Martin Redrado was always an economist of great interest. In his first weeks in office I was lucky enough to see Mr. Redrado give a talk at the LSE on the many economic struggles faced by Argentina and Argentina’s central bank since 2001. A few key points were made at the beginning of his term as the governor of the bank. In good humour, he apologised for the chaos of previous bank policies and made the point that the bank had to claim some responsibility for failed policies of the past in order to be successful in the future. He also made it clear that slow growth and the de-politicisation of the bank is a crucial part of regaining Argentina’s stability and re-entrance into the global economy as a competitive nation. His last major point was that the models and transparency of the bank has to be beyond clear to investors in order to normalize the economy of South America’s second largest economic power.

Despite many years of modest surpluses in Argentina, the default in 2001 still has the effect of limiting access to international capital markets for Argentina. The fact that international investors do not have much faith in Argentina’s investment climate, and bondholders since 2005 refused to accept Argentina’s debt restructuring leaves President Kirchner limited avenues for finding extra revenues. While post 2002 resulted in Nestor and Cristina Kirchner being the only ones who wished to tackle Argentina’s debt crisis after a series of failed presidencies due to the collapse of the Peso. Despite economic gains post 2003 until the 2008 crisis, recent years and pressures have matted out the shine of their positive achievements. Battles with the opposition in Congress have left Kirchner with fewer options, as the opposition gained a majority in Congress last summer and economic troubles to the north have set not only Argentina, but all economies on a voyage to find extra funding. In an unwise and perhaps desperate move, Kirchner chose to challenge the one Che in power who has economic stability in mind, that of Central Bank governor Martin Redrado.

Today, Redrado has survived his ousting as bank governor by President Cristina Kirchner via a legal challenge last Friday. The Executive wished to transfer $6.6 billion of Argentina’s foreign currency reserves to service public debt, but with the Central Bank being legally independent from the Executive branch, Congressional support is needed in order to authorize the transfer of funds. Therefore when Redrado asked to study his legal options in the matter of a transfer issued by President Kirchner, Kirchner sought to remove him from his position. Legal quarrels however forced Kirchner to keep Redrado as governor as a judge in Argentina re-clarified his independent legal position as Central Bank governor where he remains today. Kirchner insists that opposition leaders in Congress seek to block the Presidency from addressing issues of national debt, but with the legal ruling restricting her and Redrado’s staunch statements claiming himself as a professional economist and not a politician, he might be the only one limiting small yet significant run on the Argentine Peso in this current political skirmish since the failures of 2001. A likely conclusion will be a compromise, where Kirchner calls in favours and taxes on other parts of the economy, with whatever is left, and Redrado gives her some reserves, albeit with a measured amount to maintain Argentina’s economic reputation and of course in a polite manner.

While Redrado fights to keep Argentina’s economy out of the negative spotlight, Venezuela’s economy has made world headlines with the devaluation of the Bolivar, Venezuela’s currency. Venezuela and Argentina often lead a fight in the region for Latin America’s highest inflation rate, while being two very different economies. Venezuela’s devaluation comes from several different factors, but the largest rationale for the move is in order to gain added revenues from Venezuela’s lucrative oil exports. Oil in Venezuela has become very much a part of the reserves for Presidential policies, even lending funds to Argentina, mind you at a higher rate now than in the past. The devaluation will likely give Chavez more money and political clout via added spending on his projects and give him a popular boost before legislative elections take place in September. Rates on essential food and medicine imports being set at a lower rate than non-essential goods is also part of the new exchange rate, officially being a two tier rate with a second higher rate being applied to imported good deemed as ‘non-essential’. A third tier rate might arise out of the black market however, as Venezuelan companies who are not favoured by the government’s social reforms will have a harder time getting US Dollars and turn to other means to keep afloat. With Venezuelans running out to buy consumer goods before the new exchange rates take effect, and security forces being ordered to enforce against any retail price hikes on any retailers who overcharge consumers, the image of any Latin American running to the streets to spend their soon to be devalued currency is not often one that gives confidence to many investors. Despite this, the long run impression of devaluations in Venezuela is seen as political, but not wholly unjustified as Venezuela is essentially an oil economy and has to address falling oil prices in many markets. Redrado no doubt wishes to keep Argentina’s reserves out of the political fray of local politics and not turn the Peso into a currency based on one commodity or one person’s political ambitions. While Venezuela’s economic policies are validly criticised for their inherently political motivations, Argentina does not have an oil cushion to soften any economic blows, and must rely on investor confidence in its reserves and creativity by the Kirchners in order to cover their end of the year 13 billion dollar debt payment.

