trusts – equaled 19.7 percent of GDP, compared to 21.5 percent in 2019. (ICEFI estimates that the average government spending in Central America in 2019 will be 18.5 percent.) This drop will affect most public entities, particularly in social spending.

  • Education faces deep cuts. The budget of the Secretariat of Education, for example, will drop from 4.85 percent of GDP in 2019 to 4.49 in 2020. Transfers to public universities are slated to be reduced 23.1 percent from 2019 levels, and scholarships are also on the chopping block – cut 27.5 percent for national and 37.5 percent for international scholarships.
  • Health spending in Honduras – the country with the highest poverty rates in Central America – will decline from 2.39 percent to 2.37 percent at a time that inflation is more than 4 percent. The budget for Infrastructure and Public Services will be hit hardest – cut from 0.82 percent of GDP to 0.40 percent. Capital expenditures or investment will decline 33.5 percent year on year, including 38.5 percent from machinery and equipment and 34.6 percent for construction.
  • One of the only government sectors seeing increases is in the military and security, according to ICEFI. The 2020 budget proposes a 39.6 percent increase from 2019 on military and security equipment.

At first glance, the budget would appear to produce a surplus in 2020 of about 0.4 percent of GDP, which is double that ICEFI estimates for 2019. But factoring in the transfer of resources to the funds and trusts – a more reliable way of tracking fiscal behavior – the deficit will actually be 1.5 percent of GDP. That’s lower than ICEFI’s estimate of the deficit this year (1.9 percent), but it is achieved at the expense of the wellbeing of a majority of the Honduran population.

If approved and implemented as proposed, the budget will set back several strategic goals that the Honduran government itself has set. The budget confirms the government’s desire to reduce the public deficit principally through cuts to social spending and some capital expenditures – even though the approach contravenes commitments made under the UN Convention of the Rights of the Child and General Comment No. 19 (2016) on public budgeting for the promotion of children’s rights, which establishes that states should not deliberately adopt regressive measures that undermine child’s rights.

  • Although some provisions of the budget in principle could expand production of goods and services, they do not clearly point to either social inclusion, especially in terms of gender, age, and ethnicity. Budget allocations dedicated to attention to women are very low, equaling barely 0.19 percent of all spending. Neither does the budget focus on achieving any particular Sustainable Development Goals (SDGs).

The transparency and inclusiveness of the budget debate in the Honduran Congress will be crucial to determining the longer-term impact of this budget on human rights and the provision of public goods and services to the most vulnerable Hondurans, including children, adolescents, and women. Executive and Congressional decisions on the budget will shift the country’s path toward prosperity and governance – or continue down a path of instability and tension. More breaks for those capable of paying taxes, while cutting essential services to those who cannot, will be a step in the wrong direction. At a minimum, Honduran leaders should demonstrate the benefits of such moves will outweigh the costs. The legitimacy and effectiveness of the Honduran budget will depend on a broad, inclusive, and honest debate.

November 26, 2019

* The Instituto Centroamericano de Estudios Fiscales conducts in-depth research and analysis on the region’s economies. This is the second in a series of summaries of its analyses on Central American countries.

Argentina: Market Meltdown Can Be Halted

By Arturo Porzecanski*

From right to left, then-president Cristina Ferdandez de Kirchner, then-minister Alberto Fernandez, and other then-ministers

Ministers of Cristina de Kirchner / Wikipedia / Creative Commons / https://es.wikipedia.org/wiki/Archivo:Ministros_de_Cristina.jpg

The unexpectedly strong performance of the Alberto Fernández-Cristina Fernández de Kirchner (FF) ticket in Argentina’s August 11 presidential primaries has triggered a stampede out of the country’s currency, stocks, and bonds, but FF hold the key to staving off a full-fledged crisis. If the confidence of local and foreign investors is not recovered soon, the market rout has the potential to induce runaway inflation, plunge the economy into a deep recession, and cut off domestic and international financing for both the outgoing and incoming governments, potentially leading to a default.

  • The FF Peronist ticket’s 15.6 percentage-point margin of victory over President Mauricio Macri and his companion was foreseen by none of the pre-election polls. The wide gap shocked investors because it indicates the Fernández duo could win in the first round in the October 27 general election, avoiding a second-round ballot on November 24 in which the pro-market Macri was thought to have a better chance. The coattail effect of FF helped allies in provincial and local primaries around the country. With likely majorities in one or possibly both houses of congress, FF would have a powerful government that could implement much of its agenda, for better and for worse.

Now the challenge is to stop the vicious cycle of capital flight, currency depreciation, accelerating inflation, and plunging economic activity sparked by the electoral results. Failure to do so sooner rather than later will make it very difficult for the government to refinance its maturing short-term debts, and the Central Bank will likely experience a steady drain of its international reserves. In that scenario, the IMF, which has been sending big checks to Argentina every three months, would probably not send the next one in late September.

