Latin America: End of “Supercycle” Threatens Reversal of Institutional Reforms

By Carlos Monge*

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By Eduardo Ballón and Raúl Molina (consultores) and Claudia Viale and Carlos Monge (National Resource Governance Institute, América Latina), from Minería y marcos institucionales en la región andina. El superciclo y su legado, o las difíciles relaciones entre políticas de promoción de la inversión minero-hidrocarburífera y las reformas institucionales, Reporte de Investigación preparado por NRGI con colaboración de la GIZ, Lima, Marzo del 2017. See blog text for high-resolution graphic

Policies adopted in response to the end of the “supercycle” have slowed and, in some cases, reversed the reforms that moved the region toward greater decentralization, citizen participation, and environmental protection over the past decade.  Latin American governments of the left and right used the commodities supercycle to drive growth and poverty reduction at an unprecedented pace.  They also undertook institutional reforms aimed at improving governance at large.

  • Even before demand and prices for Latin American energy and minerals began to rise in the early 2000s, some Latin American countries launched processes of decentralization (Colombia and Bolivia); started to institutionalize mechanisms for citizens’ participation in decision making (Colombia and Bolivia); and built progressively stronger environmental management frameworks (Colombia and Ecuador). Peru pressed ahead with decentralization and participation at the start of the supercycle, and when it was in full swing, created a Ministry of the Environment.
  • Implementation of the reforms was subordinated by governments’ overarching goal of fostering investments in the extractive sector. Indigenous consultation rights in Peru, for example, were approved in the second half of 2011, but implementation was delayed a year and limited only to indigenous peoples in the Amazon Basin.  President Ollanta Humala, giving in to the mining lobby, claimed there were no indigenous peoples in the Andes and that no consultations were needed around mining projects.  Local pressure forced a reversal, and by early 2015 four consultation projects on mid-size mining projects were launched.

These reformist policies have suffered setbacks since the decrease in Asia’s and particularly China’s appetite for Latin American energy and minerals has caused prices to fall – and the value of exports, taxes, and royalties, and public incomes along with them.  The latest ECLAC data show a decline in economic growth and a rebound of poverty both in absolute and relative figures.  The gradual fall in the price of minerals starting in 2013 and the abrupt collapse in oil prices by the end of 2015 reversed this generally favorable trend.

The response of the governments of resource-dependent countries has been “race to the bottom” policies, which included steps backward in fiscal, social, and environmental policies.  Governments’ bigger concern has been to foster investments in the new and more adverse circumstances.  In this new scenario, the processes of decentralization, participation, and environmental management have been negatively impacted as local authorities and citizens’ participation – as well as environmental standards and protocols – are perceived by companies and rent-seeking public officials as obstacles to investments.

  • Peru’s Law 30230 in 2014, for example, reduced income tax rates, weakened the oversight capacity of the Ministry of the Environment, and weakened indigenous peoples’ claim public lands.

The correlation between the supercycle years and the progress and regressions in reforms is clear. (click here for high-resolution graphic).  During the supercycle – when huge amounts of money were to be made – companies and government were willing to incorporate the cost of citizen participation, decentralization and environmental standards and protocols.  But now, governments are desperate for new investments to overcome the fall in economic growth and extractive rents, and extractive companies are not willing any more to assume these additional costs.  Those who oppose the “race to the bottom strategy” are fighting hard to restore the reforms and to move ahead with decentralization, increased participation, and enhanced environmental management, to achieve a new democratic governance of the territories and the natural resources they contain.

April 7, 2017

* Carlos Monge is Latin America Director at the Natural Resource Governance Institute in Lima.

