This upcoming week and month will bring attention from the FPA towards Latin America. In addition, Fareed Zakaria interviewed Alvaro Uribe, President of Colombia last week and the interview was aired this past Sunday. Brazil and Rio de Janeiro has also won their bid to host the first Olympics for Brazil and South America as a whole, but issues abound as developing countries will always be seen in the light of the negative and positive aspects of the last Olympics in China, a fellow BRICs nation where order and progress might not include all Carioca in this celebrated event.

A book signing by Ambassador Heraldo Muñoz will take place on October 8th in New York City. Heraldo is the Permanent Representative of Chile to the United Nations and Chairman of the United Nations Peace-Building Commission. He will discuss his new book, “The Dictator’s Shadow: Life Under Augusto Pinochet” at the lecture and book signing. Those of you in New York who would like to attend can find the link to the event here on the FPA website.

Later in the month, a lecture series supported by the FPA will be presenting His Excellency Ambassador Arturo Sarukhan, Ambassador of Mexico to the United States. He will be speaking on: “Mexico’s Foreign Policy and the Current State of Mexican-American Relations.” For more information on the October 21st event, please see the link here.

Fareed Zakaria has interviews numerous leaders in the Middle East and Latin America last week. His interviews with Chavez, Ahmadinejad, and Gadhafi last week were topped off with a short interview with President Alvaro Uribe of Colombia, which was aired this past Sunday. I have a great appreciation of Zakaria’s work and focus on global policy issues and thought his interviews last week did bring out important questions and concerns, which were politely asked and validly addressed and pressed upon in all three initial interviews. Uribe’s interview, while informative, did lack deeper questions and seemed to be a lot shorter than those last week. Generally Zakaria asks many questions of leaders which I have always wanted to know myself, but often can only find in Spanish language or Arab language media. The interview with Uribe was altogether good, but for a leader who is likely the most popularly elected leader in the Western Hemisphere, certain questions were absent for the most part. Zakaria is well aware of the threats on Uribe’s life, 15 and counting, and Uribe answered those questions diligently. What I believe was lacking was questions on Colombia’s position and evidence regarding foreign support for the FARC and other internal terrorist movements in Colombia. This was a disappointment due to the lack of attention in English language media on the topic and the fact that in the interview with Chavez, conflict with Colombia was addressed but not responded to in the accompanying Uribe interview. As well, claims by US and Canadian officials denying support for an FTA between Colombia and its northern neighbours did not enter into the discussion, despite the growing debate over the country’s human rights record. This would have been interesting as the US and Canada has a trade policy that avoids criticizing similar or worse human rights records with other US and Canadian trading partners, namely China and for Canada, China and Cuba to name a few. While the agreement will be passed it seems between Canada and Colombia, an election in Canada was almost created over the issue two weeks ago and another election might be started ironically on the lack of trade between Canada and China as seen in early election commercials by one of the opposition parties. No matter what position viewers might have taken on Colombia and associated issues, a discussion on those topics would have informed us better on a situation that many have opinions on but few really understand.

Now for lighter fare, Rio de Janeiro has won their bid to host the 2016 Olympics, being the first South American nation to host the event ever. Mexico did host it nearly 40 years ago, but for the continent to the South it is a deserved first. It seems that the Olympic Committee is starting to see themselves as the ones who should pick the winners of the global economy in the future, but success does not always come from the event even if the country does well post Olympics. China received much criticism of their treatment of Tibet and Uigurs in the build up to their Olympic games and many citizens in Beijing lost their rights to property and their homes in the process of building grand structures for the games and making China look issueless in the process. The Committee should have expected this and many protestors sought to hold them to account for it.

Regarding Brazil, like with China and other developing nations, the Committee should consider questions of poverty and the benefit to the whole. If they choose to pick winners for policy reasons that often slide into issues of security and economics, then the result of that progress should be taken into account. Brazil has done its best since the 1980s to reform every aspect of its society, reduce poverty and balance the economy, even successfully in the latest economic storm. Crime and poverty however will be a major issue in Rio even in 2016, and while these issues cannot be resolved in such a short time, a focus on reduction and avoiding the repeat of China 2008 where the disadvantaged in China were ignored by China and the Olympic Committee is unacceptable in 2016 as it was in 2008. I do have faith that Brazil will do its best to provide for all events, and have learned from China 2008 on what not to do and who not to avoid. Boa Sorte Cidade of the Cariocas!

