U.S. Immigration Policy: Not Just Getting Rid of “Bad Hombres”

By Eric Hershberg, Dennis Stinchcomb, and Fulton Armstrong

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An agent from U.S. Immigration and Customs Enforcement (ICE)./ Department of Homeland Security / Wikimedia / Creative Commons

The immigrant deportation policy that the Trump Administration announced last week is among the most aggressive in U.S. history and promises to create tensions between Washington and Latin America and disrupt communities across the United States.  Homeland Security (DHS) Secretary John Kelly has told agencies under his aegis to “use all authorities to the greatest extent practicable” to remove undocumented immigrants from the country.  President Trump called his new initiative a “military operation” – which an embarrassed Kelly denied during meetings in Mexico City intended to control damage from other Trump statements.  The White House said the measures will “take the shackles off” the enforcers, and U.S. media reported enforcement officers’ celebratory comments that they “can finally do their job.”  The Administration will also ask Congress to authorize a large expansion – another 15,000 – of enforcement positions.

  • The rationale repeatedly refers to deporting “criminals” – whom Trump calls “bad hombres” and “bad dudes” – but the new policy will exempt no classes or categories of “removal aliens,” including non-criminals. U.S. press already report roundups of individuals with no criminal records who are being expelled from the country within 72 hours.  Fear among immigrants is pervasive, and there are many reports (such as here and here) of families hunkering down in their homes, withdrawing children from school, and setting up contingency plans for protecting U.S. citizen kids should their undocumented parents be grabbed by the authorities and sent abroad.
  • The policy weakens protections from “expedited removal” that the Obama Administration put in place, which allowed immigrants caught after they had been in the country for 14 days or more to be released pending proceedings to determine their eligibility to remain in the United States. (Details remain murky but supposedly will be announced soon.)  Individuals facing expedited removal are not entitled to appear before a judge.
  • It increases efforts to press local police to help federal agencies find and deport undocumented immigrants, blurring the line between local and federal forces. Legal experts say this commingling of forces violates the Constitution, and many local police chiefs lament that it reduces the willingness of immigrant communities to help them fight crime.
  • It removes privacy protections for people who are not U.S. citizens or permanent residents, putting their personal information in the hands of vigilantes, blackmailers, and others who have no need to know it. Trump previously threatened to withhold federal assistance from “sanctuary cities” in the United States, which he accuses of causing “immeasurable harm to the American people and to the very fabric of our republic” because they are reluctant to implement his deportation policies.

Two new measures suggest a long political campaign against undocumented immigrants.  DHS will create an office – with the acronym VOICE – to collect information from victims of alleged crimes.  It will be funded with “any and all resources that are currently used to advocate on behalf of illegal aliens” (most of whom have never committed a crime).  The Administration will also “identify and quantify all sources of direct and indirect” assistance to Mexico, obviously to evaluate U.S. leverage against the Mexican Government if the Administration is not pleased with compliance with Washington’s wishes.

Deporting all 11 million undocumented immigrants estimated to be in the United States will be impossible, but the new measures will push unprecedented numbers of Mexicans and Central Americans back into societies that have no jobs and no security for them.  That burden and the loss of immigrants’ remittances will cause those countries incalculable harm.  The Administration’s rhetoric hammering on “criminal immigrants” is deceptive:  DHS admitted in 2014 that most of the “criminals” it deported were guilty only of their undocumented presence (31.3 percent) and traffic violations (15 percent), and it would be foolish to expect that the Trump government will be more judicious.  The insinuation that immigrants commit more crimes than do native-born citizens, moreover, has been debunked; they are incarcerated at a rate half that of native-born.  These polices may enjoy the support of Trump’s political base, but the attacks on the defenseless; subversion of traditional values such as the right to legal counsel and the right to privacy; coercion of local police and civilian authorities; and the deportation of countless friends and neighbors whose everyday contributions enrich community life in the United States will have a profound impact extending far beyond its immediate victims.

