What Will Trump Do About NAFTA?

By Malcolm Fairbrother*

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

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

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

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

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

January 10, 2017

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

What Comes After TPP?

By Fulton Armstrong and Eric Hershberg

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President Barack Obama and President Pedro Pablo Kuczynsky at the APEC 2016 summit / Ministerio de Relaciones Exteriores – Peru / Flickr / Creative Commons

The Obama administration’s failure to win U.S. approval for the Trans-Pacific Partnership is a disappointment for Latin American countries on the Pacific Rim – and such a big opportunity for China to expand its influence that President-elect Donald Trump, despite his theatrical pledge to withdraw from it, might eventually consider rescuing the accord. The Asia-Pacific Economic Cooperation (APEC) summit in Lima last weekend was the last chance for Latin American leaders to say goodbye in person to President Obama and to mourn the passing – for at least the short term – of his TPP-centered vision for trans-Pacific trade.  In a meeting with leaders of the 11 other TPP countries, Obama tried hard to convince them of “the United States’ continued strong support for trade” despite growing evidence to the contrary.  Both U.S. President-elect Donald Trump and Hillary Clinton, who was Obama’s Secretary of State for four years, firmly and repeatedly stated opposition to TPP.  The White House continued efforts all the way up to election day (November 8) to persuade the U.S. Senate to approve the deal in a lame-duck session, but the Republican leaders – like Clinton champions of free trade until it became a 2016 campaign issue — slammed the door on it.

With the collapse of TPP, several Asian countries have already signaled a willingness to sign on with China’s own free trade initiative, the Regional Comprehensive Economic Partnership (RCEP) – which Latin America is not yet part of. Malaysian Prime Minister Najib Razak, angry with the United States over trade and other issues, threw his lot with China during a visit to Beijing last month.  (The Philippines, which has also moved aggressively to ally itself with China in recent months, is not in TPP.)  Japanese Prime Minister Shinzo Abe met with Trump last week and said his country “could have great confidence” in the President-elect, but he has nonetheless warned his parliament that RCEP will prevail.

  • Latin Americans are also slowly but surely gravitating toward China as trans-Pacific leader in trade. Just days before the Lima summit, Peruvian Foreign Minister Eduardo Ferreyros announced that, while Lima still hoped TPP would become reality, his government has begun talks with China over accession to RCEP. His Chilean counterpart, Heraldo Muñoz, last Friday also expressed preference for TPP but told the Wall Street Journal that his country was leaning toward joining RCEP. Chinese President Xi Jinping, in Lima for the summit, was also making stops in Ecuador and Chile. (He’s visited Mexico, Argentina, Brazil and Venezuela on previous trips.) In an op-ed in Peru’s El Comercio just before the summit, Xi said, “United by the same dream, there isn’t a more timely moment for the deepening of our multidimensional cooperation.”

The APEC forum may have been trying to counter Trump and others’ criticism of the lopsided impact of global trade by issuing a statement – titled “Quality Growth and Human Development” – emphasizing the benefit of global trade to all citizens in all countries. It was certainly in this spirit that the host of summit, Peruvian President Pedro Pablo Kuczynski, warned that proponents of trade barriers would do well to revisit the history of the 1930s, singling out for unusually sharp criticism the stance taken by the U.S. President-elect.  On its face, Trump’s campaign rhetoric suggests TPP is totally dead; he’s many times called it a “disaster” being “pushed by special interests who want to rape our country.”  Free-traders found a glimmer of hope in an organizational chart reportedly leaked by the Trump transition team last week that listed a former lobbyist from the U.S. Chamber of Commerce, which has strongly supported TPP, as head of his “trade reform” team.   Yet if the new U.S. Administration is going to reengage on TPP, the primary reason would probably be to undercut China’s RCEP initiative.  Much of the U.S. foreign policy establishment of both parties believes fervently that the impact of U.S. disengagement with the Pacific Rim would be harmful to U.S. global and hemispheric leadership.  Should those concerns sway the incoming President, he could opt to set aside his caustic rhetoric on TPP, negotiate face-saving adjustments to the accord, and instead focus his tough talk on China. TPP’s flaws may ultimately appear minor and manageable compared to the competing scenario of Latin American governments seeking commercial prosperity through a Chinese-led Pacific economic bloc. That is certainly the hope of most Pacific Rim governments across Latin America, whose alarm at developments in the U.S. already has them eying alternatives across the pond.

