Latin America-Caribbean: Illicit Fishing is Environmental Security Challenge

By A.J. Manuzzi*

The Ecuadorian naval vessel, LAE Island San Cristobal / Defense Visual Information Distribution Service / Creative Commons license

Illegal, unreported, and unregulated (IUU) fishing and associated crimes are undermining coastal communities throughout Latin America and the Caribbean – hurting the economic wellbeing of licit fishers and reducing coastal and ocean biodiversity, fish stocks, and food security. The EU and the UN Food and Agriculture Organization (FAO) have made ending IUU fishing a priority because it contributes to overfishing, enables labor abuses, and violates international norms on sovereignty and biodiversity.

IUU fishing comprises a diverse slate of illicit acts, including foreign vessels fishing in another country’s sovereign waters without permission; disregard for international environmental laws; and inadequate catch reporting to state authorities. Illicit actors include large distant-water fleets (DWFs) backed by states like China, Taiwan, and Japan as well as individual locally based artisanal vessels with small crews. 

  • Latin America represents only 2.1 percent of global aquaculture production, but its losses to IUU fishing – losses that experts estimate to be $2.3 billion a year – make it the third-hardest hit continent. According to a 2020 study by the Fisheries Economics Research Unit and the Sea Around Us organization at the University of British Columbia, income losses are as high as $600 million, and tax revenue losses are as high as $300 million dollars, with the other $1.4 billion owing to the general redirection of catches from legitimate to the illicit seafood trade.
  • Costa Rica has seen by-kill of young fish from the use of illegal nets as well as incursions by illegal fishermen in its offshore national parks. Until recently, Ecuador faced a flotilla of as many as 340 Chinese vessels catching and storing marine life around the Galapagos Islands. In Jamaica, depleted seafood stocks have pushed local fishers into deeper waters, where there is a risk of collision with IUU fishers searching for diminishing sources of conch and lobster. In Suriname, IUU fishers have been known to steal the nets of domestic fishers.

IUU fishing often involves forced labor and other crimes, further harming coastal communities and billions of people worldwide whose economies and diets are tied to fish. By undercutting legal market prices, it threatens the livelihood of licit fishers who pay fair wages and don’t have the same technological advantages. 

  • Overfishing reduces supplies for local communities. The FAO estimates that total fish consumption in Latin America and the Caribbean will increase 33 percent by 2030 (more than any other region). Overfishing by IUU actors has already forced the Dominican Republic and Jamaica to increase imports of fish and seafood and impose new catch quotas that, when expanded in other countries, would likely affect the more than 3 million people in the region who work in fishing or aquaculture.
  • Related crimes are committed by artisanal fishers operating in coastal waters, where they illegally harvest seaweed, pursue endangered species, fish in the off-season, or engage in smuggling; domestic industrial fishers who misreport catches; and DWFs that use flags of convenience to trick authorities. 
  • IUU fishers threaten biodiversity because they are heavily skewed toward immediate predation, with little concern for the long-term economic impact and environmental costs. They also complicate states’ fishery sustainability efforts, making implementation of the UN Sustainable Development Goal to eliminate IUU fishing fall far behind. In addition, shark finning is prominent in Costa RicaEcuador, and Chile despite domestic and international laws against it. Nine of the 12 shark species found aboard a Chinese IUU freighter off Ecuador in 2017 were endangered. 

The regulatory frameworks for fighting IUU fishing are weak; enforcement tools are lacking; and most countries lack the resolve to address the problem. The current international framework includes a hodgepodge of international and national agreements and initiatives, without the active engagement of many of the world’s largest fishing nations. 

  • The cornerstone is the Agreement on Port State Measures (PSMA), which binds signatories to reduce illicit fishing by denying IUU fishing vessels access to port services and to lessen access of illicit catch to international markets. International bodies such as the FAO provide tools for tracking vessels, but regional fisheries management organizations (RFMOs) and advocacy groups like Oceana say that there is only limited sovereign commitment to the rules. Some of the most seriously affected countries are those with the fewest resources to combat the problem.

The combination of IUU fishing and related crimes, such as labor abuses and copy-cat practices by local fishers, pose threats to national economies, food security, and ultimately regional stability. What’s needed is obvious: enhanced monitoring, control, and surveillance capacity; updated legal instruments and increased judicial sanctions; and more resolute multilateral action on fishing subsidies and ocean protection. One question is whether the victims of IUU fishing themselves can muster the national and regional resolve to address the problem – sacrificing the short-term gain of permissiveness for the long-term goal of protecting strategic interests. Without that resolve, Latin America and the Caribbean will continue to be victimized by IUU fishing and the inequality, labor abuses, resource exploitation, and violations of national sovereignty it enables.

July 21, 2022

*A.J. Manuzzi is a Master’s student in International Affairs in the School of International Service. This article draws on research he performed as a Research Assistant for a CLALS project on Illegal, Unreported, and Unregulated (IUU) fishing in nine Latin American and Caribbean countries.

Argentina: From Bad to Worse?

By Arturo C. Porzecanski*

Argentina’s new Economy Minister, Silvina Batakis / Government of Argentina / Creative Commons license

Argentina’s mismanagement of fiscal, monetary, and exchange-rate policies – and its business-unfriendly, interventionist policies destructive of investor confidence – have delivered an increasingly unpopular mix of economic stagnation and accelerating inflation. While the government most likely will muddle through until the next national elections in October 2023, there is a non-negligible risk that remaining public confidence could collapse and lead to uncontrolled inflation, deepening recession, social unrest, and even the resignation of President Alberto Fernández.