 February 27, 2017

U.S.-Mexico Trade: The Numbers and the Real Issues

By Robert A. Blecker*

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Two maquiladoras in Tijuana, Mexico. The low percentage of Mexican value-added in Mexico’s exports is a key reason why the country has not gotten nearly as much employment growth as it hoped for when it joined NAFTA. / Anthony Albright / Flickr / Creative Commons

Officials in the Trump administration are proposing a new way of measuring the U.S.-Mexican trade deficit that, by making the deficit look larger than it currently appears, will likely be spun to support efforts to impose high tariffs or dismantle NAFTA.  According to press reports, the President’s senior advisors, including the head of his new trade council, Peter Navarro, are proposing to include only “domestic exports” (exports of U.S.-produced goods) in calculating bilateral trade balances with Mexico and other countries.  This would exclude “re-exports” – goods that are imported into the United States from other countries (such as Canada or China) and transshipped into Mexico – which are currently counted in total U.S. exports.

  • In spite of its political motivation, the proposed new accounting would render a more accurate measure of U.S. exports. In fact, it would make the U.S. deficit with Mexico look closer to what Mexico reports as its surplus with the U.S.  For 2016, the U.S. reports a deficit of $63.2 billion with Mexico, while Mexico reports almost twice as big a surplus of $123.1 billion with the U.S.  If the U.S. excluded re-exports, its trade deficit with Mexico for 2016 would be $115.4 billion, which is much closer to the Mexican number.

Nonetheless, this recalculation fails to correct for another bias, which makes the U.S. deficit with Mexico look artificially large.  Imports are measured by the total value of the goods when they enter the country, from the immediate country of origin.  But in today’s global supply chains only part of the value-added in imported goods comes from any one country.  A television, for example, can be assembled in Mexico with components imported from Korea and other East Asian nations.  As a result, the reported U.S. imports from Mexico (especially of manufactured goods) greatly exaggerate the Mexican content of those goods.  Although data limitations do not permit an exact calculation of the Mexican content of U.S. imports from Mexico, it is likely relatively low.  (My own estimates suggest it is on the order of about 30-40 percent for manufactured goods).  Indeed, the low percentage of Mexican value-added in Mexico’s exports is a key reason why the country has not gotten nearly as much employment growth as it hoped for when it joined NAFTA.

The Trump Administration’s aggressive rhetoric and action on other issues related to Mexico, including immigration and the wall, suggest a political motivation for the proposal to adopt a new measure of exports, regardless of its merits.  But the real problem is not the “correct” number for the U.S.-Mexican trade deficit; it is why NAFTA has not lived up to its promise of supporting high-value added exports and high-wage job creation in both countries.  This promise was based on the idea that the United States would export capital and intermediate goods to Mexico for assembly into consumer goods, which would then be exported back to the United States.  But especially since China joined the WTO in 2001, Mexico has increasingly become a platform for assembling mostly Asian inputs into goods for export to the United States (and secondarily Canada).  Even if “re-exports” are excluded, Mexico remains the second largest export market for the United States (after Canada) – and U.S. exports to Mexico are 65 percent greater than U.S. exports to China.  Focusing too much on measuring the U.S.-Mexico trade imbalance only distracts attention from the need to reform NAFTA so as to encourage more of the “links” in global supply chains to be produced in North America generally.  If the Trump administration is serious about making the U.S. more competitive vis-à-vis China, it should think about viewing Mexico as a partner instead of as an enemy.  In the larger context of Trump’s many objectionable policies on migration and in other areas, a long-overdue correction of U.S. export statistics is not worth getting upset over.  The real issue is whether Trump’s trade policies – with Mexico and beyond – will bring the promised gains to U.S. workers, or will further enrich corporate billionaires and Wall Street tycoons.

February 23, 2017

* Robert A. Blecker is a Professor of Economics at American University.

U.S.-Mexico Tensions: Harbinger for Latin America?

By Eric Hershberg and Fulton Armstrong

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The U.S.-Mexico border near Tijuana and San Diego. / Tomas Castelazo / Wikimedia Commons / Creative Commons

U.S. President Donald Trump’s unilateral actions on Mexico last week have precipitated the most serious crisis in bilateral relations in decades and threaten to further undermine U.S. image and interests throughout Latin America.  During last year’s campaign, in the face of Trump’s characterization of Mexicans as rapists and drug-traffickers and repeated pledges that he’d make Mexico “pay for the Great Wall,” President Enrique Peña Nieto adopted a strategy of patience and positive engagement.  He paid dearly in political terms for meeting with Trump in August – a misjudgment that worsened his already declining popular approval – but he continued to try to stay on the high road after the election.