November 22, 2016

Does Trade Incentivize Educational Achievement?

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

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

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

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

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

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

November 7, 2016

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

Brexit: Limited Implications for Latin America

By Arturo C. Porzecanski*

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Photo Credit: Elionas2 / Pixabay / Creative Commons

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

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

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

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

 October 17, 2016

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

What does “Canada is back” mean in the Americas?

By Stephen Baranyi*

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Mexican President Enrique Peña Nieto and Canadian Prime Minister Justin Trudeau during the “Tres Amigos Summit” in Ottawa, June 2016. / Presidencia de la República Mexicana / Flickr / Creative Commons

Canadian Prime Minster Justin Trudeau and his cabinet ministers’ statements following their election in October 2015 that “Canada is back” reflect a global strategy that is likely to give a boost to Canada-Latin America relations.  Canada never “left” the Americas during the decade of Conservative governments led by Prime Minister Harper, but the new administration is patching up its predecessors’ mixed record.  Building on the Americas Strategy launched in 2007, Ottawa signed new bilateral free trade agreements with Colombia, Peru and others; broadened its engagement in regional security affairs; and greatly increased its whole-of-government engagement in Haiti.  Canada played a major role at the Summit of the Americas in Panama (April 2015) and hosted the Pan American Games (July 2015).  Yet the revelation of Canada’s espionage in Brazil, visa restrictions on Mexicans, the poor reputation of some Canadian mining firms in the region, and its inability to reach a trade agreement with the Caribbean Community fed a growing desencanto in Canada’s relations with the region.

Through mandate letters issued to ministers in late 2015, the Trudeau government made clear that the Americas would remain an important priority, despite renewed emphasis on Asia and Africa, and that inclusive growth, the responsible governance of Canadian extractive activities abroad, and women’s and indigenous peoples’ rights would get emphasis in the region.  In June, Canada hosted the “Tres Amigos Summit” with NAFTA partners United States and Mexico.  Ottawa also announced that by December, Mexican citizens would no longer need visas to enter Canada, removing a big irritant in Canada-Mexico relations.  The government reaffirmed its partnership with Colombia by indicating its desire to make bilateral free trade more inclusive and announcing projects to support the implementation of peace accords.

  • Ottawa has opportunities for deeper involvement in these countries. In Mexico, Canadian interests will be served through a better balance between pursuing economic opportunities in sectors like petroleum and supporting Mexicans struggling to strengthen rule of law in a system compromised by corruption.  Colombia also requires a sophisticated whole-of-Canada engagement strategy, particularly since the failure of its referendum on the peace accords on Sunday.  Ottawa has signaled interest in continuing to support the rule of law and broader development in Haiti, but Trudeau’s ability to justify large expenditures there will depend on the completion of legitimate elections by February 2017.

Ottawa’s appointment of a new Ambassador to the Organization of American States (OAS) and commitment to revitalizing it as “the premier multilateral organization of the Americas” points to broader engagement on a regional level.  The Trudeau administration could join the Latin American and Caribbean trend on drug policy by decriminalizing the sale of marijuana at home and supporting reforms to OAS and UN counterdrug programs.  Assisting the implementation of the UN Small Arms Treaty, which Ottawa is poised to ratify, could also contribute to rule of law and security in the Americas.  Canada will also find many partners (from Chile to Costa Rica) to promote gender equality.  With regard to First Nations, Ottawa may be tempted to focus on funding new aid projects; yet Canada’s credibility will remain suspect until it ratifies the American Convention on Human Rights and ensures that all Canadian mining firms respect the rights of indigenous communities to free and prior informed consent in large-scale extractive activities.  The Trudeau government will probably monitor the multi-dimensional crisis in Venezuela, the situation in Brazil, and other challenges in the region – over which it probably lacks the leverage to make a significant difference but can lend moral authority to solutions.  Given its clear commitment to a global, rather than regional, strategy, the current administration is wise to carefully select entry points on which its thematic priorities align with opportunities in particular countries.

