Truck of Mexican company Olympics crosses Puente Internacional Comercio Mundial while approaching border crossing into U.S., in Laredo (Stringer/Courtesy Reuters).
Yesterday I attended a conference “Made in North America: Competitiveness, Supply Chain, and Transportation in the NAFTA Region,” which was part of World Trade Week’s events here in New York. From the interesting panels there emerged three main points, one positive and two less so.
The positive outlook is that macroeconomic and global winds look quite favorable for North America. The general feeling was that while the last twenty years of globalization focused on China’s rise, the next twenty years will not. Rising labor costs in China will soon reach Mexico’s levels, and energy costs, proximity benefits, and complications over intellectual property issues will all favor North American nations over their Asian competitor.
But given these encouraging headwinds, the specialists all felt the United States, Canada, and Mexico were not making the most of their opportunity, and that the trade reorientation that is occurring (for instance, the billions of dollars invested in Mexico by big name auto makers) is not because of, but rather in spite of, today’s policies.
One of the biggest challenges for the three North American countries continues to be their inability to lessen trade regulations. While tariffs are disappearing, other hurdles continue, and have even multiplied in recent years, often because of concerns over Chinese imports of tainted food products, dry wall, and the like. The data collection and paper work now necessary to import a whole range of products can add some 10 to 12 percent to the costs of invoices and trade more generally. Ironically, many of these new regulations hit the United States’ neighbors harder, since goods come on individual trucks over short distances (rather than, for example, on huge container ships with two weeks lead times). The three countries also have yet to resolve disparate customs forms, railroad protocols for some types of packages, and other small scale irritants that can have outsized effects on trade and manufacturing.
A second issue is physical infrastructure. North America isn’t prepared to take advantage of the likely global reshuffling that will occur as China’s economy changes. Its roads, rails, ports, and airports aren’t equipped for the production chains of today, much less for those of tomorrow, as most are geared east to west rather than north to south. The United States’ ports are also at or near capacity—reflected in the minimal growth of the last several years. (Container trade has instead shifted south, some to Mexico but much to the rest of Latin America—areas to which the United States should pay more economic attention).
If energy prices continue to increase, China begins to look inward, and more manufacturing becomes customized, the world could see a re-regionalization of production. But North America won’t be able to capture or capitalize on the opportunity if the United States, Canada, and Mexico don’t work together to change bilateral and trilateral policies and invest in infrastructure.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
Source: The 2012 IMF Economic Outlook Report for the Western Hemisphere
The recent IMF economic outlook report entitled, “The Western Hemisphere: Rebuilding Strength and Flexibility,” is overall quite bullish on the region. Fueled by favorable commodity prices and plentiful international credit, it lauds (as much as the IMF does) the steady growth of the past decade. Perhaps as important for the IMF, many Latin American governments have used rising revenues in economically sound ways. The region as a whole has turned deficits to surpluses, and lowered debt to GDP levels by some 15 percent. Many countries invested in targeted social programs, helping reduce regional poverty levels from 44 percent in 2002 to 33 percent in 2008.
Commodities have driven this growth, led by South American exporters such as Argentina (soybeans and grains), Peru (gold and copper), and Uruguay (beef and rice). But their booms also reflect other forces—for instance, expansionary policies in Argentina, high levels of foreign direct investment in Peru, and domestic demand in Uruguay. The report also highlights the expansion of the middle class and consumption-led growth, focusing particularly on the rapid increase in mortgages. In countries such as Brazil, Chile, Colombia, Mexico, Peru, and Uruguay this sector has grown an average of 14 percent a year since 2003.
The report distinguishes between financially integrated commodity exporters (Chile, Brazil, Colombia, Peru, and Uruguay) and those not integrated into global financial markets (Argentina, Bolivia, Ecuador, Paraguay, and Venezuela). Not surprisingly, the report favors the former group, talking up their macroeconomic management, lower inflation rates, and in some cases rainy day funds. It also argues that the latter haven’t been able to take advantage of cheap international financing to their economic detriment.