  • Peña Nieto resurrected former Finance Minister Luis Videgaray, the architect of the Trump meeting last August, as Foreign Minister, and he replaced his ambassador in Washington with one having deep experience with NAFTA and a reputation for calm negotiation, in response to Trump’s repeated demand for a renegotiation of the 1994 accord. As opponents across the political spectrum egged him on to reciprocate Trump’s belligerent tone and strident U.S. nationalism, Peña Nieto – like all Mexican presidents for the past 25 years – tried hard to suppress the anti-Americanism that has lingered beneath the surface of Mexican politics even while the two neighbors have become increasingly integrated economically, demographically, and in governance.  Even after Trump’s first barbs following inauguration on January 20, Peña Nieto emphasized his preference for calm dialogue – “neither confrontation, nor submission.”  He declared that Mexico doesn’t want walls but bridges, and accepted the American’s demand to renegotiate NAFTA, although with a “constructive vision” that enables both sides to “win,” with “creativity and new, pragmatic solutions.”

Preparations for the summit meeting, scheduled for this week, crashed when Trump – without coordinating with his Mexican counterpart or the appropriate U.S. government agencies – issued executive orders putatively aimed at tightening control of the border.  One directed an immediate increase in efforts to deport undocumented Mexicans, and the other launched the “immediate construction of a physical wall on the southern border.”  Trump initially abided by an informal agreement with the Mexicans not to repeat his harangue that he was going to make Mexico pay for the wall, but on January 26 he tweeted that “If Mexico is unwilling to pay for the badly needed wall, then it would be better to cancel the upcoming meeting.”  His press spokesman followed up with a suggestion that Washington could impose a 20 percent tariff on imports from Mexico to cover the costs of construction, after which Peña Nieto, facing a firestorm at home, postponed the meeting.  The two presidents talked on the phone for an hour the following day and reportedly agreed to let things calm down, although the two sides presented different versions of the chat.

The speed of the trainwreck – in Trump’s first week in office – and the depth of the damage his unilateralism has done to bilateral relations have alarmed many in Mexico and the United States, including Republicans who worked hard to build the relationship.  (Only the Administration’s stunning decrees regarding immigration from other parts of the world have overshadowed the mess.)  Mexico is, of course, not without leverage and, as Trump stirs up long-repressed Mexican nationalism, Peña Nieto – whose popular support was recently in the garbage bin – is going to have to talk tough (at least) and could have to retaliate.  He could impose tariffs on the billions of dollars of Mexican exports that Americans have grown accustomed to having at low prices.  Mexico could also opt to diminish cooperation in counternarcotics and other law enforcement efforts, or to cease blocking Central American migrants seeking to reach the U.S. border – interests that the impulsive Trump policy team doesn’t seem to have considered.

Coming on the heels of Trump’s executive order totally withdrawing from the Trans-Pacific Partnership, the new president is presenting the image of a U.S. leader whose harsh policies and arrogant style serve neither the United States nor Latin America’s interests.  Having appointed as White House National Security Council Senior Director for Latin America a political scientist whose writings draw bizarrely on analytic approaches that have been rejected in the discipline for more than 30 years, and whose recent articles lament the Obama administration’s abandonment of the Monroe Doctrine, the region’s leaders will rightly conclude that Washington is voluntarily abdicating any plausible case for leading multilateral cooperation around common interests.  The United States and Latin America are inextricably linked, however, and a policy based on stale assumptions of big power unilateralism ultimately will run into insurmountable obstacles: however ignorant Trump and his team are proving themselves to be, we live in the real world of the 21st century, in which imperialist, mercantilist fantasy will be treated with the disdain that it deserves.

January 31, 2017

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.