The last month of economic news has been as diverse as the last 10 months of the same forecasts. With the start of July, the drop in recent markets worldwide and predictions of further problems in large economies such as the UK and Japan set to bring the recession further attention, but by mid month the result was that some US banks were making some profits, even paying back small sums of money to Mr. Obama and some auto manufacturers were not destined to be completely eliminated as stability slowly crept back into market forecasts. While these announcements will likely change in the next few weeks as SME’s continue to wind up their companies, the biggest market change seems to be coming from China and India. While many believe that only 8% growth in China may be the limit in order to stave off mass discontent among its population, growth rates of 5% or more in places like India, and lower yet stable rates in Brazil draw attention to hopes of an economic recovery coming from the recently famous super emerging economies of the BRICs. Of great interest and increasing popularity, Brazil, who has managed to maintain a stable growth rate in their economy since the 1990’s global economic troubles between 3-5% and was able to reasonably shield itself from the meltdown of Argentina’s economy in 2001. Brazil is beginning to change into the next large emerging market economy in form and function. The recent recession has taken the new Brazil and brought its relative successes in the last few months into the meeting rooms and policy branches of those economies who wish to change the relationship between North America and Europe towards South America’s largest and most promising economy.

In the Americas there are two large economies outside of the United States that while being hit hard by the recession, have managed to keep the core financial and economic systems of their countries in good shape. Canada and Brazil have stood out as two of the largest stable economies in the Americas and worldwide. With banking systems that have not collapsed and reserves of cash from past years of growth shielding some of the effects of the global economic crisis, both countries could begin to push the Americas and world economy back into positive territory. Limits to BRICs and other relatively healthy economies may be restricted formally and informally however depending on how the EU and US decide to react to other large economies worldwide. Effects on countries such as Canada and Brazil might be produced by restrictions coming from the new Buy America provisions in the US or as an example, be expanded by talks of a possible EU-Canada Free Trade Agreement. Limiting trade between NAFTA partners in North America and retracting from agreements between the US and trade partners in the Americas is what all trading partners of the US fear in the region as well as globally.

Many experts on global economics such as Zakaria and Khanna see the US as possessing a major role in the future world economy, but also one of shared influence and regional power as a necessity. Limits to expanding the economies of the Americas in a united fashion is seen in the lack of interest in regional trade agreements and the lack of support for trade agreements as with the one with the US and Colombia. While the US seeks to put pressure on its economic allies during the recession, the EU is seeking increased open trade with large economies such as Canada, India and China, and China is seeking many economic ties with countries such as Peru, Chile, Venezuela, Argentina and of course Brazil. Even Canada has ratified a trade agreement between itself and Chile, Colombia, Costa Rica and is working on agreements with CARICOM. Effects from Buy America might better regarded as the Buyer Beware provisions, as the US creates a policy environment to push its allies to trade with other economies outside of the Americas and produce economic legacies outside of the US which will strangle future growth of private industry in the US itself. As with any investor, the prospect of future governmental and trade restrictions by doing business with a US company or investor will produce negative incentives in the long run. With so few healthy investors currently, economic legacies such as Ford, Disney, Coca-Cola and McDonalds may be replaced by those created and grown in other healthy economies outside the US and the Americas…bad economic policy is simply a caveat emptor of economic growth.

Not all US policy experts agree with Buy America, and some even have been making attempts to approach Brazil as the next India or China. Mind month, the publication and discussion of the new book: Brazil as an Economic Superpower? Understanding Brazil’s Changing Role in the Global Economy was accompanied in Washington DC by a discussion of Brazil as a rising global economic power. This book launch and discussion followed the Brooking Institutions release of interesting economic data and reports on the region as a whole. Many of these discussions focus or Brazil or Latin America as the next China or India, but in reality the Latin American method or growth and that of growth in China, India and Russia only bare some basic similarities. Latin America and Brazil have traditionally depended on commodity prices principally. While the Brazilian economy is fairly diversified, a large portion of its GDP does come from commodity and oil prices, which is similar to a country like Canada who have a great deal of GDP linked to natural resources. Manufacturing in all economies, including Canada, Brazil, China and India have been greatly affected, leaving China with a growth rate of 6.1% in the first quarter of 2009. While oil prices and other commodity prices have bounced back and forth since 2008, manufacturing has taken severe hits in all nations. China and to a certain degree, India, depend greatly on the demand in foreign markets on US and global consumer spending. Entrepreneurial Organisations such as the SBA.org in the US and CFIB in Canada would be able to make the point that many of the jobs in the US and North America depend on SME’s, and with the increase in bankruptcies and the lack of business loans coming from banks in any financial state, the job loss will only increase and create a further decline in consumer spending. Manufacturing depends on its consumers being able to purchase its good and grow the economy. China, who produces many of these good in the US and EU are entirely dependent on these economies as their growth is directly linked to US and EU consumers. Brazil, while dependent on consumer spending has less than 40% of its trade with the US and is balanced by heavy industry, commodities and technology industries. While many of these sectors are hurt by the recession, it gives Brazil some added security in the long term within the global economy.