The real economic test for the countries in the region will be how they fare when external conditions become less favorable—the commodity boom slows and/or widespread cheap credit fades. If the IMF is right, the divides between integrated and non-integrated exporters will only deepen, revealing the wisdom and folly of today’s diverging economic policies.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
A candidate for United States citizenship grips a small American flag during a naturalization ceremony celebrating Bill Of Rights Day in the Federal Hall National Memorial in New York (Lucas Jackson/Courtesy Reuters).
A recent Pew Hispanic Center report highlights the rather steep declines in the number of Mexicans coming to the United States, as well as the rising numbers leaving for Mexico. Taken together, they show that net migration from 2005 to 2010 reached zero—with inflows and outflows of some 1.4 million individuals (a rough average of 280,000 a year) cancelling each other out. This is a huge migratory shift, and one that reflects many things, including a weaker U.S. economy, a stronger Mexican economy, changing Mexican demographics, rising deportations, and enhanced border security.
Another migratory change has also occurred: of the Mexicans that still come to the United States, many more do so legally. At the start of the twenty-first century, less than 10 percent came with papers. A decade later, it is 50 percent.
The vast majority of these came on “family reunification visas”—spouses, parents, children, or siblings of U.S. citizens or legal permanent residents. Others—some ninety thousand in 2011—came on H-visas to work, their professions ranging from engineers to agricultural workers. Ten thousand more came to study. Some two thousand—more than double 2000 levels—came on E-2 NAFTA visas, reserved for investors and business people from countries that are U.S. trading partners. Mexicans also received their highest ever number of EB-5 visas, which require a $500,000 to $1 million investment in a U.S. business, and the creation of at least ten U.S. jobs.
The rise in legal immigration has the potential to alter the political debate, as it lessens the law and order challenges. But some will still be concerned about the role of this large group of immigrants, believing as the late Harvard professor Samuel P. Huntington did, that Mexican immigrants “threaten to divide the United States into two peoples, two cultures, and two languages.” Perhaps a final trend can help allay these worries. In the past decade, one million Mexicans swore their allegiance to the U.S. and became citizens—surpassing all other nationalities—a sure sign of their desire to become Americans.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
This morning, I did an interview with Ken Prewitt and Tom Keene on Bloomberg Radio. Always lively hosts, we talked mostly about most about Mexico—its economic prospects, its security situation, and the changing immigration flows to the United States. We also touched on Brazil, and whether one should be bullish or bearish on its future.
The full interview can be listened to here.
I look forward to your feedback via twitter or in the comments section.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
James F. Hoge Jr., Robert A. Pastor, and Jorge Castañeda discuss the future of U.S.-Mexico relations (Don Pollard/CFR).
The Council on Foreign Relations held a half day symposium this past Tuesday entitled “U.S-Mexico Relations Beyond the 2012 Elections.” The first panel with Alejandro Hope, Eric Olson, and myself focused on U.S.-Mexico security cooperation. We started off discussing the recent drop in violence in the first quarter of the year, and then turned to how cooperation could and should continue (but shift) with the next U.S. and Mexican administrations, stressing the need to strengthen Mexico’s civilian law enforcement and criminal justice institutions.
The second panel concentrated on U.S.-Mexico economic ties, and the ever deepening economic integration between the two nations. The panelists, Gerardo Esquivel, Claudio X. Gonzalez, and Carla A. Hills, reflected on how much Mexico’s economy has transformed in the last nearly twenty years since NAFTA, and took a hard look at where it still needs to go. The discussion also looked at the unsung benefits to the United States, and the need to work from the bottom up to change the nature of today’s political debates on issues such as trade and immigration.
The final luncheon panel brought together two long time scholars and practitioners, Bob Pastor of American University and Jorge Castañeda, former Mexican Foreign Minister. Their conversation looked forward, to where Mexico could and might go if it can improve its security situation and harness the power of its growing middle class. Both presented the possibilities for an active and dynamic bilateral future, though for this to happen, they felt Mexico would have to lead that effort.