The Impact of Falling Oil Prices on the Western Hemisphere

By Thomas Andrew O’Keefe*

L.C. Nøttaasen / Flickr / CC BY-NC 2.0

L.C. Nøttaasen / Flickr / CC BY-NC 2.0

The sharp drop in the benchmark Brent crude price of oil from just under US$115 per barrel in June 2014 to its current perch around US$50 has important ramifications for the Western Hemisphere.  For Venezuela, which earns some 95 percent of its foreign exchange from petroleum exports, it is a potential disaster.  Underlying political tensions will be exacerbated if there is no money to continue funding social welfare programs or heavily subsidizing gasoline.  It probably also spells the end of PetroCaribe’s generous repayment holidays and what are in essence below-market interest loans for Caribbean and Central American nations.  Sharply lower oil prices also put at risk major energy projects such as the development of Brazil’s pre-salt reserves, which require a minimum price of $50 to $55 to be economically viable.  Equally tenuous are Argentine efforts to regain energy self-sufficiency by exploiting its vast shale oil and gas reserves and Mexican plans to attract foreign investors to participate in deep-water oil exploration and drilling.  The minimum price for a barrel of oil below which new investment projects in Canada’s oil sands are no longer attractive is around $65.  Shale oil producers in the United States are also being squeezed by low petroleum prices.

On the other hand, net energy importers such as Chile, Paraguay and Uruguay benefit from sharply lower oil prices.  Although being weaned off  PetroCaribe will be painful for the Caribbean and Central America in the short term, they will be able to seek oil at the lower prices elsewhere.  The pressure on the Obama administration to lift the ban on U.S. crude oil exports, in response to a glut of domestic shale oil production, could also redound in favor of the Caribbean and Central America by lowering international oil prices further through increased global supply.  Already, 2015 began with U.S. companies authorized to export an ultralight crude called condensate.

In hopes of rallying OPEC to stabilize oil prices, Venezuelan President Maduro last weekend rushed off to lobby Saudi Arabia, which just two months ago refused to decrease production in order to raise prices, but oil industry sources say there’s little chance of a policy change.  Meanwhile, the environment may turn out to be among the biggest beneficiaries of lower oil prices.  Less investment in shale oil production reduces the risk of leaks of methane, a potent greenhouse gas, as well as decreases flaring.  Similarly, slowing down oil sands production in Alberta and Saskatchewan means that the very high levels of greenhouse gas emissions associated with extracting crude oil from bitumen (not to mention the negative impact on water resources) is diminished.  Although lower fossil fuel prices traditionally have undermined incentives to move to greater reliance on renewable and non-traditional energy resources, this may no longer be true.  For one thing many governments around the world are now embarked on ambitious efforts to reduce carbon emissions by, among other things, raising the costs associated with petroleum usage through cap and trade regimes that force companies to buy government-issued pollution permits.  Still others have enacted outright carbon taxes on utilities and large factories per metric ton of carbon dioxide emissions.  In addition, the heavy initial capital investment that was previously associated with things like wind, solar and geothermal power are falling.  For example, a combination of technological advances and Chinese overproduction have resulted in much lower prices for solar panels so that the cost of generation from a large photovoltaic solar plant is now almost 80 percent less than five years ago.  Geothermal energy may be the renewable that most benefits as drilling rigs idled by lower oil prices are now available at a lower cost for geothermal projects.  

*Thomas Andrew O’Keefe is President of San Francisco-based Mercosur Consulting Group, Ltd. and teaches at the Villanova University School of Law.

January 13, 2015

Drug Dealing in Costa Rica: A Perverse Path toward Social Inclusion

By Rodolfo Calderón Umaña*

Antonio / Flickr / Creative Commons Attribution-NonCommercial-ShareAlike 2.0 Generic (CC BY-NC-SA 2.0)

Antonio / Flickr / Creative Commons Attribution-NonCommercial-ShareAlike 2.0 Generic (CC BY-NC-SA 2.0)

Central America’s emergence as a principal transit route for illicit drugs from South America to the U.S. has given rise to local retail markets supplying users within the region.  A study of three Costa Rican communities – one in greater San José and two along the Caribbean coast – highlights several factors that determine the scale and consequences of these local markets.  Among the most important are the high levels of social exclusion experienced by households in these localities and residents’ motivation to become involved in the business because it offers resources (money, power and prestige) that cannot be achieved through the legitimate channels of education or quality employment.  Other factors include the proximity of the communities to drug trafficking routes and the extent of previously existing demand from local consumers.