OAS-Venezuela: Almagro Ups the Ante

By Stefano Palestini Céspedes*

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Luis Almagro, OAS Secretary General, met with Freddy Guevara, First Vice President of the National Assembly of Venezuela, in Washington, DC in early February 2017. / Juan Manuel Herrera, OAS / Flickr / Creative Commons

OAS Secretary General Luis Almagro’s second report on Venezuela, issued on March 14, reflects his personal commitment to enforce the principles enshrined in the Inter-American Democratic Charter, but risks getting ahead of the organization’s member states and could ultimately hurt the credibility of the charter and OAS.  The 73-page document states that the government of Venezuelan President Nicolás Maduro has become a “dictatorial regime” that violates “every article” of the Charter; concludes that all attempts at dialogue have failed; and essentially calls for the OAS to suspend Venezuela’s membership in accordance with the charter’s democracy clause.  Almagro said the UNASUR negotiation (supported by the Vatican) has failed to achieve any of its proposed objectives and has become “a tool for reinforcing the regime’s worst authoritarian features domestically and, externally, for not engaging in international condemnation and pressure.”

  • The report concludes with an ultimatum: If the government does not call for general elections, release all political prisoners, restore all laws it has annulled, and select a new electoral authority and a supreme tribunal in the next 30 days, Venezuela should be suspended from the OAS. Few observers believe Maduro could meet these conditions even if he wanted.

Almagro’s actions, including his forceful call for application of Article 21 of the Charter – the “democracy clause” – moves his office and the OAS into uncharted territory as it would be the first time it is applied against an elected government.  Article 21 was applied against the government in Honduras that came to power in a coup in June 2009, but the sanctions were initiated at the request of ousted President Zelaya and strongly supported by Latin American governments – including Hugo Chávez – and Washington.  To enforce Article 21 against an incumbent government, a strong consensus needs to be built.

The Secretary General’s showdown with President Maduro presents a test for the Charter and, ultimately, for the OAS, as it pushes the organization beyond its traditional institutional limits.  Any decision on suspension must be approved by a two-thirds majority of member states, whose delegates represent executive branches that traditionally have shied from intervening in each other’s affairs.  Some insiders also grumble that the Secretary General has fallen short in his consultation with the member states; instead he seems to take a partisan position such as by inviting Maduro’s opposition to OAS headquarters this week for a press conference.  If the members back Almagro’s call for suspension, he will have demonstrated that principled arguments can break even strong institutional barriers – moving OAS into a new phase.  In that case, the Secretary General together with the member states will need to come up with a post-suspension plan; only then will OAS become part of the solution to Venezuela’s crisis.  If member states do not support the Secretary General’s call, Almagro will be respected as a leader moved by convictions, but the OAS will probably move one step down towards irrelevance.

March 21, 2017

Stefano Palestini Céspedes is CLALS Fellow and Postdoctoral Fellow at the Department of Political and Social Sciences at the Freie Universität Berlin, where he specializes in international organizations and regional governance.

Return of the Monroe Doctrine: Making Latin America Irate Again

By Max Paul Friedman*

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Uncle Sam stakes his claim in the Western Hemisphere in a political cartoon outlining the basic tenants of the Monroe Doctrine (1912). / Wikimedia / Creative Commons

A vigorous resuscitation of the Monroe Doctrine may well be at hand under U.S. President Donald Trump, even though history shows us that it will contradict another favored policy – “America First” – which signals a desire to return to the most notorious isolationist organization in U.S. history.  The Monroe Doctrine, first articulated in 1823 as a means of blocking external interference in the Western Hemisphere, was the central pillar of U.S. policy toward Latin America until Barack Obama’s Secretary of State, John Kerry, told a roomful of Latin American diplomats in 2013 that “the era of the Monroe Doctrine is over.”  The statement was part of an effort to rehabilitate the U.S. image in a region long accustomed to seeing the United States as seeking to control it through persuasion when possible, and force when necessary.  In a policy paper published last December, Craig Deare, a dean at the U.S. National Defense University and now Trump’s top Latin America advisor on the National Security Council staff, denounced Kerry’s statement “as a clear invitation to those extra-regional actors looking for opportunities to increase their influence.”  He specifically mentioned China.