  • The Macri administration has announced some palliative measures (e.g., a 90-day freeze in gasoline prices and a tax exemption for food purchases), and the Central Bank has tightened marginally monetary conditions. But the government leadership team is powerless to restore the investor confidence that has evaporated.

Given his clear frontrunner status, Alberto Fernández could play a crucial role in reversing the trend. During eerily reminiscent circumstances in Brazil in mid-2002, local and foreign investors were increasingly worried that Luiz Inácio “Lula” da Silva, who was running strong in the polls in his fourth presidential campaign, would end the market-friendly policies of the outgoing Fernando Henrique Cardoso – including a break with the IMF, from which Brazil had been borrowing.

  • Worried about potentially inheriting an economic and financial mess, Lula made a public statement – he called it a “Letter to the People” – making clear his commitment to sound fiscal and monetary policies and the rule of law. He wrote about a “new social contract capable of assuring economic growth with stability,” one of whose premises was “naturally, a respect for the country’s contracts and obligations.” He followed those words with concrete actions. Two months before the elections, he gave his blessing to a new IMF program committing the next government to maintain, with minor modifications, Cardoso’s austere fiscal and monetary policies.

Lula’s actions after his election, including putting a market-friendly and popular mayor in charge of his transition team and choosing a career private-sector banker to run the Central Bank, provide a path that Alberto Fernández could follow as well. Under Lula, the Brazilian Central Bank felt supported in its all-out effort to extinguish the flames of inflation and to buttress the currency. Interest rates were thus hiked as needed before and after the October 2002 elections. He initiated confidence-building meetings with investors before taking office and reassured lenders and investors, both in Brazil and abroad.

  • So far, Alberto Fernández is denying any responsibility for the developing financial and economic crisis, blaming Macri for all that’s gone wrong. But unless he makes announcements that give confidence to local and foreign investors, he will inherit a mess.

August, 22, 2019

*Dr. Arturo C. Porzecanski is the Distinguished Economist in Residence at American University and a member of the faculty of the International Economic Relations Program at its School of International Service. This article is adapted from an essay he wrote in Americas Quarterly.

EU-MERCOSUR: Does Their New Association Agreement Mean Much?

By Thomas Andrew O’Keefe*

29/06/2019 Coletiva de Imprensa UE-Mercosul

Press conference about the trade agreement between the Mercosur and the EU / Palácio do Planalto / Creative Commons

After nearly two decades of intermittent negotiations, the European Union and the four core MERCOSUR nations (Argentina, Brazil, Paraguay, and Uruguay) have finally inked a trade agreement, but its real impact won’t be felt for years, if ever. When the negotiations began in the mid-1990s, the EU was the largest trading partner of the MERCOSUR countries, and the United States was number two. Today China is in first place, the European Union is second, and the U.S. is fourth, behind intra-Latin American trade (EU investors, however, continue to have the largest stock of foreign direct investment assets in the MERCOSUR region). When ratified, the EU-MERCOSUR Association Agreement, signed in Brussels on June 28, will exempt a little more than 90 percent of two-way trade from tariffs.

  • About 93 percent of MERCOSUR exports will eventually obtain duty-free access into the EU market, the bulk as soon as the agreement comes into effect. Agricultural commodities such as beef, chicken, corn, eggs, ethanol, honey, pork, rice, and sugar only get reduced duties, with many also subject to quotas. Another 100 MERCOSUR agricultural items are completely excluded from any type of preferential treatment.
  • Some 91 percent of European exports will get duty-free access to MERCOSUR, but gradually as tariffs are reduced over a 10-year period. The phase-out is over 15 years in the case of European automobiles, furniture, and shoes. MERCOSUR tariffs on the remaining 9 percent of primarily EU manufactured goods will remain in place permanently.
  • The agreement offers service providers from any signatory country full access to the markets of all the other signatory states.

MERCOSUR showed greater flexibility with the EU on agricultural subsidies than it had with the United States, a position that contributed to ultimate rejection of the Free Trade Area of the Americas (FTAA). Subsidies in the EU-MERCOSUR agreement are permitted if “necessary to achieve a public policy objective.” The MERCOSUR countries also capitulated on the use of anti-dumping tariffs on intra-hemisphere trade. The new accord, however, does authorize governments to impose a duty that is less than the margin of dumping if it adequately removes injury to the affected domestic industry. It also includes provisions for ensuring that sanitary and phytosanitary (SPS) measures as well as technical norms are not abused and become disguised impediments to free trade, although it permits enforcement of the European “precautionary principle” notion to restrict the importation of genetically modified food, for example, where the risks to health are not scientifically conclusive.