One of the most significant characteristics of local drug markets in these communities, as elsewhere, is that they are socially and territorially bounded because trust is the key factor shaping relationships between suppliers, sellers and consumers.  Some local suppliers maintain direct ties to cartels, but they operate their businesses independently.  Youth are assigned the most vulnerable tasks and are thus disproportionately represented among those arrested and convicted of crimes.  Violence serves as the principal instrument for controlling and regulating the drug trade, and the result is that for youth in these settings violence becomes normalized as a routine form of behavior.  This spawns a generalized climate of fear and insecurity, and the typical response of community residents is to retreat from public space and to isolate themselves inside their homes.

These findings support calls for new responses to the drug trade at the community level.  Central American governments, encouraged to a significant degree by U.S. programs, have tended to emphasize repressing and “combatting” the scourge of drug trafficking, yet where this approach has been implemented – particularly in Central America’s Northern Triangle — social problems have only gotten worse.  In Costa Rica, it’s not too late to undertake a comprehensive strategic review of policies in this domain and to bolster programs to stabilize affected areas.  Particularly if designed and implemented from the bottom up, programs can identify and reach out to vulnerable residents before they are drawn into drug micro-markets as vendors, consumers, or both.  Vocational training programs matched to real employment opportunities are absolutely fundamental – to reduce residents’ social exclusion.  Our research findings indicate that enhancement of public spaces where community residents can congregate and initiatives focused on building trust between communities at risk and representatives of the state can also be highly productive.  Costa Rica is at a critical juncture: it can either sustain and expand the participatory policy frameworks that buttress community cohesion and resilience or run the risk of falling into the devastating spiral of delinquency and violence that has plagued its neighbors in the Northern Triangle.

*Dr. Calderón Umaña is a researcher at FLACSO-Costa Rica.  The study is being conducted by FLACSO-Costa Rica with funding from the International Development Research Centre.

Mexico and NAFTA: Lessons Learned?

By Robert A. Blecker*

Photo credit: Alex Rubystone / Foter / Creative Commons Attribution-NonCommercial-ShareAlike 2.0 Generic (CC BY-NC-SA 2.0)

Photo credit: Alex Rubystone / Foter / Creative Commons Attribution-NonCommercial-ShareAlike 2.0 Generic (CC BY-NC-SA 2.0)

Twenty years after the North American Free Trade Agreement (NAFTA) went into effect, it is clear that the promises made by Mexican President Carlos Salinas and U.S. President Bill Clinton – that the accord would make Mexico “a first-world country” and halt the migration of Mexican workers to the United States – have not been fulfilled.  In Salinas’s famous words, Mexico would “export goods, not people.”  But the number of undocumented Mexican immigrants in the United States rose by a conservatively estimated 3 to 4 million during the first two decades of NAFTA, and millions more were apprehended at the border and deported.  The reasons why immigration flows accelerated post-NAFTA are not hard to discern.

  • NAFTA fostered integration of Mexican industries into global supply chains targeted at the U.S. market, accelerating Mexico’s transformation into a major exporter of manufactured goods.  Nearly one million manufacturing jobs were created there in the first seven years of NAFTA (1994-2000).  But this job growth was offset by similar job losses in agriculture, and manufacturing employment has fallen by about a half million since 2001.  The net increase in manufacturing employment from 1993 to 2013 was only about 400,000, less than half of the annual growth in the Mexican labor force.
  • Real hourly earnings in Mexican manufacturing were no higher in 2013 than in 1994, and Mexico’s per capita income has stagnated relative to that of the United States.  In 2012, typical Mexican manufacturing workers received only 16 percent as much per hour as their U.S. counterparts, down from 18 percent in 1994.  Even adjusted for the lower cost of living, workers without a college degree in Mexico still earn only about one-quarter to one-third of what they can earn by moving to the United States.

The benefits of NAFTA for Mexico have been attenuated by several factors.  First, Mexican export industries still largely follow the maquiladora model of doing assembly work using imported inputs, so their value-added is only a fraction of the gross value of their exports and they have few “backward linkages” to the domestic economy.  Second, the Mexican government has frequently allowed the peso to become overvalued, making Mexico less competitive and driving multinational firms to locate in other countries.  Third, the tremendous penetration of Chinese imports into all of North America (Canada, Mexico and U.S.), especially since China joined the World Trade Organization in 2001, has displaced significant amounts of actual or potential Mexican exports.  A revaluation of China’s currency, rising Chinese wages and increasing global transportation costs have recently led to some “reshoring” of manufacturing to Mexico, but employment in Mexican export industries has grown only modestly as a result.