October 5, 2016

* Stephen Baranyi is an Associate Professor at the University of Ottawa’s School of International Development and Global Studies.  He also chairs the Latin America and Caribbean Group (LACG) of the Canadian International Council.  The author acknowledges his LACG colleagues’ input into this blog, while taking responsibility for its limitations.

Can Latin America Achieve Fiscally Sustainable and Egalitarian Social Citizenship?

By Fernando Filgueira*

Uncertain Future

Photo Credit: Jan Tik / Flickr / Creative Commons

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

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

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

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

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

July 18, 2016

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

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

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

By Eric Hershberg

Brazil Contrasts

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

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

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

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

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

June 3, 2016

Increasing the Benefits of Trade Agreements

By Antoni Estevadeordal and Joaquim Tres*

Trade 1993-2016

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

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

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

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

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

May 9, 2016

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

Trade 1993-2016 v2

Source: IDB

Nicaragua: Where’s the Canal?

By Fulton Armstrong

Canal Nicaragua

Coming soon to Nicaragua? Photo Credit: tryangulation / Flickr / Creative Commons

The Nicaraguan government and Chinese investment group leading the Nicaragua Grand Canal project continue to claim enthusiasm for their dream, but enough fundamental problems remain unresolved to suggest that prospects for its eventual construction are dimming – and the principals are maneuvering to avoid picking up the tab for the expenditures made so far.  In a year-end statement last December, President Ortega’s office said the canal project would be one of his government’s top 25 priorities this year and emphasized its benefits to the Nicaraguan people.  Hong Kong-based HKND Group had announced in November that it was “fine-tuning” the canal design to address problems raised in an environmental impact study, which would delay the beginning of major excavations and lock-building until the end of 2016.  Company officials have since said, however, that construction of a fuel terminal and wharf on the Pacific coast –necessary to bring in the massive equipment the project requires – could start as early as this August.  The company still claims that it will complete the canal in 2020 – a prediction that few, if any, outside experts see as feasible.

The project faces massive obstacles, with no solutions in sight.

  • The estimated US$50 billion in financing is nowhere to be seen. Chinese investor Wang Jing, who has already spent US$500 million of his own money on the project, lost some 85 percent of his US$10 billion personal fortune in last year’s Chinese stock market correction.  (Bloomberg named him the worst performing billionaire of 2015.)  Observers believe his losses as well as the problematic environmental impact study have cooled his and other private investors’ support.  An initial public offering of shares has been postponed indefinitely.
  • Project managers have yet to demonstrate the need for the canal and propose solutions to significant engineering challenges, such the need for construction able to withstand earthquakes made likely because of seismic faults along the route. HKND says the canal will handle 3,500 cargo ships a year, including ones bigger than those transiting the Panama Canal, but industry experts say there’s no demand for more than will be accommodated by the expansion of the existing canal – and that the United States has no ports capable of receiving the larger vessels.  Global warming, moreover, could soon open a faster and cheaper route north of Canada.
  • Public protests have diminished during the hiatus in canal-related news and activities, but opponents remain strident and are gaining international support. Detractors’ resolve to fight has been strengthened by the environmental report, by a credible UK firm, determining that the project will “have significant environmental and social impacts,” including dislocation of at least 30,000 Nicaraguans.  Indigenous and Afro-Nicaraguan groups on the Atlantic Coast are upset about disruptions to traditional territories, including cemeteries and holy places.  Amnesty International has condemned the treatment of affected persons as “outrageous” and “reckless.”

The “biggest earth-moving project in history” is still looking like one of the biggest boondoggles in history – yet another in a long series of chimera canals in Nicaragua since early last century.  The government says that popular support for the project remains about 81 percent, but a survey by Cid Gallup, published in the Nicaraguan newspaper Confidencial in January, showed that 34 percent of 1,000-plus respondents consider the canal to be “pure propaganda.”  One quarter believe technical studies have been inadequate and that funding will not materialize.  Those sentiments could be reversed somewhat by the appearance of massive excavation equipment and creation of related construction jobs, but support will still be tempered by concerns about persons whose lives are disrupted by the project – and by perennial and profound suspicions that corruption will take the lion’s share of benefits.  Some opposition leaders believe HKND’s big push to appear optimistic is to build a case for collapse of the project to be Nicaragua’s fault, so that the company can demand that Managua repay the $500 million that Wang has reportedly spent.  The lack of transparency surrounding the project only fuels such speculation. 