  • By early 2021, the Argentine economy had already recovered from the 15 percent drop in real GDP caused by the pandemic in the second quarter of 2020. That was a relatively easy feat because the economy was already in a recession; real GDP in the first quarter of 2020 stood 11 percent below that in the fourth quarter of 2017. So far this year, the pace of economic activity has remained below that 2017 peak, and it has started to drop some more, with the latest consensus forecast projecting GDP declines in the second and third quarters, followed by stagnation in the fourth trimester.
  • Inflation has accelerated from a yearly average pace of under 50 percent in 2020 and 2021 to an annualized rate of 85 percent in the first half of this year. This month’s inflation rate may well have three digits once annualized. To slow down inflation, the government has resorted to price controls on staples sold by supermarkets; import and capital controls to prevent the currency from devaluing faster; export quotas on beef, corn, and wheat to keep domestic supplies higher and prices lower; and hefty subsidies to state-owned and private companies that supply electricity, gasoline, natural gas, mass transit, and water and sewer services to consumers. As a result, the headline inflation rate is underestimated by at least 10 percentage points, while the subsidies are keeping the fiscal deficit about 4 percent of GDP wider than otherwise.

By now Argentina wasn’t supposed to be in such lamentable economic shape. Barely four months ago, the government and the International Monetary Fund (IMF) completed negotiations on a $44 billion loan under an Extended Fund Facility (EFF). The country was granted an up-front disbursement of almost $10 billion, plus $4 billion more in late June.

  • The IMF program has three main targets for this year. The first is a modestly narrower fiscal deficit – 2.5 percent of GDP rather than last year’s 3 percent (measured excluding interest payments on the public debt). The second calls for a nearly $6 billion accumulation of central bank net international reserves, which would take the year-end total to over $8 billion. And the third requires a reduction in central bank financing of the government’s budget deficit, to the equivalent of 1 percent of GDP from 3.7 percent in 2021.
  • The program’s rather modest fiscal and monetary objectives are based on optimistic assumptions, however, and its structural reforms fall way short of what is required to spark confidence and a sustainable economic recovery. Populist economic measures – advocated mainly by the Peronist faction led by Vice President Cristina Kirchner – have greatly harmed the country’s business and investment climate.
  • It is an open secret in Argentina that the main purpose of the IMF loan is really to help the government avoid defaulting on the $44 billion the Fund previously loaned (in 2018-19) to President Mauricio Macri’s administration. That loan is scheduled for repayment in full between September 2021 and mid-2024, and the present government had made it plain to the IMF that it had no means to do so absent a reprofiling or a quid pro quo. Therefore, in Argentina, the new IMF loan is widely understood to be a fig leaf over what is an indirect debt rescheduling on an installment plan – and it is characterized as a debt refinancing by the government itself.

Even the mild conditionality attached to the new IMF loan has already proven difficult to meet and has claimed its first significant victim –Economy Minister and Fernández ally Martín Guzmán resigned on July 2. His replacement is Silvina Batakis, a heterodox Peronist economist handpicked by Cristina Kirchner.

  • All indications are that the government missed the IMF targets for end-June, especially once discounting any window dressing, and that, failing to take restrictive fiscal and monetary measures soon, it will miss the goals for the full year. Argentina’s financial markets have been reacting badly. The stock market index has been trailing far behind inflation; the government’s dollar-denominated bonds have plunged to distressed levels, mostly below 25 cents on the dollar; and the Argentine peso, whose value is set artificially by the central bank under a rationing system, trades in parallel (but legal) and black markets at less than half its official value.
  • Social and political tensions are on the rise, largely because wages and pensions are incapable of keeping up with inflation. On July 9, Independence Day celebrations were marred by nationwide protests against the government, though at least they were peaceful. On July 13, farmers staged a one-day strike to complain against punishing taxes, damaging currency controls, and a scarcity of diesel fuel that has hit them during the harvest season. New Economy Minister Batakis will need to walk a fine line between introducing unpopular corrective measures to break the inflation spiral – restrictive fiscal and monetary policies, in particular – and pleasing political masters who seem to be persuaded that a muddling-through scenario of tightening controls and ignoring market realities is still viable. A miscalculation could lead to triple-digit inflation, widespread social unrest, and the early exit of President Alberto Fernández.

July 14, 2022

*Dr. Arturo C. Porzecanski is Research Fellow at American University’s Center for Latin American and Latino Studies, and Global Fellow at the Woodrow Wilson International Center for Scholars.

South America: Future Global Green Hydrogen Hub?

by Thomas Andrew O’Keefe*

An oil rig off the coast of Brazil / Redacción EFEverde / Creative Commons license

A handful of South American countries have long produced hydrogen using fossil fuels for their domestic hydrocarbon, steel, and petrochemical industries, but early efforts by Brazil, Chile and Uruguay to shift to renewable and carbon-free energy sources, along with the emergence of new lower-cost technologies, could position the continent as a leading global green hydrogen supplier.