The increased integration of North American industries through NAFTA has proved to be a mixed blessing for Mexico.  U.S. booms have helped Mexico grow, but only for temporary periods, and being dependent on the U.S. market has held Mexico back since the U.S. financial crisis of 2008-2009 and the ensuing “Great Recession” and sluggish recovery.  Of course, NAFTA is but one of Mexico’s constraints.  The country’s restrictive monetary and fiscal policies, frequent currency overvaluation, monopolization of key domestic markets and inadequate investments in physical and human capital have also held it back.  The Mexican economy still suffers from a profound dualism, in which only about one-fifth of all non-agricultural, private-sector workers are employed in large, highly productive firms, while the vast majority are employed in small- or medium-sized enterprises with low, stagnant or even falling productivity.  Mexico’s experience under NAFTA certainly argues against portrayals of international trade agreements, such as the proposed Trans-Pacific Partnership, as panaceas for the economic ills of Mexico or any other country.  Whatever one thinks of the “reform” agenda of President Enrique Peña Nieto – which is focused on areas such as energy, education, and telecommunications – these reforms are unlikely to help Mexico break out of its slow growth trap if the foundations of the country’s trade and macroeconomic policies remain untouched.

*Dr. Blecker is a professor of economics at American University.

Argentina: Burying the hatchet?

By Arturo C. Porzecanski*

Photo credits: Finizio and Global Panorama / Foter / Creative Commons Attribution-NonCommercial-NoDerivs 2.0 Generic (CC BY-NC-ND 2.0)

Photo credits: Finizio and Global Panorama / Foter / Creative Commons Attribution-NonCommercial-NoDerivs 2.0 Generic (CC BY-NC-ND 2.0)

The administration of Cristina Fernández de Kirchner has shown a willingness to bury the proverbial hatchet and bring to a definitive end what was once the largest sovereign default in recorded history – nearly $100 billion in obligations to domestic and foreign bondholders and official foreign-aid and export-credit agencies, including the United States Export-Import Bank.  In late May, Argentina reached an agreement with its official creditors (gathered as the so-called Paris Club), committing to repay everything that had come due in full and in cash – nearly $10 billion in principal, past-due interest, and interest-on-interest – over the next five years, starting with a down-payment in July.  In recent days, President Kirchner has also signaled that she is ready to negotiate a payment plan with bondholders who are potentially owed even more than the Paris Club creditors.  The trigger for this conciliatory attitude is two U.S. Supreme Court decisions announced on June 16 which granted jilted creditors wide latitude in seeking redress from Argentina.  The first ordered the government in Buenos Aires to stop discriminating among its bondholders by paying most but not all of them; and the second mandated banks operating in the United States to disclose any and all assets owned by Argentina anywhere in the world, facilitating efforts to seize them by unpaid creditors.

Argentine governments since the closing and troubled days of 2001 have taken a notoriously hard line toward creditors ever since Acting President Adolfo Rodríguez Saá announced that he would be suspending payments on the public debt and dedicating all sums budgeted for that purpose to fund an emergency jobs program and increased social spending.  Cristina and her predecessor (and late husband), Néstor Kirchner, embraced a populist-cum-nationalist view of the world according to which the state must favor the interests of the majority of its population, particularly in terms of redistributing income from the “haves” to the “have nots.”  Pervasive state interventionism, confiscatory taxation, disrespect for private property rights, widespread controls (on prices, interest rates, foreign trade, and capital flows), and confrontational attitudes toward investors became the hallmark of economic policy in Argentina.  Despite a vigorous economic recovery starting in mid-2002, creditors never got a single payment from Argentina – and the government made only an arrogant take-it-or-leave-it proposition to private creditors by which they would turn in their bonds and receive new ones worth one third as much.  By late 2010, over 92 percent of the private creditors capitulated and went into the debt exchange.  According to a reputable comparative study of sovereign defaults in the Journal of International Money and Finance published in 2012, Argentina’s behavior towards its creditors displayed an exceptional degree of coerciveness.  While Argentine and European creditors had no luck pursuing their claims in their respective courts, most bondholders who had legal rights under New York State law succeeded in obtaining favorable judgments – and lately, in gaining enforcement rights as well.