It’s hard to resist presidential decree. Yesterday, after calling for his resignation, President Cristina Fernández de Kirchner issued a decree to remove the governor of Argentina’s Central Bank, Martín Redrado, from his post. The impasse has been brewing for some time, coming to a head this week.

Kirchner wanted Redrado to devote $6.6 billion in foreign currency reserves to paying off national debt. Meeting a $13 billion debt that comes due this year is critical to Argentina regaining access to global credit markets, which left the nation isolated after its 2001 default, the largest external default in history. Since then, the weight of default has been eased by strong economic growth, particularly from 2003-2007, and large loans offered to Argentina by Hugo Chavez. Now growth is flagging, and the interest rate on Mr. Chavez’s loans exceeds 10%.

Tax hikes or entitlement cuts are the more orthodox tools under such circumstances. These appear a bit too sour to the political palette of the president, who told reporters “It was not Redrado who gathered the reserves, it was the government.” True enough, but sacking Redrado and raiding foreign reserves is bound to spark a short-term backlash. A sell-off of the peso seems inevitable. Mark Mobius, executive chairman of Templeton Asset Management, said investors should “generally” avoid Argentina.

More troubling are the medium-to-long-term implications. The independence of central banks throughout the region is critical to economic stability. Should the banks (once again) become the handmaiden of populist politicians the beast of inflation may return—already Argentina has Latin America’s second-highest rate of inflation, eclipsed by Venezuela.

Every year at about this time gadflies of the region indulge in the publication of the Latinobarómetro poll. The survey chronicles opinion on a spate of questions among 18 Latin American nations. This year (the survey focus changes a bit every year) views on democracy and the free market formed the basis of pollster’s questions. The 2009 study, published in cooperation with The Economist last week, is especially interesting given the global recession and number of elections held throughout the region over the past year.

There is ample good news in Latinobarómetro’s findings. With the exception of Mexico, Latin America endured only a tangential blow from the global economic crisis, in stark contrast to the region’s setback from recession at the beginning of the decade. Perhaps because of this support for the market economy reached record highs in many countries. Interesting qualifiers to this are Colombia and Venezuela. Despite years of stable growth and a smart avoidance of global headwinds, support for the market economy has waned in Colombia, whereas in Venezuela over 65% of respondent’s expressed support for market economies, up some 20 points over 2007 findings. As The Economist notes, “the poll offers a warning to Mr. Chávez.” Though 45% of Venezuelan’s still back his government, 81% of those polled believe private enterprise is essential for economic development. Region wide, one-third now accept that privatizations were beneficial for their country, up from 22% in 2003.

Views on governance also give cause for celebration. For the first time since the poll began in 1995, governments garnered higher approval ratings than the armed forces, a real coup (no pun intended) for a region with hundreds of military interventions in its past. Satisfaction with democratic performance has reached its highest point in Latinobarómetro’s history; only in Peru is democracy less popular than it was in 1996. In Uruguay, a stunning 80% are satisfied with the way their democracy works. Popular opinion, in Honduras and throughout the region, was also strongly opposed to the coup in Honduras.

A few troubling trends are still at play. Support for democracy is coinciding with the worrying trend of extended presidential terms. Additionally, exceptions to generally positive trends are often found among the larger economies in the region, such as Colombia and Mexico. (Luckily, Brazil is a part of the good vibes.) Views on social issues are far from consistent. Homosexuality is becoming more widely accepted, even if homosexual marriage is still less than popular, but on the other hand, the same proportion of respondents (36%) believe that women should stay at home rather than work as was reported in 1997.

Development is an uneven slog, easily prone to criticism for what remains to be done or what appears to being undone. Two decades ago Latin America was uniformly undemocratic and there were few market economies. Change slowly began in the 1990s and accelerated in the 21^st century. Now the vast majority of states are democracies—though impaired some may be—with market economies—though undiversified some surely are. But as the 2009 Latinobarómetro study attests, people throughout Latin America are becoming more supportive of democracy and free trade, surely because they are realizing a better life for themselves as a result of liberalization. The glass is looking half full.

Long thought to be a volatile, potentially destructive force in liberalizing economies, capital flows are curtailed through a variety of taxes, limits or deposit requirements.