While the headlines usually paint a pessimistic view—whether of the situation on the ground in Mexico or of the politics on Mexican oriented issues in the United States—many of the panelists offered a different take. The question for all though was how the next two administrations will take on the many pressing issues, and if they will choose to work together or apart.
To listen to audio from the first panel click here, for the second panel click here, and for the third panel click here.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
The recent Foreign Affairs article “Bearish on Brazil” lays out a quite pessimistic view of Brazil. For the author, Ruchir Sharma, the Brazil fuss has risen and will largely fall with commodities. Brazil’s policies of high interest but low investment rates, as well as high taxes and a large welfare state, mean that its “commodity-driven surge will soon begin to wash away.”
Sharma points out many of Brazil’s real challenges. Brazil is underinvesting (a problem that Brazilians at least say they are trying to address), whether in terms of infrastructure, education, or research and development. High interest rates too plague the markets, creating disincentives for long-term investments (though their slow but steady decline, and subsidized rates from the national development bank, help offset some of the barriers). He rightly points out too that Brazil’s rise can’t be explained without China and the scramble for natural resources. A graph of the last century’s commodity prices, posted on Jim Lindsay’s blog, highlights the price surge that has fueled Brazil’s growth.
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Commodity Prices 1900-2011, Source: McKinsey Global Institute
But this take on Brazil and many of his subsequent conclusions miss the broader story. Yes, Brazil has grown—even in these commodity driven boom times—at half the pace of China or India. Yet these growth differences have at least as much today to do with the level of development and per capita income—Brazil’s nears US$12,000 a person, while China and India just break $8,400 and $3,700 respectively—as high interest rates and infrastructure. Historically, as nations get richer, growth gets slower.
Same for the critique of the welfare state. Yes, Brazil overspends particularly on public sector pensions (though they recently passed a law to rein in future spending). But other policies—conditional cash transfers such as Bolsa Familia and Brazil Without Poverty—have arguably spurred growth by expanding and supporting Brazil’s growing middle class. Now some 100 million strong, these domestic consumers have powered Brazil’s economic rise (an internal market that China, for instance, has yet to develop).
Further, the assumption that social programs that reduce poverty and inequality in middle income countries hinder rather than help growth is contradicted by many economic studies. For instance, World Bank studies show that poverty and inequality drag on economic growth. As a historical footnote, European countries and the United States began building their own welfare states at around these per capita levels, to great economic growth effects (increasing productivity of the economically active population and smoothing life time consumption patterns, which increased domestic demand and the like).
In the end, today’s hype about Brazil may not in fact be justified. The nation faces many difficult problems—among them education, infrastructure, complex bureaucracies, and expensive regulations. But its successes and failures will be a part of a more complicated and broad based interplay, rather than a just a commodity slowdown.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
Workers spread cement for a new bus lane projected to carry more passengers during the 2014 World Cup, in Belo Horizonte (Washington Alves/Courtesy Reuters).
Yesterday I attended the annual Brazil Summit in New York, organized by the Brazilian-American Chamber of Commerce. What struck me in the presentations (reinforcing what I heard during my last two visits to Brazil), was the quite disparate views of Brazil today and the levers for growth tomorrow.