A revitalized Monroe Doctrine, however, contradicts the Administration’s other strong impulse, present in its statements far beyond Latin America, toward isolationism.  Trump is promising to build a literal wall between Latin America and the United States, but the Monroe Doctrine was decisively unilateral and interventionist.  It stated that the United States would not intervene in European affairs if European powers did not intervene in the Americas, but Monroe carefully did not state that the United States would not intervene in the region.  Indeed, Presidents James Monroe (1817-1825) and John Quincy Adams (1825-1829) and other U.S. leaders desired and expected the future annexation of parts of what was then Spanish or Latin American territory in Cuba, northern Mexico (later Texas), and beyond.  Later, even in the “isolationist” early decades of the 20th century, the United States was vigorously engaged in military intervention and outright occupation of several countries in Latin America.  The Marines were in Nicaragua (1912-33), Haiti (1915-34), and the Dominican Republic (1916-24).

  • Latin American resistance prompted Franklin Roosevelt’s “Good Neighbor Policy,” which supplanted the Monroe Doctrine’s unilateralism with respect for national sovereignty, but during World War II, FDR threatened Latin American governments with economic embargoes and other measures if they didn’t round up and intern thousands of Germans, Italians, and Japanese. After the tide in the war turned in 1943, the Latin American deportation and internment program was continued by U.S. officials seeking to turn the program to economic advantage by crushing commercial rivals.

Even Obama had difficulty reversing the United States’ longstanding desire to guide political and economic developments in Latin America – continuing, for example, Washington’s “democracy promotion” efforts in Cuba and elsewhere – but steps toward normalization of relations with Cuba and other initiatives made important strides toward assuaging Latin American irritation with U.S. imperiousness.  Obama went further than any president since FDR in restoring good relations, and ended the Cold War in Latin America.  Donald Trump’s competing impulses – the interventionism of Monroe and the isolationism of “America First” – will keep U.S.-Latin America relations on edge.  His unilateralist style has already hit its first victim, Mexico’s President Enrique Peña Nieto, and is likely to claim more soon.  If Trump revives the Monroe Doctrine’s unilateralism more broadly in response to a perceived threat from China throughout the region, he is likely to succeed only in making Latin America irate again.

February 2, 2017

* Max Paul Friedman is a Professor in the History Department at American University and author of Rethinking Anti-Americanism: The History of an Exceptional Concept in American Foreign Relations.

2017: Happy New Year in Latin America?

By Eric Hershberg and Fulton Armstrong

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Brazilian President Michel Temer surrounded by members of his party in mid-2016. His government will continue to face questions of legitimacy in 2017. / Valter Campanato / Agência Brasil / Wikimedia / Creative Commons

The year 2016 laid down a series of challenges for Latin America in the new year – not the least of which will be adapting to a radically different administration in Washington.  Last year saw some important achievements, including an elusive peace agreement in Colombia ending the region’s oldest insurgency.  Several countries shifted politically, eroding the “pink tide” that affected much of the region over the past decade or so, but the durability and legitimacy of the ensuing administrations will hinge on their capacity to achieve policy successes that improve the well-being of the citizenry.  The legitimacy of Brazil’s change of government remains highly contested.  Except in Venezuela, where President Maduro clung to power by an ever-fraying thread, the left-leaning ALBA countries remained largely stable, but the hollowing out of democratic institutions in those settings is a cause for legitimate concern.  Across Latin America and the Caribbean, internal challenges, uncertainties in the world economy, and potentially large shifts in U.S. policy make straight-line predictions for 2017 risky.