The news on recent increases in growth in China and India are positive, but with many consumers losing jobs recently and many smaller industries only failing in recent weeks, it is hard to predict a concrete economic demand for consumer products and link growth in China to the markets it depends on. In reality, many smaller and larger US firms often depended on cheap operating loans from US banks, and without not only financially stable banks, but banks willing to give out loans to investors, it is impossible to justify any prediction of growth in consumer spending when SME’s are neglected from economic recovery and are the last to receive financial aid in the economic crisis, yet provide the majority of jobs in many developed countries. Countries like Brazil and Canada should be considered a relatively strong option for investors, as historically and logically growth seems more likely for all levels of industry in few similar countries in the long run and the avoidance of economic bubbles have been relatively successful in the past.

An interesting piece I encourage you all to read:
Latin America and the Economic Crisis: Designing and Implementing Stimulus Policies
Mauricio Cárdenas, Director, Latin America Initiative
The Brooking Institution

June 25, 2009 —
Dani Rodrik recently wrote in his daily blog that Andrés Velasco is the living example that sound macroeconomic policies have a high dividend. Chile’s decisive fiscal stimulus package—adopted last January—has made him President Bachelet’s most popular minister. Not too long ago, during the years of high copper prices, many Chileans questioned their government’s economic management for saving too much and postponing key investments. Of course, those critics are silent now. Events are showing that a commitment to rules that focus on long run objectives, rather that immediate gratification, pays-off.

But rather than talking about Chile, I would like to make a more general point regarding Latin America. Today’s conventional wisdom –and I say this in complete awareness that ministers generally adhere to, and oftentimes shape, mainstream views—is that stimulus packages are working and that Latin America will soon be out of the recession. In Brazil, for example, most analysts consider that the contraction is a thing of the past. I want to take issue with those views.

Let me start by stating what, in my view, is the conventional wisdom:

The adoption of sound macroeconomic frameworks, mostly since the late 1990s, allowed Latin America to bring down inflation and public debt. Foreign reserves are high for historical standards, reflecting stronger current accounts and access to external capital. As a result, Latin America is coping with this crisis much better than a decade ago. In fact, there has been no crisis, just a mild recession.

Key to the current episode has been the ability to conduct countercyclical monetary and fiscal policies. In the current phase of the cycle, policy rates set by the central banks have been cut to 0.75% in Chile (a reduction of 7.5 percentage points), 4% in Peru, 4.5% in Colombia, 4.75% in Mexico, and 9.25% in Brazil.

Fiscal stimulus has also been the norm, although the size and composition of packages has also varied from country to country. The largest expansions have taken place in Chile (2.5% of GDP), Brazil, Peru, and Mexico.

Macro-financial variables have shown remarkable stability. In 2009, inflation has been falling, exchange rates have appreciated, stock prices have increased, and spreads on sovereign debt are falling.

Even though production and employment figures are still declining –and GDP growth projections are being revised downwards– virtually all forecasts suggest that the recovery will start soon. The latest Global Development Finance Report from the World Bank (the less optimistic of the existing “official” reports) projects major rebounds in all economies. The difference between the 2010 and the 2009 GDP growth forecasts is 5 percentage points for the world economy. The corresponding figure is 5.4 percentage points for the OECD countries, and 4.2 percentage points for Latin America. The expected rebound is spectacular for Mexico (7.5 percentage points).