The first panel focused on information technology (IT). Here the speakers touted Brazil’s current position as the sixth largest IT market in the world, and it’s potential to rise to the third. In their view, this rosy future depends on the government. Here kudos were given for Dilma Rouseff’s Science without Borders program (which she highlighted on her recent visit to Washington DC and during later stops at MIT and Harvard), which will send some hundred thousand Brazilians to do post-graduate work abroad in the next four years. Also plugged was the government’s PRONATEC program to train some eight million mid-level professionals and technicians. On the investment side, the speakers highlighted the billions the government is investing in IT infrastructure (broadband, telecommunication networks, and the like), and billions more in payroll tax breaks and other public incentives within the “Greater Brasil” (Brasil Maior) plan to support the expansion of IT industries. In addition (and under government direction), Petrobras will provide some $200 billion in IT investment over the next decade as part of the buildup of its oil and gas business. Finally, on top of these specific programs, the BNDES—Brazil’s national development bank—will earmark a good portion of its $100 billion in annual lending for IT initiatives. For those on the panel, Brazil’s government has never been so involved, and has never been so necessary to leapfrog past the bottlenecks of today to the technology of tomorrow.
This contrasted sharply with the second panel on infrastructure. Here the mood was more somber, both about the challenge Brazil faces and the positive role to be played by its government. The overall picture was that Brazil’s infrastructure is bad and comparatively getting worse. Only 6 percent of its roads are paved, compared to over 50 percent in its BRIC counterparts China and Russia (and 35 percent in Mexico). According to the World Economic Forum’s Global Competitiveness Index (which ranks country’s infrastructure on a scale of one to seven); Brazil trails not only the Asian tigers such as Hong Kong and Singapore (which score in the six’s), but also countries such as China and Chile. Despite being the world’s sixth largest economy, Brazil comes in at 104 out of 142 countries in terms of its “overall quality of infrastructure.” It is also moving in the wrong direction, falling six spots over the last three years.
Yet when getting to the fixing phase, most of the suggestions involved less, not more government. Industry leaders did talk about needing a better skilled labor force (a public but also private sector challenge). But they also stressed streamlining bureaucracy, lessening the tax burden, lowering interest rates, and importantly creating long-term financing markets independent of the BNDES as vital to turning the situation around. For those in the infrastructure trenches, government doesn’t seem to be the answer.
These two seemingly contradictory positions capture another aspect of Brazil’s reality—the fundamental tensions over the best future development model: state or market led. As Brazil works to become a true global powerhouse, both camps have their supporters and detractors. Perhaps the greatest challenge will be to find a balance, incorporating both strands in order to harness (rather than hinder) the many potential engines of growth.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
Group of internally displaced Colombians protest at the entrance of AG headquarters in Bogota (Jose Gomez/Courtesy Reuters).
This is a guest post by Stephanie Leutert, a research associate here at the Council on Foreign Relations who works with me in the Latin America program.
The best known Colombian security story is that of declining violence. Indeed its homicide rate dropped from near 80 homicides per 100,000 in 1990 to 32 per 100,000 in 2010 lower than its eastern neighbor Venezuela, or the notoriously violent Central American countries to the north. In fact, Colombian police now share best practices and security advice with their Honduran and El Salvadoran counterparts, and are training twelve thousand Mexican officers.
A new report by Colombian nonprofit CODHES shows, however, that these security statistics are incomplete. The number of people displaced by violence has not fallen in tandem with murders. CODHES estimates that some 260,000 Colombians were forced from their homes in 2011 (an average of seven hundred displacements a day). By comparison, 280,000 Colombians were displaced in 1999, when the murder rate was closer to 75 per 100,000.
Estimates of the total number of Colombians displaced by violence in the past seventeen years range from 3.6 to 5.4 million (more than Sudan, Iraq, or Somalia). Approximately five hundred thousand of these Colombians have flooded across Colombia’s borders with Ecuador, Venezuela, and Panama. Most are driven out by organized crime, paramilitaries, or the Fuerzas Armadas Revolucionarias de Colombia (FARC) rebel group.
Since taking office, President Juan Santos has actively supported Colombia’s displaced, pushing through land-restitution policies and even joining a displaced farmer’s protest. But concrete results have been painfully slow. Many rural areas of Colombia don’t have land-ownership records, making claims hard to verify.