  • Hydrogen is the most abundant element in the universe and can be produced from water utilizing the electrolysis process whereby a direct current is applied to separate hydrogen and oxygen molecules. The hydrogen gas that is produced can be either burned – for heat or to generate electricity – or stored in fuel cells that produce electricity to power transportation.
  • South America has been producing hydrogen for several decades. Many countries on the continent are already important hydrogen producers for the steel and petrochemical industries, including the manufacture of fertilizers, as well as for refining heavy-crude petroleum products. The electricity to facilitate electrolysis in South America currently relies exclusively on fossil fuels. This explains why hydrogen production is today a major source of greenhouse emissions in some South American countries.
  • Countries with substantial hydrocarbon reserves such as Argentina, Bolivia, Brazil, Colombia, and Peru also have the potential to utilize natural gas to produce so-called “blue” hydrogen, which incorporates carbon-capture and storage technology. The technologies to ensure the elimination of all greenhouse house emissions associated with the extraction, transport, and use of natural gas have yet to be developed.

Three South American countries have a jump on producing “green” hydrogen, made exclusively with renewable and carbon-free energy resources such as geothermal, hydro, solar, wind, and even nuclear power for electrolysis.

  • In 2020 the outgoing administration of Sebastián Piñera of Chile launched an ambitious plan to convert the country into a major global exporter of green hydrogen by 2030. An Australian company at the end of 2021 announced plans to invest $8.2 billion to build a major export-oriented green hydrogen complex in the southern Argentine province of Rio Negro. A pilot project in Argentina has been producing small amounts of electrolytic hydrogen from wind power since 2008.
  • Chile and Uruguay are best positioned to attract green hydrogen investment projects, given their long-term national energy plans forged through extensive stakeholder consensus-building efforts as well as stable economic policies and predictable regulatory frameworks. These factors contributed to putting both countries at the forefront of the continent’s transition to a greener energy matrix. The Santiago metro system, for example, is now powered exclusively by renewable energy, while Uruguay is often ranked behind Denmark as a global leader in terms of wind-generated electricity.

Converting South America into a major global green hydrogen exporter will require new and less costly technologies to produce, transport, and consume it. Ideally, South American governments should encourage regional research and development of new technologies to reduce the current high costs to produce green hydrogen, perhaps with funding from the Development Bank of Latin America (CAF), which is now based in Montevideo, or the Fund for the Structural Convergence of the MERCOSUR (FOCIM). Regional economic integration schemes such as the Andean Community and MERCOSUR can also facilitate the creation of new supply chains for manufacturing competitively priced inputs such as fuel cells and electrolysers to produce hydrogen from water. Another missing piece is a low-cost way to overcome hydrogen’s comparatively low energy density. At present you need about three times more space to store hydrogen to make the equivalent level of energy sourced from natural gas. Retrofitting existing pipeline networks and devising innovative ways to more cheaply transport hydrogen over long distances, is also necessary.

  • South American countries would be wise to decarbonize domestic transport and industry through wide-spread use of green hydrogen before making the leap to global exports. Serving global markets sustainably will also require the deployment of low-carbon transport options to replace the current fleet of long-distance ships that rely on highly polluting diesel. Utilizing liquid hydrogen or ammonia and even methanol produced with green hydrogen to power ocean-going vessels may provide the solution.

June 3, 2022

* Thomas Andrew O’Keefe is President of Mercosur Consulting Group, Ltd. and a lecturer with the International Relations Program at Stanford University.

Argentina: Is China Nostalgic for the Macri Era?

by Patricio Giusto*

Argentine President Alberto Fernández and Chinese President Xi Jinping at the Great Hall of the People in Beijing, China / Casa Rosada / Wikimedia Commons / Creative Commons license

Argentina’s return to Peronism with the victory of President Alberto Fernández and Cristina Kirchner in 2019 has not led to a rapprochement between Argentina and China as widely predicted. After the first half of the Fernández’s presidency, relations with China are riddled with unfulfilled promises, political and bureaucratic obstacles, detrimental economic measures, and other challenges. To some extent, paradoxically, Beijing might be missing center-right President Mauricio Macri’s times (2015-2019).

Fernández and other key figures of the Argentinean government frequently refer to the country’s “deep friendship” and “strategic relationship” with China. Under Fernández, Argentina has just joined the Belt and Road Initiative (BRI) and, according to the official line, bilateral links are very strong. Of China’s top priorities for the relationship, however, almost nothing has been accomplished with Fernández. Fierce political struggles within the Fernández coalition have contributed to an erratic foreign policy that lacks of a comprehensive strategy on China. Mounting U.S. pressure on certain critical issues has also been a factor.

  • When Fernández traveled to Beijing to sign the BRI agreement three months ago, the two governments announced more than $13 billion in infrastructure investments, but they have released no details on projects or their financing.

The energy sector has been particularly messy for China with Fernández in charge.

  • An $8 billion nuclear power project with Hualong One technology has stalled as Argentina tries to renegotiate the financial conditions during a severe economic crisis – and faces tough diplomatic pressure from Washington to abandon the project. The Santa Cruz hydroelectric dams, the largest Chinese investment project in Argentina, have suffered constant economic restraints and union strikes for two years. An Argentinian financial default has provoked the total interruption of Chinese finance. PowerChina filed an official complaint about handling of its bid to build a Chihuidos hydroelectric dam in Neuquén province. The Belgrano II thermal power plant project with China’s CNTIC – financed by the U.S. EXIM Bank – has mysteriously never started. The oil company Sinopec, weary of economic volatility and strikes, sold its assets in Argentina in early 2020, affecting its operations.