The agreement – now being “legally scrubbed” and translated into the EU’s 23 official languages – faces an elaborate, multi-year ratification process in the EU, where individual countries and the European Parliament must approve it, as well as each MERCOSUR government. Agricultural forces are already lining up in many European countries in opposition. In the meantime, the accord’s greatest impact is a signal by Brazilian President Bolsonaro and Argentine President Macri that they’re making progress on their stated objective to return MERCOSUR to its original trade focus – in contrast to their predecessors – and to claim an economic “victory” when growth in both countries remains stagnant.

  • Despite the flexibility MERCOSUR showed on agricultural subsidies and anti-dumping, its main sticking points with the United States in the FTAA, a free trade agreement with the United States seems remote as the Trump administration – in contrast to the Europeans – is unlikely to offer meaningful concessions based on the lesser developed status of the MERCOSUR countries. Neither will the Association Agreement with the EU reverse or even slow the region’s shift toward trade with China and the rest of Asia.

August 6, 2019

* Thomas Andrew O’Keefe is the President of New York City-based Mercosur Consulting Group, Ltd. and a lecturer at Stanford University. He is the author of Bush II, Obama, and the Decline of U.S. Hegemony in the Western Hemisphere.

Cuba: U.S. Sanctions Underscore the Need for Meaningful Reform

By Ricardo Torres*

Cruise ship at Havana Harbor in April 2018/ kuhnmi/ Flickr/ Creative Commons

Washington’s new measures to tighten the embargo will hurt the Cuban people, especially the private sector, but Havana has little choice but to double-down on reform and make its economy more efficient and independent. Holding Cuba responsible for Venezuela’s resistance to U.S. regime-change policies in that country, and for alleged “acoustic” incidents harming U.S. diplomats in Havana, U.S. Secretary of State Mike Pompeo and National Security Advisor John Bolton last week announced steps that, taken together, amount to almost full reversal of the engagement that former Presidents Barack Obama and Raúl Castro announced four and a half years ago, in December 2014.

  • Among key measures is full enforcement of Title III of the Helms-Burton law of 1996 – ending waivers that three predecessor administrations had invoked – and allowing even Cuban-Americans who were not U.S. citizens at the time to sue companies involved in business dealings (“trafficking”) involving properties nationalized by the Cuban government since 1959. The U.S. officials have also pledged regulations clamping down on remittances to Cuba (which had already been regulated to ensure that senior government officials did not receive them); prohibiting dollar transactions through third-party financial institutions; and stopping “non-family” travel to the island. Details will not be known until the regulations are published, a process that usually takes several months.

The U.S. actions come at a delicate moment for the Cuban economy, will certainly worsen the country’s balance-of-payments situation by increasing the cost of international transactions, and will directly affect key sectors that depend on tourism and remittances.

  • Among the hardest hit will be Cubans engaged in private businesses, who depend on remittances for investment and foreign visitors as customers. At the end of 2018, a little more than 1.4 million formal jobs were in the non-state sector, including the self-employed (cuentapropistas), members of cooperatives, and private farmers – almost equal to the 1.6 million in state enterprises. Many others work in the informal sector to supplement their incomes.
  • The perceived increased risk posed by the U.S. measures will also cause foreign companies to postpone or cancel entirely plans to invest in Cuba.

Trump Administration efforts last year to reverse Obama-era policies, coupled with other challenges – including the weakening of the Venezuelan economy and the shift of a previously key partner like Brazil – are taking their toll on the Cuban economy. In addition, an accumulation of important internal problems has made the country vulnerable. Austerity measures announced as early as in summer 2016, including a reduction in imports and energy rationing in the public sector, have already hurt. Even in the context of a good international environment and improving ties with the United States, the Cuban economy grew slowly over the past decade. The ups and downs in policies dealing with the private sector, agriculture, and in the derailed process of reform in the dominant state sector – as well as setbacks in efforts to attract foreign investment – underscore the economy’s deep structural flaws and damage caused by deficient responses and successive delays.

In these changing times, appeals to “Resist!” are no longer enough. Aggravated by the U.S. measures, the expected worsening of the economic situation will disproportionately affect the most vulnerable of the Cuban people. The external problems could be the argument that the Cuban government needs to push aside obstacles to domestic economic reform. The country has immense internal potential but has been held hostage to the ideological purism that many profess.

  • The government of President Díaz-Canel has already announced new measures to stimulate the development of state enterprises, cooperatives, and the private sector itself. Foreign dependence has proven to be disastrous for Cuba. No foreign power is going to come to resolve the flaws of the Cuban model. Broadening and deepening reform, liberating the domestic productive powers, seems to be the only possible way forward in addition to rethinking international alliances and embracing markets more broadly.

April 23, 2019

*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.

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).