And many displaced land-owners fear coming forward, with good reason. Threats are common, and some twenty land-rights leaders have been murdered in the past two years. Among those living abroad, polls show that Colombian refugees are afraid of returning home due to continuing security problems. Though homicides have turned the corner, ongoing displacement and intimidation still threaten Colombia’s security.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
Apartment buildings stand behind a low-income neighborhood in Mexico City (Edgard Garrido/Courtesy Reuters).
A recent study highlighted in La Jornada, a Mexican newspaper, claims that some ninety million Mexicans are poor, roughly 80 percent of the total population. This contrasts drastically with calculations by the OECD (which put the poor closer to twenty-three million) or those by Mexican researchers Luis de la Calle and Luis Rubio (who estimate that 25 percent of Mexicans—approximately twenty-nine million—are poor).
So how should we define who is and isn’t poor? The World Bank includes everyone that earns more than two dollars a day; an expansive view that likely rings false for those scraping by just above this bare minimum. The OECD’s measurement is relative by country, based on the median household income. CONEVAL, a Mexican governmental organization that conducts the country’s official poverty measurements, takes a multi-dimensional approach, with income considered alongside access to healthcare, education, social security, housing, and food. By this comprehensive measure, some fifty-two million Mexicans are poor.
The study profiled in La Jornada takes these poor, and adds the next CONEVAL category—those vulnerable to becoming poor (nearly another forty million)—to get to the total number of ninety million. Vulnerable, according to CONEVAL, means lacking access to one or more social services or having an income close to the poverty line.
Given CONEVAL’s methodology, it’s almost impossible to compare to other countries. But taking just one indicator—healthcare—the difference between poor and vulnerable in the United States is at least illustrative. Fifteen percent of the U.S. population is poor (roughly 47 million). Another 43 percent are one health emergency away from poverty—e.g., some 130 million are “vulnerable to poverty.” This suggests that 60 percent of Americans—or almost 180 million—are “poor” if we are using a more comprehensive definition of poverty, such as the one cited by La Jornada.
Calculations such as these are useful in any country, to show who and how people are vulnerable. But it is also important to see the differences, between the twenty plus million abjectly poor Mexicans, the thirty million more moderately poor, and the nearly forty million who aren’t, but whose hold on a more middle class life is tenuous. The distinctions matter especially for policymakers trying to design initiatives to support these different groups, helping all to gain valuable economic ground.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
Colombian policemen stand in front of the Centro de Convenciones in Cartagena (Jose Gomez/Courtesy Reuters).
The sixth Summit of the Americas on April 14-15 is part of an intense spring of bilateral and regional interactions in the hemisphere. It will bring together thirty-three heads of state from nearly every member of the Organization of American States (OAS) in Cartegena, Colombia, to discuss regional issues ranging from expanding economic ties to turning back a surge in criminal activity.
For the United States, this summit poses two main challenges. The first, largely overcome, is Cuba. In recent weeks, tensions have been high over Cuba’s exclusion from the OAS and its events. The Obama administration has repeated longstanding U.S. arguments that Cuba does not meet the OAS requirements of being a democratic nation. Most Latin American countries tend to see this ongoing exclusion (as well as U.S. foreign policy toward Cuba in general) as counterproductive.
Through deft diplomacy, Colombia’s President Juan Manuel Santos found a solution–Raul Castro would stay home, but Cuba’s future participation would be discussed. In the end, only Ecuador’s president Rafael Correa made good on the threat of the ALBA bloc (comprising Venezuela, Ecuador, Cuba, Nicaragua, Bolivia, and several island nations) to not attend without Cuba.
The second challenge is to make actual progress on the agenda. The discussions will range from strengthening institutions for disaster preparedness to poverty and inequality reduction, regional infrastructure projects, and access to technology. One topic likely to dominate the meeting is security, and in particular the issue of drug legalization.
A number of Latin American presidents past and present have supported the idea. Washington has said it is willing to listen to the discussion, though the National Security Council’s Senior Director for Western Hemisphere Affairs, Dan Restrepo, confirmed that “the Obama administration has been quite clear in [its] opposition to the decriminalization or legalization of illicit drugs.”