The Argentinian government has slowed other forms of cooperation, apparently for security reasons, as well.

  • Buenos Aires announced, for example, that it alone would fund the Antarctic Logistics Pole project in Tierra del Fuego province that it had discussed with China. It has not acted on the long-awaited purchase of Chinese J-17 fighter jets and wheeled armored vehicles because of financial constraints and U.S. pressure, according to Ministry of Defense sources.
  • On another flagship project, management the Paraná-Paraguay waterway, the country’s most strategic fluvial corridor, Fernández decided to nationalize part of the operation and determined that only a Belgian company was a qualified partner.
  • In the agricultural sector, Fernández has also dismissed a Chinese investment project estimated to be worth $3.7 billion to develop the pork industry through the installation of mega-factories in different parts of the country.

Some Fernández policies have hurt Argentina’s interests directly as well. He suspended beef exports to China last year – supposedly to curb domestic inflation – but inflation continued to rise while Argentina lost hundreds of millions of dollars from exports and hurt Chinese buyers’ confidence. The country’s bilateral trade deficit with China reached a record $7.3 billion in 2021, after having decreased to $2 billion a year in Macri’s times.

The repeated friendly rhetoric and gestures between Argentinian and Chinese counterparts do not conceal the fact that the relationship under Fernández has been full of obstacles and frustrations for Beijing. President Macri’s international approach was openly pro-West and he had clear ideological differences with China, but there is no doubt that relations then were much more fluent and fruitful for both Argentina and China.

  • The second half of Alberto Fernández’s term is likely to be similarly plagued, with the critical issues blocking progress unlikely to be resolved. Argentina’s economic situation will almost certainly continue to worsen, depriving it of resources to hold up its side of any deal with China. U.S. pressure will continue being a key factor, aimed at restricting cooperation with China in critical issues for Washington’s agenda, such as telecommunications and defense. On the other hand, the two countries’ desire to find ways to cooperate will remain strong no matter who wins the Argentinian presidency in 2023, and China – if patient enough with the ups and downs of the relationship – will continue to be an irreplaceable partner for Argentina.

June 1, 2022

* Patricio Giusto is executive director of the Sino-Argentinian Observatory, an advisor to the Argentinian National Senate, and a visiting professor at Zhejiang University. He is also a researcher and associate professor at Pontifical Catholic University of Argentina.

Ecuador: Is Coca Codo Sinclair a Bellwether for China in Latin America?

by Julie Radomski*

Mega project Coca Codo Sinclair inaugurates its new tunnel / Carlos Rodriguez / Agenda de Noticias ANDES / Wikimedia Commons / Creative Commons license

Ecuador’s Coca Codo Sinclair hydroelectric project – celebrated as a triumph of then-President Rafael Correa’s Revolución Ciudadana and a harbinger of the promise of South-South Cooperation when inaugurated in November 2016 – today appears to be a lightning rod for debate around China’s preferred form of international cooperation. The project was emblematic of the new relationship between Latin American countries and development finance’s new regional leaders, Chinese policy banks. Five years into its operations, Coca Codo is riddled with uncertainties and dramas at local, national, and global scales. 

  • The 1500 Mw project consists of a diversion dam; 24.8 km of tunnel to channel water under the Andean foothills; a compensation reservoir; pipes dropping the water 620 meters; and an eight-turbine powerhouse. It supplies Ecuadorians with 30 percent of their electricity, helping to edge out expensive and fossil fuel-driven thermoelectricity.

The project was a crowning jewel of efforts since the mid-2000s by Chinese policy banks – the China Development Bank and China Export-Import Bank – to provide Latin American countries with billions of dollars in loans, the majority for large infrastructure projects of the variety once financed by multilateral development lenders like the World Bank. Indeed, between 2005 and 2018, the total lending to the region by these two Chinese banks was greater than that of the World Bank and Inter-American Development Bank combined. Coca Codo was financed by a 2010 loan from the China Export-Import Bank and constructed by Chinese state company Sinohydro.

  • However, since 2015 lending has trended steeply downwards, and since 2019 Chinese policy banks have provided no new loans to Latin American countries or state-owned enterprises. While this by no means indicates a downgrading of China-Latin America relations, the nature of this political and economic relationship is no longer oriented around multibillion-dollar state-to-state infrastructure lending like that which made Coca Codo Sinclair possible. This is likely due, at least in part, to the increased hesitancy on the part of Chinese lenders following political controversies surrounding such projects.

The impacts of the projects of this period are still very much an ongoing and controversial issue for countries like Ecuador.

  • Although vital in providing Ecuadorians inexpensive and emissions-friendly electricity, to this day the project has not been fully turned over to the Ecuadorian government, primarily because its distributors (snail-shaped pipes that channel water to each of the powerhouse’s eight turbines) exhibit thousands of fissures that Sinohydro has been unable to repair despite years and millions spent trying. New fissures continue to emerge that experts say indicate “imminent danger” of equipment failure, or even collapse.
  • The diversion dam is also in danger of collapse due to a rare and catastrophic process of “headward” erosion (erosión regresiva o remontante) along the Coca River. The erosion, resulting from the collapse of the famed 150-meter San Rafael waterfall in February 2020, has so far caused two major oil spills, the loss of houses and land, and the repeated destruction of a major roadway connecting the Amazonian region to Ecuador’s capital. The Ecuadorian state power company, CELEC-EP, is investing millions in new infrastructure to attempt to contain the erosion before it reaches the dam. They are also studying the possibility of building an entirely new dam that could be reconnected to the existing powerplant.