  • Latin America’s two largest countries are in a tailspin. The full impact of Brazil’s political and economic crises has yet to be fully felt in and outside the country.  President Dilma’s impeachment and continuing revelations of corruption among the new ruling party and its allies have left the continent’s biggest country badly damaged, with profound implications that extend well beyond its borders.  Mexican President Peña Nieto saw his authority steadily diminish throughout the course of the past year, unable to deal with (and by some accounts complicit in) the most fundamental issues of violence, such as the disappearance of 43 students in 2014.  The reform agenda he promised has fizzled, and looking ahead he faces a long period as a lame duck – elections are not scheduled until mid-2018.
  • The “Northern Triangle” of Central America lurches from crisis to crisis. As violence and crime tears his country apart, Honduran President Hernández has devoted his energies to legalizing his efforts to gain a second term as president.  Guatemala’s successful experiment channeling international expertise into strengthening its judicial system’s ability to investigate and prosecute corrupt officials is threatened by a weakening of political resolve to make it work, as elites push back while civil society has lost the momentum that enabled it to bring down the government of President Pérez Molina in 2015.  El Salvador, which has witnessed modest strides forward in dealing with its profound corruption problems, remains wracked with violence, plagued by economic stagnation, and bereft of decisive leadership.
  • Venezuela stands alone in the depth of its regime-threatening crisis, from which the path back to stability and prosperity is neither apparent nor likely. The election of right-leaning governments in Argentina (in late 2015) and Peru (in mid-2016) – with Presidents Macri and Kuczynski – has given rise to expectations of reforms and prosperity, but it’s unclear whether their policies will deliver the sort of change people sought.  Bolivian President Morales, Ecuadoran President Correa, and Nicaraguan President Ortega have satisfied some important popular needs, but they have arrayed the levers of power to thwart opposition challenges and weakened democratic institutional mechanisms.
  • As Cuban President Raúl Castro begins his final year in office next month, the credibility of his government and his successors – who still remain largely in the shadows – will depend in part on whether the party’s hesitant, partial economic reforms manage to overcome persistent stagnation and dissuade the country’s most promising professionals from leaving the island. Haiti’s President-elect Jovenel Moise will take office on February 7 after winning a convincing 55 percent of the vote, but there’s no indication he will be any different from his ineffective predecessors.

However voluble the region’s internal challenges – and how uncertain external demand for Latin American commodities and the interest rates applied to Latin American debt – the policies of incoming U.S. President Donald Trump introduce the greatest unknown variables into any scenarios for 2017.  In the last couple years, President Obama began fulfilling his promise at the 2009 Summit of the Americas in Trinidad and Tobago to “be there as a friend and partner” and seek “engagement … that is based on mutual respect and equality.”  His opening to Cuba was an eloquent expression of the U.S. disposition to update its policies toward the whole region, even while it was not always reflected in its approach to political dynamics in specific Latin American countries.

 Trump’s rhetoric, in contrast, has already undermined efforts to rebuild the image of the United States and convince Latin Americans of the sincerity of Washington’s desire for partnership.  His rejection of the Trans-Pacific Partnership – more categorical than losing candidate Hillary Clinton’s cautious words of skepticism about the accord – has already closed one possible path toward deepened ties with some of the region’s leading, market-oriented economies.  His threat to deport millions of undocumented migrants back to Mexico and Central America, where there is undoubtedly no capacity to handle a large number of returnees, has struck fear in the hearts of vulnerable communities and governments.  The region has survived previous periods of U.S. neglect and aggression in the past, and its strengthened ties with Asia and Europe will help cushion any impacts of shifts in U.S. engagement.  But the now-threatened vision of cooperation has arguably helped drive change of benefit to all.  Insofar as Washington changes gears and Latin Americans throw up their hands in dismay, the region will be thrust into the dilemma of trying to adjust yet again or to set off on its own course as ALBA and others have long espoused.