April 4, 2016

How are the Americas Faring in an Era of Lower Oil Prices?

By Thomas Andrew O’Keefe*

Gas Station Guatemala

Photo Credit: Josué Goge / Flickr / Creative Commons

The sharp drop in global oil prices – caused by a combination of a slowing Chinese economy hurting commodities sales and efforts by Saudi Arabia to retain market share – has both downsides and advantages for Latin America and the Caribbean.  By keeping production levels steady, despite decreased demand, so that a barrel of crude remains below US$40, the Saudis’ hope is to put U.S. shale oil producers and Canadian tar sands producers out of business.  The drop in oil prices has had a varied impact elsewhere in the Americas:

  • The effect in Venezuela, already reeling from over a decade of economic mismanagement, has been catastrophic. The ripple effect is being felt in those Caribbean and Central American countries that grew to depend on PetroCaribe’s generous repayment terms for oil imports that allowed savings to be used for other needs.  In 2015, for example, this alternative funding mechanism in Belize was slashed in half from the previous year.  The threat of interest rate hikes on money that must eventually be repaid for oil imports also pushed the Dominican Republic and Jamaica to use funds raised on international capital markets to reduce their debt overhang with Venezuela.  (For those weening themselves off PetroCaribe dependency, however, the lower prices are a silver lining.)
  • Low oil prices have also knocked the wind out of Mexico’s heady plans to overhaul its petroleum sector by encouraging more domestic and foreign private-sector investment.
  • In South America, the decline has undermined Rafael Correa’s popularity in Ecuador because the government has been forced to implement austerity measures. The Colombian state petroleum company, Ecopetrol, will likely have to declare a loss for 2015, the first time since the public trading of its shares began nine years ago.  In Brazil, heavily indebted Petrobras has seen share prices plummet 90 percent since 2008, although that is as much the result of the company being at the center of a massive corruption scandal that has discredited the country’s political class.
  • On the other hand, lower petroleum prices have benefitted net energy importers such as Chile, Costa Rica, Paraguay, and Uruguay.

The one major oil producer in the Americas that has not cut back on production and new investment is Argentina – in part because consumers are subsidizing production and investment by the state petroleum firm YPF, which was renationalized in 2012 and now dominates domestic end sales of petroleum products.  Prices at the pump remain well above real market values.  While successive Argentine governments froze energy prices following the 2001-02 implosion of the Argentine economy, this time policy is keeping some energy prices high.  This encourages conservation and efficiency and spurs greater use of renewable alternatives, but it becomes unsustainable during a prolonged dip because it will, among other things, make the country’s manufacturers uncompetitive.  The Argentine example underscores that predictions of a pendulum shift in Latin America in favor of private-sector investment in the hydrocarbons sector over state oil production are still premature.

The lower prices do not appear likely to harm the region’s continuing substitution of natural gas for coal and oil as a transitional fossil fuel to greener sources of energy.  Natural gas prices remain at their lowest levels in over a decade, and the expansion of liquefied natural gas plants allows for easier transport of natural gas to markets around the world.  They are also unlikely to dent the global shift to greater reliance on renewable energy resources driven by the international consensus that climate change can no longer be ignored and something must be done to address it.  At the UN climate change talks in Paris last December, for example, countries agreed to keep temperature increases “well below” 2 degrees centigrade above pre-industrial levels and made a specific commitment “to pursue efforts” to achieve the much more ambitious target of limiting warming to no more than 1.5 degrees centigrade.  The year 2015 was the second consecutive year in which energy-related carbon emissions remained flat in spite of 3 percent economic growth in both years. 

March 24, 2016

*The author is the President of San Francisco-based Mercosur Consulting Group, Ltd.  He chaired the Western Hemisphere Area Studies program at the U.S. State Department’s Foreign Service Institute between July 2011 and November 2015.