The scientific community is debating the extent to which the dam itself may have contributed to the disastrous erosion. Lack of rigorous environmental assessments and monitoring mean that there may never be definitive evidence either exonerating the dam or proving its guilt in the current social, economic, and environmental crisis. There is, however, broad agreement that, given the instability of the Coca River basin, the dam should not have been constructed at the current location and scale due to environmental risks.

Critics of Chinese global economic expansion have seized on Coca Codo Sinclair as a symbol of the danger of China’s influence in Latin America. Other observers argue that the project’s downsides are a result of national institutional failures, irrespective of the “Chineseness” of its finance, engineering, and construction. Either way, recent patterns in Chinese lending indicate that the country’s decisionmakers no longer see this type of project as the basis of win-win development or mutual cooperation. It appears that environmentally sensitive, politically polarizing mega-infrastructure will not be the face of China-Latin America cooperation going forward. Regardless, Ecuadorians are faced with the return of expensive and unreliable electricity, an irrevocably altered Amazonian River basin, and about $3 billion at risk of being carried away by the river.

May 6, 2022

*Julie Radomski is a PhD Candidate and Fulbright-Hays Fellow at American University specializing in development studies.

Central America: The Great Failure of Capitalism

By Alexander Segovia*

San Salvador’s Torre El Pedregal opposite a slum/ ContraPunto-Diario Digital El Salvador

Central American capitalism is inefficient, concentrates wealth within small elites, and hinders broader economic and political participation – and, even as the COVID pandemic underscores its failures, shows little prospect of changing. With the exception of some aspects of the Costa Rican version of Central American capitalism, the entire region has categorically failed in at least four fundamental areas: building productive, competitive, and integrated economies; achieving social progress for the majority of the population; consolidating democracy; and protecting the environment.

My recently published comparative historical review of the region’s brand of capitalism analyzes the development and implications of its two main stages.

Agro-export capitalism. In the 1870s, Costa Rica, El Salvador, and Guatemala – and later Honduras and Nicaragua – found that they could incorporate themselves into world capitalism through the production and exportation of coffee and bananas, and subsequently through other primary products. That strategy brought certain innovation, economic modernization, and national cohesion. After World War II, despite extreme dependence on enormously volatile foreign markets, the model generated some material wealth and even some temporary social progress, especially in urban areas. 

  • Agro-export capitalism, however, caused deeper poverty among the population, especially in rural areas; a greater concentration of wealth and power within a small elite; and a disproportionate exploitation of natural resources. The result was a system that concentrated wealth and power on some while excluding others – a system incompatible with democracy everywhere except Costa Rica. The failure to create jobs, promote social progress, and create conditions for democracy was a major driver of the region’s armed conflicts of the 1980s.

Rentier-transnational capitalism. The wars in the 1980s (along with the mass migration and internal economic, political and social crises they entailed), a deepening of capitalist globalization, and a wave of neoliberal reforms throughout the region brought about a transformation that modified the region’s capitalist model for the first time. The new rentier-transnational capitalism, based on the dynamism of services and trade and favoring consumption over production, turned out to be even less productive than before. 

  • These changes worsened the concentration of wealth and power on elites, who were even further bolstered by kinship with a transnational economic elite that emerged in the 1990s. Rather than create wealth, rentier-transnational capitalism deepened dependency on family remittances from abroad – from the very people who left their homeland to escape violence and unemployment that the failed economic model aggravated. 

COVID-19 has deepened Central America’s socioeconomic crisis, worsening poverty and inequality, putting democracy at even graver risk, and increasing the urgency for socioeconomic, legal, and institutional reforms of the system of privileges and perks for the elites and to establish a more equitable distribution of income and wealth. But the region’s form of capitalism, which has so obviously failed, continues to operate with impunity – and very few national and international actors, including most academics, ask why. Without rupturing this model of elite accumulation, neither democracy nor inclusion will come about.

  • Last century and in the first two decades of this, national and international actors tried to make changes, including efforts to adjust the role of the state. They argued that a democratic and social state with enough autonomy from the economic elites could create a capitalism that is more inclusive and compatible with democracy. But their efforts were either simply not permitted by the local conservative forces (often buttressed by regional and international allies) or were modified in such a way that they did not change the status quo. The problems of inequality, weak institutions, and undemocratic practices are clearly not going to fix themselves.
  • The United States has enormous historic responsibility for the configuration, functioning, and maintenance of the Central American variety of capitalism. It had great influence over the formation of national states and economies, especially in Honduras and Nicaragua, and was a fundamental actor in impeding the modernization of capitalism, such as in Guatemala in the 1950s. It has also been consistently the principal ally of the economic elites opposed to democracy and redistribution, and it has promoted neoliberal economic reforms and electoral strategies that further strengthened their economic and political power. If Washington is serious about addressing the root causes of Central America’s troubles, it could shift toward supporting reforms that would move the region toward a capitalism that is inclusive, sustainable, and compatible with democracy. 