I think this view errs on the side of optimism. Latin America should hope for the best but prepare for the worst. By not properly considering the risks ahead, governments have the temptation of exhausting the policy tools and not reserving any ammunition for battles that are foreseeable. My critique of the conventional wisdom is based on the following four points:

The numbers on real activity and aggregate demand conditions which are coming out from Latin America are not that encouraging

Although it is true that retail sales in Brazil increased 6.9% in April (relative to a year before), industrial production registered a 14.8% contraction in May. In Mexico, where GDP contracted by 8.2% in the first quarter, industrial production fell 13.2% in April, and consumer confidence continued to fall in May. The Chilean economic activity contracted 4.6% in April and industrial production fell by 11.1%. The figures for other countries show a similar picture: Latin American economies are experiencing a deep contraction, and the evidence does not suggest a significant recovery underway.

Of course, all this could change with a big rebound in the second semester. But, is that realistic? The contraction in investment has been in the double digits during the first months of this year for the majority of countries in the region, and will have an impact on future growth. More importantly, investor and consumer confidence measures are very low and still falling in the majority of Latin American countries. We know from past episodes that it takes time –and a good amount of positive economic news– to reverse the direction of these perceptions, especially the consumer’s sentiment.

Latin America is betting on the rebound of commodity prices

China’s real GDP growth slowed to 6.1% during the first quarter of this year. Although several measures of real activity and domestic demand have been improving lately (investment grew by 32.9% in five months to May), exports continue to deteriorate. Chinese exports contracted by 26.4% in May, suggesting that there is excess capacity. To the extent that exports do not recover, investment will loose momentum as well as commodity imports, which have increased for stockpiling purposes. These are very negative news because they suggest that the surge in commodity prices will not last. Why commodities moved ahead of the fundamentals is not clear, but Latin America should be prepared to deal with prices which are more in line with lower Chinese import demand in future months.

Private capital flows are shrinking at an alarming pace

The World Bank projects that net private debt and equity flows to developing countries will decline from 8.6% of global GDP in 2007 to 2.0% in 2009. This is much worse than in the debt crisis of the 1980s or the Asian and Russian crises combined. Many in Latin America argue that the region is somehow immune to this trend, mainly because of the role that foreign direct investment plays in the region. This could be true, but at the same time, the evidence available suggests that FDI flows depend largely on growth in the OECD countries. With the major contractions expected in the U.S., Europe and Japan, FDI flows will fall in the medium term. The latest IMF data suggests that this is already happening. The investment projects under way are likely to be completed, but starting new investments is a different game. The recent drop in the cross-border M&A activity is a strong signal in this direction.

For the emerging and developing countries as a whole, private debt and equity flows will likely fall short of meeting external financing needs. The question is how much of the shortfall will affect Latin America. Some countries are better prepared than others. Countries with large current account deficits, strong dependence on tourism and remittances, and limited access to private debt and equity flows will suffer considerably. This of course, points in the direction of Central America and the Caribbean, where a sharp adjustment seems inevitable.

In the largest countries, with access to international markets, much will depend on the ability of private firms to roll over their debt. There are hundreds of corporations in these countries that borrowed in the international syndicated loan market and some that issued international bonds during the last few years. They hold the majority of the outstanding short term external debt as well as the medium to long term obligations coming due in 2009. Financing the public sector is not the problem; the real issue is how to refinance the large Latin American corporations.

The prospects in this regard are not all that encouraging. The supply of credit to the region could fall even further because there are mounting pressures on the capital position of the major banks. Liquidity problems in the global interbank market remain an obstacle for banks to fund additional assets, while tightening of credit standards has been generalized. Last but not least, government ownership (even if temporary and partial) of the large banks changes the priorities in the direction of domestic recovery in the developed world, rather than greater credit risk exposure in emerging countries.

There is no ammunition left

The capacity of central banks to cut interest rates and of governments to provide more fiscal stimulus is very limited. Even in Chile, there is discussion that the fiscal deficit is already too high and that the government should bring it down again next year. The Mexican central bank has said that further cuts in interest rates are not likely, in line with the language other monetary authorities have used recently. In other words, fiscal and monetary policies do not have many degrees of freedom. If the world economy does not recover soon and private capital flows to Latin America remain low, there is not much that Latin American countries can do. Even worse, it is possible that some of the expansionary policies of the recent months will need to be reversed. This is already part of the debate in countries like Mexico, where the government may need a tax increase to cut the fiscal deficit in 2010.