Argentina has set such a bad example in terms of how to restructure the public debt that no other nation has dared to follow it since.  Given the recent advance in creditor rights courtesy of the U.S. Supreme Court, chances are that no other government will ever be motivated to copy Argentina’s rogue-debtor behavior – a very good outcome for the world at large.  Concerns that the decade-long judicial fight in the United States will slow down or impede future sovereign debt restructurings are greatly exaggerated.  Before reaching their decisions, the U.S. courts heard from many academic and non-academic experts, and from several governments (Brazil, France, Mexico and the United States), and the New York District Court of Appeals dismissed warnings of impending doom as “speculative, hyperbolic, and almost entirely of [Argentina’s] own making.”  Argentina engaged in uniquely egregious misconduct, violating the well-established norms of sovereign debt restructuring, refusing to negotiate with its creditors, ignoring court orders, and failing to honor its obligations subject to U.S. law despite the country’s unquestioned ability to pay.  The legal rights conferred to minority bondholders in the 1990s, which were actionable in this instance, have been superseded during the 2000s by the widespread inclusion of new “collective action” clauses, inspired by English law, preventing a small minority from blocking a debt restructuring supported by a large majority (at least 75 percent) of creditors.  These clauses have worked very well in recent years, including in the cases of Greece and Belize in 2012 and 2013, respectively.  Therefore, while the advancement of creditor rights brought about by the Argentina litigation will encourage governments to be more conciliatory towards their creditors, the evolution of market practices means that fewer than 8 percent of total creditors will never again be able to demand payment in full the next time that a government obtains the consent of everyone else.

*Dr. Porzecanski is Distinguished Economist in Residence at American University.

Replicating the U.S. Shale Gas Revolution in Latin America

By Thomas Andrew O’Keefe*

Photo credit: Energy Information Administration / Foter.com / Public domain

World Shale Gas Map / Photo credit: Energy Information Administration / Foter.com / Public domain

The shale gas revolution in the United States promises not only to soon make the country energy self- sufficient but also serve as the catalyst for a major revival of manufacturing.  Similar high hopes have been raised for Latin America, where some of the planet’s largest reserves of shale gas are found.  According to U.S. Energy Information Administration estimates, Argentina is said to have the world’s second largest reserves of technically recoverable shale gas (China is first).  The United States is currently in fourth place, followed by Canada and Mexico.  Brazil is in tenth place, with Chile and Paraguay not far behind.  The possibility that Latin America can pursue a successful shale gas strategy, however, is tempered by a number of important legal and/or geological differences that can serve as important bottlenecks.  In addition, the region’s tumultuous politics often get in the way of implementing policies that boost investment and encourage a highly productive energy sector.

The most important legal difference is that subsoil rights belong to the above ground property owner in the United States, while everywhere else in the Western Hemisphere the government (national, state or provincial) is the owner.  Developers have had an easier time purchasing access to shale gas deposits from individual landowners throughout the United States.  This explains, in great measure, why Canada’s significant shale gas reserves have not been as extensively exploited as in the United States, despite a hydrocarbons regime receptive to private-sector investment.  In addition, environmental protection legislation that impacts the shale gas industry is fractured among Federal, state, and local government authorities in the U.S.  That has facilitated developers extracting waivers and more lenient treatment in the United States that would be harder to obtain in most Latin American nations, where environmental protection is the exclusive or predominant prerogative of the central government.  Furthermore, current technology for extracting natural gas from shale reserves demands huge amounts of water, a resource that is scarce in those regions of Mexico, for example, where most of its extensive shale gas reserves are located.

Political realities are the most crucial (and often overlooked) factor that can easily undermine any effort to develop Latin America’s extensive shale gas reserves.  On paper, Argentina should be a regional energy powerhouse, supplying not only its own energy needs but those of its neighbors. However, the country has for years pursued policies that have scared off private-sector investment, heightened Argentine dependence on foreign energy imports, and led to a steady hemorrhaging of hard currency reserves.  To outsiders these policies appear illogical, but they make perfect sense to Argentine political leaders trying to consolidate their power base.  Mexico is an example of a country constrained by its Constitution from developing its extensive off-shore hydrocarbon resources.  Any political party that tries to make major amendments to those constitutional provisions, however, risks annihilation at the polls.  Brazil’s recent adoption of nationalistic legislation to encourage the domestic manufacturing of hydrocarbon-related technology could well impede exploiting its shale gas reserves if similar mandates are created for the highly specialized and capital-intensive hydrofracking equipment the industry utilizes.  In fact the only Latin American country where the stars seem aligned to repeat the U.S. shale gas success story is investor-friendly, politically-stable, energy-starved, and free-market oriented Chile, whose shale gas reserves are concentrated in the remote, under populated (and very wet) far south of the country that desperately seeks new opportunities to promote local economic development.  