 January 4, 2017

China, Latin America, and the New Globalization

By Andrés Serbin*

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

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

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

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

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

December 13, 2016

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

Implications of Fidel’s Passing

By Fulton Armstrong

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As a tribute to Fidel Castro, flowers and posters adorn the gates outside the Cuban Embassy in Buenos Aires. / Gastón Cuello / Wikimedia / Creative Commons

The death of Fidel Castro last Friday night has drawn largely predictable reactions from largely predictable quarters, but the analysis of the meaning of the comandante’s passing that matters most belongs to the Cuban people.  History may ultimately absolve Fidel of his most egregious excesses and errors over the last six decades, but Cubans are the ones who will decide which parts of his revolution to keep – and which to reject or allow to fade away.  By all accounts, Cubans want to preserve some of the gains of the revolution, including their sense of national dignity and some social benefits, while seeking a vastly improved living standard.  But no one can claim to know exactly what “the people” want – and how they want to achieve it.

  • The economic reforms that President Raúl Castro launched years ago have been halting and hampered by policy contradictions and bureaucratic obstacles rooted in elites’ fears of losing political control. Processes like the 7th Party Congress’ Conceptualización have been so muted as to undermine change and breed cynicism among the population.  Raúl and his team have a roadmap that, while as unorthodox as ever, will move the economy in the right direction.  Fidel’s departure is a signal that the old-timers, perennially blamed for slowing change, represent an eventually diminished threat.  The next generation of Party leaders knows full well that their legitimacy is going to have to come from concrete results, especially improving living standards, and it needs to move ahead with the hundreds of lineamientos, laws and regulations that have already been approved.  It’s their own plan, and the excuses for non-implementation of at least the easier measures are getting thin.  Major reforms such as unifying exchange rates will be a big challenge, as for any country, but the new team at some time will have to bite the bullet.
  • On the political side, Raúl lags even farther behind. Fidel’s passing puts a lot of pressure on him to flesh out his plan to step down as President in 15 months (a commitment that so far seems solid).  Some of Raúl’s actions indicate a desire to build institutions, perhaps even the National Assembly as it moves back into the Capitolio this month; improve decision-making processes; and reduce party intervention in day-to-day matters.  But his handover of power to a new generation won’t work if his policy team stays in the shadows forever.  His vision entails them learning how to do politics among themselves and, increasingly, with the Cuban people – which implicitly entails respect for the plurality of legitimate views across Cuban society.  The Cuban people have shown they’ll not form lynch mobs the moment political space opens up.

Cubans can find support for their evolutionary change in every corner of our Americas, except perhaps one.  Reactions throughout Latin America and the Caribbean differed in tone and effusiveness, but they uniformly showed respect for the deceased comandante and support for the Cuban people.  Regional leaders called him a “giant in history” and “a leader for dignity and social justice in Cuba as well as Latin America” and the like, while one merely tweeted “condolences to the Cuban government” and had staff explain he’d miss the funeral because the logistics of flying to Cuba were “not easy.”  But the region’s best wishes for Cubans to find a stable path from a Castro-dominated past into the future that they collectively – in the Party and “the people” – wish to find were strong.

The outlier is, again, the United States.  President Obama and Secretary Kerry’s messages were statesmanlike and consistent with Washington’s sensitivity toward any country in mourning even if it has different interests and values.  President-elect Trump took a different approach.  His condolence statement focused on issues from the past and his affiliation with combatants from the Bay of Pigs invasion who tried to oust Castro in 1961 and endorsed his own candidacy last month.  He tweeted that he will “terminate the deal” of normalization if Cuba is “unwilling to make a better deal for the Cuban people, the Cuban-American people, and the U.S. as a whole.”  Obama’s staff prematurely declared normalization “irreversible,” and Trump may be equally premature in threatening to reverse it.  Cuba’s changing on its own, and Fidel’s passing will probably give change on the island, if not in Washington, a push.  Efforts to return to a Cold War posture would probably put Cuba on the defensive and slow its transition processes – but not even Fidel could stop the march of time.