In summary

In summary, Latin American governments and multilateral banks are betting excessively on a sharp economic recovery. For their projections to be right, a major recovery should be already underway. The latest figures, however, do not support that view. Even if the U.S. shows a moderate V- shaped recovery in the next two quarters, China’s imports, commodity prices, and private capital flows could still be the source of very unpleasant news for the region.

Canadians are often surprised when Canada makes news on the international stage. Many were shocked to see that one of the world’s most influential publications, The Economist took to criticizing Canada’s jewel and Olympic city, Vancouver, comparing drug violence in Canada’s west coast hub to violence which has scarred Colombia for more than three generations. While the article mentions little about Colombia compared to Canada, the reality of drug violence in Vancouver in recent months and the increase in the drug war in Mexico and the US has pulled international attention towards Vancouver in a negative light, something many Canadians are not used to, or even portray in local media and election campaigns.

The face of drug violence in Colombia is well beyond anything affecting Vancouver and Canada. At its high point, drug cartels in Colombia controlled large parts of the country and employed entire towns and villages, some even using the raw materials of cocaine as its only viable currency. The culture and effect of narcotics in Colombia permeates local dialogue and history to such an extent that it has robbed Colombia of its traditions and stories and hid the nation’s true culture and heritage behind a veil of violence and conflict. Even after last year’s military campaign against the FARC, who kidnapped one presidential candidate in Ingrid Betancourt and tried to assassinate Colombia’s current President Alvaro Uribe, Colombia is still mired in drug violence which has marked the lives of every citizen of Colombia and turned one of the most promising economies and richest cultures in Latin America into a literal war zone in many parts of the country.

The Canadian dialogue is quite different than that of Colombia. Politics in Canada and Canadian’s self image in the world often keeps Canada in the position of being a relatively closed country economically and socially. Despite having a high degree of immigration and a stable economy with a great deal of equality, accepting a proactive role in the world has not been easy to accept for many Canadians. The results of having Canada become open to the benefits and costs of a booming economy and increased internationalism for its own merits and not those of empire or a good neighbor policy has made Canada a lot more interesting, a lot more influential if its citizens desires it, and is forcing Canadian cities to address issues that were always seen as the problems of the US or other TV narrative worthy nations. Canada’s governments often spend their time shifting blame between municipal, provincial and federal governments and leave the dialogue on Canada frozen in the 1970s, even appointing a leader of one of the major political parties who has not had any tacit connection to the country for over 25 years. This is not surprising, as The Economist suggests that the re-election of British Columbia Premier Gordon Campbell came without much attention given to the persistent violence in Vancouver, even though during one of his media interviews he was rushed off because an armed robber crossed close by to the Primer after robbing a jewelry store in the area.

The challenge of the narcotics trade has come in the last few years of Canada being pulled into a position of influence on the world stage, a position that few in Canada realize or know how to deal with or address without altering the image of stability in communities nationwide. While the country is forced to adopt an advanced position of obligation in the world, it also must adopt a worldview that can help it deal with new issues before it becomes a major problem. A structural and cultural issue that injures Canada’s economic progress is a prime example. Foreign accredited professionals in Canada are welcomed into the country for many of their skills, but few are allowed to re-qualify in a reasonable manner, leaving Canada crippled from within in boosting its own economy, even limiting the number of doctors able to certify in various Provinces during a current crisis of a shortage in health care professionals. Ironically this week, Austrian immigrant to Canada Frank Stronach, owner of Canadian company Magna International, has become one of the controlling stakeholders of GM’s Opel in Europe. The purchase of the auto giant Opel in Europe is a major shift in the world economy, coming from Canada in purchasing a major European auto manufacturer which most Canadians have likely never heard of or few knowing that Mr. Stronach was an immigrant and proud Canadian. Canada has some of the most highly intelligent and restricted immigrants in the world, a result of a world view which limits policymaking beyond the nation’s borders.

In the end Canada will be dragged, hopefully not kicking and screaming into a position of influence on the world stage. Crime prevention and policies in communities must address the nature of cross border issues as much as an open and diverse policy perspective is needed to keep Canada growing from within and abroad. In the end, Canada and Colombia have one major aspect in common, in that they are in a relatively good position to produce a prosperous future globally if the desire and effort is there in local communities. The difference is however that Colombians have been waiting for generations for this opportunity; Canadians however have always had it and must choose to prosper in the future or lose the opportunity with increased closure, restrictions and elections.