January 12, 2022

* Alexander Segovia is a Salvadoran economist who has held wide-ranging positions in government, multilateral institutions, and academia. His book, El gran fracaso: 150 años de capitalismo ineficiente, concentrador y excluyente en Centroamérica (also available on Amazon) was published in October by F&G Editores (Guatemala).

Latin America: Is COVID Creating Space for Tax Reform?

By Tasha Fairfield*

National strike in Colombia against the Duque administration’s proposed tax reform/ Oxi.Ap/ Flickr/ Creative Commons License

The COVID‑19 pandemic and associated fiscal stress have pushed taxation to the forefront of national political agendas in Latin America and beyond, but leaders need to learn from past failures to achieve success. The question of taxing the rich has gained salience, giving rise to multiple proposals for wealth taxes around the globe. Debate over raising revenue to finance social spending and other pandemic-related priorities by taxing economic elites is particularly important in Latin America, given its staggering inequality.

  • Economically, raising revenue from the upper crust of the income and wealth distribution can actually be optimal and efficient, as Piketty and Saez have shown. From a normative perspective, almost everyone agrees that, in principle, those with more should bear a larger portion of the tax burden. Taxing the rich should be especially popular in highly unequal countries, where the rich are a tiny fraction of the populations and the vast majority would stand to benefit.  

The politics of taxing economic elites tend to be more complicated, however. On the one hand, big business conglomerates and wealthy individuals often enjoy multiple sources of power that end up mattering more than public opinion during the policymaking process. On the other hand, while the majority may approve of progressive taxation, neither voters nor social movements have given priority to demanding that economic elites be taxed more heavily. They tend to see taxation as not directly affecting average citizens, and the technical details of reform initiatives can be difficult. Public support can nevertheless play an important role in counterbalancing the power of economic elites – especially during electoral periods, when politicians tend to be more concerned about what voters want.

  • When progressive tax initiatives do not visibly and narrowly target economic elites – as occurred in Bolivia’s attempt to reinstate an individual income tax in 2003 – the public may reject them. In the Bolivian case, Finance Ministry experts designed a technically appealing flat tax that would be easy to administer yet progressive in practice, thanks to a threshold exemption that produced higher effective tax rates for higher income earners. But the flat marginal tax rate sparked widespread misperception that the proposal was regressive.
  • Inconsistent government messaging also fostered misperceptions that the tax would affect a wide swath of Bolivians. President Gonzalo Sánchez de Lozada at one point asked the “middle class” to “assume this sacrifice,” even though in reality that “middle class” was only a tiny, privileged group of highly paid wage-earners and independent professionals. The proposed reform ended up provoking popular protests, despite the fact that most participants would have been exempt from the tax, and the reform was quickly abandoned. 

The pandemic era increases the opportunity that a strategy linking tax reform to social spending – an approach that has been used successfully in many previous instances – will gain momentum. Programs that provide tangible benefits naturally draw greater interest and support from popular sectors than taxes targeting economic elites.

  • The more immediate and visible the associated benefits, such as expanded and more generous cash transfers, the more effective this strategy can be. In Chile, for example, center-left governments in the 1990s and 2000s made popular social spending initiatives contingent on tax increases, leaving the rightwing opposition exposed to popular wrath if they the chose to vote against the package. An analogous approach is earmarking tax increases to finance social programs. Technocrats dislike earmarking because it creates budget rigidities, but the political advantages are clear.
  • The pandemic has greatly augmented social need and threatens to exacerbate inequality. Colombia’s experience last May, however, shows that linking spending to taxes alone may not be enough. The Duque administration’s proposed tax reform was explicitly intended to finance expansion of basic income support for poor Colombians, and the measures were presented together within a single reform package. Yet the initiative failed because the tax measures were not adequately targeted at economic elites. A second effort later in the year fared better because the sales tax measures and a proposed income tax threshold reduction were removed.

October 13, 2021

* Tasha Fairfield is an associate professor in development studies at the London School of Economics. Her book, Private Wealth and Public Revenue in Latin America: Business Power and Tax Politics, examines how and when the interests of economic elites prevail in unequal democracies through comparative analysis of tax reform in Chile, Argentina, and Bolivia after economic liberalization.

Latin America: Enduring Less Drastic Declines in Remittances than Predicted

By Gabriel Cabañas*

Ria Money Transfer/ Adam Fagen/ Flickr/ Creative Commons License

The decline in remittances during the COVID-19 pandemic has been less severe than predicted for Latin American and Caribbean countries because many migrants are in essential jobs and industries benefitting from generous U.S. income-protection measures, and a good U.S. recovery suggests positive trends will continue.

  • In April 2020, a month after the World Health Organization declared the pandemic, the World Bank estimated the resulting economic shock would cause remittances globally to drop by around 20 percent over the year – the greatest single year drop ever recorded. The Bank said the decline hinged on the fall of wages and employment of migrant workers. Other factors loomed large, such as China’s announcement that its economy had contracted 6.8 percent in the first quarter of 2020, and Europe, especially Italy, faced growing cases of the coronavirus.