Agreement on any of the region’s crowded list of complicated issues will be difficult. It may be harder still this year due to presidential elections in the United States, Mexico, Venezuela, and the Dominican Republic. As a result, there is little the United States can promise politically.
It would be better for OAS states to focus on economic and energy issues, which will be propelled not just by governments but also by the private sector. A parallel CEO summit in Colombia, with more than 500 corporate leaders due to attend, could provide a further prompt for deal-making. Whatever the takeaways, the summit will provide, as it has in the past, a useful forum for heads of state and their staffs to come together and focus on issues of regional importance, and an opportunity for the United States to engage leaders in the region.
Hemispheric Power Diplomacy
The wave of recent U.S. diplomacy highlights the primacy of bilateral engagement with Latin America’s two largest countries: Mexico and Brazil. In March, Vice President Joseph Biden visited Mexico’s capital, meeting with President Felipe Calderón as well as the three leading presidential candidates. On April 2, President Obama hosted Calderón, along with Canadian Prime Minister Stephen Harper, in Washington for the North American Leaders summit. Economic and security issues dominated the bilateral and trilateral discussions as the three nations worked to deepen the benefits of NAFTA, now nearing its twentieth anniversary.
The diplomacy with Brazil has been even more energetic. In late March, Chairman of the Joint Chiefs of Staff General Martin Dempsey met in Brazil with Defense Minister Antonio Celso Amorim and top-ranking military official General José Carlos de Nardi to discuss issues ranging from transnational crime to cyber warfare. President Dilma Rousseff’s April 9 visit to Washington included discussions with President Obama on economic ties, education, and U.S. monetary policy, among other issues.
In Washington, and during her speeches at Harvard and MIT, she touted Brazil’s new Science Without Borders program, which plans to send up to one hundred thousand Brazilians abroad to study in the next few years, the majority to the United States.
After the summit, Defense Secretary Leon Panetta and Secretary of State Hillary Clinton will head to Brazil to meet with their counterparts on a range of issues. These stepped-up interchanges highlight the new reality that for most regional issues–democracy, trade, environment, or security–the United States’ ability to make progress will depend on Brazil. These visits help lay the groundwork for a longer-term mature relationship with a rising Brazil on a world stage.
Expanding Robust Trade
The recent flurry of exchanges provide a strong base for refocusing U.S. relations in the region, recognizing the importance of the hemisphere for the country’s well-being. This should start with trade. Latin America today represents a good economic news story for the United States. Trade with Latin America has grown faster than virtually any other region in the world, reaching nearly a trillion dollars. U.S. shipments to its southern neighbors now total some $350 billion annually, roughly a quarter of all exports. With somewhat complementary industries and economies, expanding these sales further can benefit all sides.
Energy too provides a promising opening, not just for the economies in the region but also for shifting the fraught geopolitical balance for the better. Brazil’s huge oil finds, Colombia’s rising output, and the possibility of renewed exploration and production in Mexico (if the next president reforms the oil sector to allow foreign direct investment in the same manner as Brazil’s Petrobras), would all benefit the United States. The hemisphere is also a renewable energy leader, with wind, solar, hydroelectric, and ethanol. If integrated, these alternative sources could further the quest for a cleaner and more competitive energy matrix worldwide.
Finally, drug trafficking and organized crime networks increasingly affect public security across the hemisphere. This may perhaps be the most difficult area for agreement, as more nations now question the policies of the longstanding U.S. war on drugs. But with the threats transnational in origin, so too must be the responses, building and expanding on current regional coordination.
The recent high levels of diplomatic engagement between the United States and many Latin American nations are in many ways just governments catching up with the already deep ties on the ground among families, communities, corporations, and supply chains. Sustaining this interest after the Summit of the Americas will serve Washington well, benefiting the U.S. economy, society, and global position as it tackles more recalcitrant problems worldwide.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