November 29, 2016

Latin America: Wait-and-See Reaction to Trump – For Now

By Catie Prechtel and Carlos Díaz Barriga*

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An effigy of Donald Trump in Mexico City. / Sequence News Media / Daniel Becerril / Wikimedia / Creative Commons

Most Latin American leaders publicly reacted with caution to Republican presidential candidate Donald Trump’s victory in last week’s U.S. elections, but reactions will sharpen quickly if Trump tries to make his campaign rhetoric about the region and Latino immigrants into policy.  Mexico and Central America showed clear anxiety over the implications for their economies and regional migration pressures.  Some South American presidents expressed mild enthusiasm and voiced hope for a positive relationship with the new administration, although Trump’s avowed opposition to the Trans-Pacific Partnership trade accord – under discussion at the APEC summit in Lima this week – has fueled concerns about the future of free trade.  Fear that the new U.S. President, who takes office on January 20, will deport millions of undocumented migrants from Mexico and Central America and force U.S. firms to shut factories in those countries has seized the media there.

  • Mexican newspapers headlines screamed “Be afraid!” and warned of a “Global shakedown.” Reports recited the many promises Trump had made against Mexico, including his proposal to build a border wall (and make Mexico pay for it); revising NAFTA and raising taxes on Mexican imports, putting conditions on remittances, and charging more for visas. The peso suffered three consecutive days of losses before recovering slightly following interviews by Trump and his team suggesting a softer stand on the wall and free trade.  President Peña Nieto phoned Trump with congratulations and agreed to meet soon to discuss bilateral issues, including presumably the wall.
  • Guatemala’s Prensa Libre reported businessmen are worried Trump’s rejection of free trade could have a direct impact on the economy and described the possible mass deportations as a “social bomb” for the country. In Nicaragua, newspapers speculated that Trump’s victory will give a boost to U.S. legislation, the Nicaragua Investment Conditionality Act (NICA), which calls for economic sanctions if President Daniel Ortega doesn’t take “effective steps” to hold free and fair elections.  In El Salvador, the main concern is the deep economic stresses of mass deportations of Salvadorans in the United States.  Honduras shares those concerns but apparently was more wrapped up in President Juan Orlando Hernández’s announcement confirming his intention to make a controversial bid for reelection.
  • Venezuelan President Nicolas Maduro, often given to bombastic rhetoric, has focused on working with Washington in the closing months of the Obama Administration. In a phone conversation with Secretary of State John Kerry, he stressed the need to establish an agenda with the next administration that favors bilateral relationships, but he specifically called on Obama to “leave office with a message of peace for Venezuela” and rescind a determination that Venezuela is a “threat to the United States.” Obama himself last April said the designation was exaggerated.
  • Media in Colombia speculated that Trump will be less committed to aid and support for finalizing and implementing a peace accord with the FARC. Argentina, Brazil, and Chile offered calm reactions to the news.  For Buenos Aires and Santiago, the biggest concern was potentially strained commercial relationships and free trade agreements with the United States, according to press reports.  Brazil offered little reaction to the news, but Trump’s win brought four consecutive days of losses for the real – weakening 7.6 percent since the election.

The political leaders’ cautious reactions conceal a broad and deep rejection for President-elect Trump’s values and intentions as he stated them during the campaign.  Former Mexican President Vicente Fox once again tweeted his disapproval for Trump, while José Mujica, former President of Uruguay, expressed dismay on Twitter, summing up the situation in one word: “Help!”  Press reports and anecdotal information indicate, moreover, that large segments of Latin American society have shown a widespread distaste for Trump’s win.  Their general wait-and-see attitude will end when and if Trump proves himself the unpredictable and reactionary he seemed on the campaign trail.  Latin American leaders have a lot of work ahead as they navigate a new relationship with the United States.

November 15, 2016

* Catie Prechtel and Carlos Díaz Barriga are CLALS Graduate Assistants.

Brexit: Limited Implications for Latin America

By Arturo C. Porzecanski*

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Photo Credit: Elionas2 / Pixabay / Creative Commons

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

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

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

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

 October 17, 2016

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