More recent data tell a different story. The pandemic reduced global economic growth to -4.5 percent to -6 percent, which, while devastating, was cushioned by good performance in numerous sectors and industries. Contrary to the prediction of a 20 percent decline in 2020, remittances experienced only a 7 percent drop. Some remittance-receiving countries, including Mexico, actually reported growth in remittances from 2019 to 2020.

  • Generous stimulus programs, which the World Bank could not have predicted, preserved an income flow for companies in “essential” industries employing migrant workers, and those losing jobs received generous unemployment benefits.
  • A shift to digital remittances also made it easier and less costly for migrant workers to send money to their families. Western Union, which is the largest single remittance handler (with 10 to 20 percent of the market), reported that revenues increased 16 to 20 percent in 2020. Other channels appear to be growing even faster. The impact of remittances from migrant workers in the United States was further increased by currency devaluations in emerging economies hit hard by COVID.

Policymakers and academics have traditionally viewed remittances as having marginal positive impact on the economies of recipient countries – judging that foreign direct investment (FDI) has a much deeper impact – but that assessment is changing. A report published last year examined 538 estimates of the impact and found that 40 percent showed a positive correlation, 20 percent showed a negative correlation, and the remaining 40 percent were neutral. Observers increasingly think that remittances used by recipient families for consumption are often their optimal use. During periods of income shock, such as environmental catastrophe, increases in remittances replace roughly 60 percent of lost income, according to some estimates. During the Great Recession (2008-09) FDI dropped 39.7 percent, but remittances only dropped 5.2 percent. For a select group of remittance-receiving countries, including El Salvador, remittances have grown to provide more than 20 percent of GDP.

  • In 1970 remittances worldwide totaled less than $50 billion (in 2018 dollars), and in 2018 they exceeded $600 billion – surpassing all overseas development assistance and, in 2019, all FDI (except Chinese investment). Some experts claim much of this growth is a function of measurement error – caused by how banks track remittances – but the fact that remittances have been steadily growing since the 1970s is no illusion.
  • The hemisphere’s continuing challenges emerging from the pandemic raises questions about the future, but – as long as generous stimulus plans, essential work protection, and a strong dollar continue – remittances to Latin America and the Caribbean appear likely to allow recipient countries some continued reprieve from the economic devastation caused by COVID-19 and help them achieve an earlier economic recovery.

September 3, 2021

* Gabriel Cabañas is studying international relations and economics in the School of International Service.

Latin America’s Head-First Dive Toward E-Commerce

By Alexander Borushek*

Left: Tech Park/ Sebastian Bassi/ Flickr/ Creative Commons License (modified)
Right: Informal work/ Alba Sud Fotografia/ Flickr/ Creative Commons License (modified)

The boom in e-commerce during the COVID‑19 pandemic has been stronger in Latin America than in most other regions, presenting profound consequences for traditional informal economies as well as for citizens previously disconnected from formalized economic and financial networks. Since March 2020, long-lasting and recurrent lockdowns have upended informal economies by forcing people away from face-to-face – and often cash-based – transactions. In response, retailers and consumers have been pivoting toward new online alternatives.

  • The growth in e‑commerce has also been a bright spot in an overall bleak economic landscape, with sales growing by an astonishing 63 percent in 2020, topping $100 billion. Not only did this far exceed estimates from prior to the pandemic (12.5 percent projected in November 2019) or in its early days (19.4 percent in June 2020); it was the largest percentage increase of any region in the world.
  • Latin American consumers appear quite content with the shift. More than 80 percent of the region’s first-time online shoppers say they plan on continuing to do so after the pandemic. This is good news for established entities like Argentina’s e-commerce giant MercadoLibre – which already accounted for about half of all online sales in Latin America and saw 2020 revenues double – and international competitors such as U.S.-based Amazon, Singaporean conglomerate Shopee, and China’s Alibaba subsidiary AliExpress, which are looking to make inroads in the region.

Record sales also highlight the region’s urgent need to address the deficiencies that separate its e-commerce sector from the larger and more sophisticated ones in the United States, Western Europe, and the Asia-Pacific.

  • Of particular importance is infrastructure. Beyond underinvestment in bridges, ports, and highways, the region suffers from significant bottlenecks in the logistics planning processes that affect how and at what speed products are delivered.
  • Larger crossborder synergies are hampered in part by a lack of uniform importing schemes, in contrast to the ease with which products pass through borders of the European Union or into the United States. Another obstacle is the chronically low quality, reliability, and “relevance” of the region’s postal services, according to the Universal Postal Union. In its report last October, the UPU concluded that “compared with its level of economic development, the region has the worst relative [postal] performance worldwide.” Moreover, 60 percent of the “last-mile” delivery industry is made up of either small, often informal, businesses or independently contracted drivers who use their own vehicles. This results in a huge lack of cohesive route optimization. MercadoLibre and other big players are trying to build out independent fulfillment networks, but a lot of work remains.

The e-commerce ecosystem is giving other investors, retailers, and consumers a general sense of optimism that positive change can occur.

  • Millions of citizens have been brought into the banking system since the pandemic, often through nimble fintech platforms like MercadoPago or Brazil’s NuBank (the latter having seen record numbers of new users). Coupled with widespread smartphone ownership and the already-high penetration of mobile internet and data, more people than ever are shopping and will be able to purchase items online.
  • International investor interest in the sector is also high. Recently the U.S. e-commerce firm Etsy announced that it had acquired its Brazilian counterpart Elo7 in a $217 million deal. Additionally, SoftBank’s Latin America Fund has at present five e-commerce ventures in its portfolio, including the Colombian super-app Rappi.