*Thomas Andrew O’Keefe is the President of San Francisco based Mercosur Consulting Group, Ltd. and teaches at Stanford University.

Venezuela: The True Scope of Chávez´s Legacy

By Andrés Serbin and Andrei Serbin Pont*

Hugo Chávez / Photo credit: ¡Que comunismo! / Foter / CC BY-NC-SA

Hugo Chávez / Photo credit: ¡Que comunismo! / Foter / CC BY-NC-SA

Chávez’s legacy for Venezuela goes well beyond the Bolivarian government he left in Nicolás Maduro’s hands.  Three conflicts overshadow the country’s future and contribute to many uncertainties:

  • The first, and most urgent, is the standoff between the two main factions of the ruling PSUV over how to overcome the current economic crisis, characterized by the IMF as “difficult and probably unsustainable.”  The pragmatists focus on making currency controls more flexible, and the ideologues are oriented toward increasing state control over the economy.
  • The internal party conflict between President Maduro and his supporters, committed to building the “socialismo del siglo XXI,” on the one hand, and the pragmatic sector of the governmental party (pragmatic in the sense of ensuring their businesses operate without interruption) led by the President of the General Assembly, former army officer Diosdado Cabello, with the support of high ranking military and businessmen who benefited from the “revolutionary” process through legal and illegal business.
  • The conflict between the PSUV, wielding the power of the government, and the opposition, which it accuses of being an “enemy of the revolution” linked to the “external enemies” (basically the United States) who want to derail the revolutionary process.

The dire state of the economy is aggravating each of these conflicts.  By the end of September, according to government data, inflation rates hit 4.4 percent per month, and rose to 38.7 percent in 2013 so far.  The opposition estimates an annual inflation rate of 49.4 percent—the highest since 1997.  According to the 2012 UN Economic Commission for Latin America and the Caribbean (ECLAC) report, an increasing number of Venezuelans are living under the poverty line – with a 29.9 percent increase in the poverty rate last year – with income no longer enough to fulfill basic needs.  Shortages of food and other necessities are severe; the depreciation of the Bolívar has accelerated in the currency black market, and the Central Bank is printing paper currency in an attempt to cope with the financial deficit.  Within this context, the struggle between the pragmatic and the ideological fronts of the PSUV only contributes to the chaos.

Caracas’s international relations are also a factor in the internal tensions and are fueling concerns within the armed forces, according to NGOs and others with good contacts in the military.  The economic crisis has affected the government’s ability to continue its “petro diplomacy” – diminishing its influence – and the opposition has continued persistent accusations of inadequate management of the relationship with Guyana and the claim over the Essequibo, contested territory along their common border.  In addition, a recent incident involving a maritime exploration ship of Panamanian flag with a U.S. crew detained by the Venezuelan Navy in waters under dispute with Guyana aggravated the current national and international political scenario.  The government usually resorts to nationalist appeals, but criticism of its handling of these problems is likely to grow.

The core issue in all of these situations continues to be the potential scenario of a social outbreak driven by the shortages, rising inflation, the broad sense of insecurity, and perceptions of blatant corruption in government.  These frustrations appear to cut across all sectors of Venezuelan society regardless of ideological identity.  Given the historical reluctance of the armed forces to intervene (particularly since the experience of the “Caracazo” of 1989), most observers still wonder when and if a social explosion will move them to action.  The economic and social crises, the internal tensions in the government, and the polarization with the opposition, along with the possibilities of an international incident, may add up to enough to move the military, perhaps with the support of several state governors, to act, but determining that breaking point – the Venezuela analyst’s greatest challenge – remains elusive.

* Andrés Serbin and Andrei Serbin Pontare members of the analysis team of the Coordinadora Regional de Investigaciones Económicas y Sociales (CRIES), a Latin-American think tank.