While Latin America’s e-commerce sector has yet to display the speed of Amazon Prime or offer the panoply of services available in China, it is highly unlikely to be just a temporary byproduct of the pandemic. Recurring pandemic scares might just provide the momentum the e-commerce industry needs to consolidate its role as an integral piece of the post-COVID economic equation – helping societies address deep-rooted problems that plagued the people simultaneously dependent on the informal economy and most likely to benefit from increased access to banks and other formalized financial networks.

August 10, 2021

* Alexander Borushek is a graduate of American University’s School of International Service and currently a Business Development Representative for Envoy Global, a tech firm that works in immigration and global mobility.

South America: Reality Check on Lithium Fantasies

By Thomas Andrew O’Keefe*

Lithium mine at Salinas Grandes salt desert Jujuy province, Argentina/ EARTHWORKS/ Flickr/ Creative Commons License

The urgent need to reduce global greenhouse gas emissions and transition to an energy matrix centered on renewable energy guarantees a steady demand for lithium, but speculation that South America is on the cusp of a lithium boom is premature. The chemical is critical in the production of rechargeable batteries for mobile devices, electric vehicles, and, increasingly, renewable energy storage systems. The so-called Lithium Triangle of Argentina, Bolivia, and Chile holds just over half the world’s currently known lithium deposits, while Brazil and Peru have large amounts of spodumene hard rock that contains lithium.

  • Lithium in its natural form is part of a chemical compound that requires a complex re-composition process to make, among other things, lithium‑ion battery cells. How it is mined entails significant cost differences. Lithium from the brine below salt flats in Argentina and Chile is currently the most cost-competitive. While Bolivia also has brine deposits, the lithium is less concentrated, contains more impurities, and is found at more difficult-to-access lower depths in the Uyuni salt flats. Accessing lithium in spodumene hard rock pegmatites is even more complicated and hence costlier. The advantage, though, is that this type of lithium synthesizes better with the higher nickel content required to improve electric vehicle performance and range.

The region’s largest producers adopted different approaches to capitalizing on lithium reserves.

  • In 2008, then-President Evo Morales of Bolivia restricted extraction to the state-owned Corporación Minera de Bolivia (COMIBOL) because past commodity boom and bust cycles profited foreigners and left little wealth but plenty of environmental catastrophes and other social ills in their wake. In 2017, lithium extraction was transferred to the newly created Yacimientos de Litio Bolivianos (YLB).  Morales also promoted public-private partnerships to jointly produce batteries and even electric vehicles in Bolivia. The latter echoes a failed Andean Pact initiative during the 1970s in which aspects of automobile production were to be distributed among different member states. The scheme failed because, among other reasons, manufacturing anything in isolated Bolivia was cost prohibitive due to poor infrastructure. Several decades later, logistical realities still make exporting a Bolivian-produced electric vehicle, let alone lithium‑ion batteries, economically unfeasible.
  • Chile, which also deems lithium to be a strategic mineral, imposes onerous production quotas on private-sector producers and requires that they sell 25 percent of their output at preferential rates to domestic downstream buyers. The set-aside provision is designed to encourage manufacturing in Chile of lithium‑ion battery components such as cathodes, hydroxide, and electrolytes. While Argentina is more accepting of private investment in its lithium industry, the country is notorious for recurring economic crises and erratic oscillation in economic policy that make investing in the country a high-risk proposition.

Complicating resource extractive activities in South America are heightened environmental sensitivities. Indigenous communities are well versed in the prior consultation obligation of ILO Convention 169 as well the free, prior, and informed consent requirements of the 2007 UN Declaration on the Rights of Indigenous Peoples. For over a decade now, the continent has seen numerous energy and mining projects blocked and even abandoned because of an actual or perceived failure to adequately consult with detrimentally impacted Indigenous communities. Lithium brine deposits in the Lithium Triangle countries are found in some of the most arid spots on the planet, raising concerns that the water-intensive lithium brine extraction process directly competes with subsistence agricultural activities in nearby communities. This has sparked major road blockades protesting mining projects in Argentina’s Jujuy province and in southwestern Bolivia, as well as court litigation in both Argentina and Chile.

The panorama for the lithium industry in South America is subject to new social and political realities that were not true of past commodity booms. There is little tolerance today for extractive investment projects that are not environmentally sustainable and do not benefit local communities. This trend will accelerate with efforts to turn the voluntary United Nations Guiding Principles on Business and Human Rights into a binding legal treaty. In addition, Environmental, Social, and Corporate Governance (ESG) principles emanating from the UN’s Principles for Responsible Development now make it very difficult for corporate management to push through projects that result in serious environmental damage and human rights abuses.

  • An example of this trend was the announcement last month that Daimler AG, Volkswagen AG, and BASF would join Dutch smartphone manufacturer Fairphone to launch the Responsible Lithium Partnership so that extraction in northern Chile will not negatively affect the sensitive ecosystem or the people who live in the surrounding areas.

July 14, 2021

* Thomas Andrew O’Keefe is President of Mercosur Consulting Group, Ltd. and a lecturer with the International Relations Program at Stanford University.