Such capital controls serve as a kink, allowing policymakers a freer hand to manage their economies.

Brazil recently initiated one such measure, a 2% tax on the purchase of Brazilian equities or bonds by foreigners. Regardless of what officials say, the tax is meant to reign in Brazil’s currency, the real, which has appreciated some 50% against the dollar since December. At about 1.75 reais to the dollar, the real now sits at pre-recession levels, whereas the Mexican peso is still down by over 15%. As risk appetite returns, Brazil is situated to receive a fresh wave of capital investment, further strengthening the real and undercutting the competitiveness of Brazilian exports.

Transparency and sound corporate regulation should obviate capital controls, but such reforms take time. With rampant corruption and economic crisis in the not too distant past, Brazil hasn’t arrived at that point. The recent tax is a prudent move—for now. It is moderate, and targeted at incoming capital rather than outflows.

Still, the IMF from criticized the move. IMF Chief Dominique Strauss-Kahn labeled Brazil’s capital controls as “ineffective” and went on to argue that capital controls are costly to the nations that adopt them. Dani Rodrik defended Brazil’s decision, or rather issued a technical critique of the IMF’s position, stating that the Fund cannot simultaneously insist that capital controls are both costly and ineffective.

Just as wonks at the Fund must balance political and economic realities, so too must Brazil’s policymakers. As a member of the quasi-free trade BRIC clan Brazil’s policies are likely to influence RIC, so any steps away from market liberalization runs the risk of emulation. (See: beggar-thy-neighbor.) Unfair play by one BRIC member could feed a destructive spiral of market manipulations by others. Regular interventions in capital markets, or monetary policy more broadly, could ensue, deflating the prosperity that should accrue from globalization. Thankfully, that doesn’t appear to be the case, but it’s a pitfall to be mindful of.

Crucially, Brazil doesn’t seem interested in rigging capital markets to perennially undervalue its currency the way China does. This is at least partly the result of Brazil being a democracy, so it can’t just focus on export-led growth while ignoring domestic consumption. By making its capital controls explicit Brazil is adding transparency to the investment process and because the tax is small, policymakers can make incremental adjustments, which should minimize the risk of any readjustment spooking capital investment.

Bravo for a responsible intervention. But the real remains on an upward slog.

A interesting article from the Brookings Institution’s Latin America Initiative was published online today called Fiscal Policy Rules and Latin America: Lessons from the Crisis. The article makes the point that for much of Latin America, with the exception of Mexico, has fared well despite the latest global economic crisis. A region that often has had its own economic storms and has been the origin or victim of much of the global contagion in the past is now one of the world examples of how to manage a national economy in the middle of a severe economic crisis. Two countries stand out in particular, Brazil and Chile.

Brazil, as the largest and most economically significant country in Latin America and the next worldwide economic powerhouse has done relatively well over the last year. Brazil and many of its Mercosur partners have often diversified their economic trade between the US and EU, as well as the rest of the world. Currently investments with Asia, and China specifically will further split Brazil’s trade away from Western countries and divide it more extensively to maintain an economic balance in any future economic crisis. Brazilian banks had to be well capitalized and as a result of these stricter rules, were one of the major economies in the world that did not have to recapitalise its banks or were in danger of industry-wide bank failures. Economic diversity within the Brazilian economy is a combination of natural resource production, oil revenues, production capabilities and technological training and innovation which has paid off since President Cardoso’s growth policies were further championed by opposition leader Lula Da Silva in order to build Brazil out of a position of debt, into a country where political opposition and debates continue, but growth is part of everyone’s future in Brazil.

The weakening US dollar and future prospects for the US has turned many investors’ eyes to other regions of the world that have been seen as relatively stable over the past year. Many countries in Latin America at the end of 2008 were running surpluses, or had little debt on their books and were well capitalized. In the Americas, while the US still will be the region’s powerhouse, countries like Canada, who also had a surpluses and no bank failures in 2008 and Chile, the region’s most economically secure economy, have been able to minimize their losses over the past year and will likely come out as being notable economies over the next few years.

The Brookings article focused on Latin America as a whole, but used the case of Chile to make its main argument. The goal of the Chilean economic system has evolved in a region where economic crisis was an expected event for the most part and occurred every 7-10 years without fail. Chile’s growth came from strict economic measures which developed to be flexible enough to face challenges in tough times, and maintain an economy that could not be used by political forces for political needs at the detriment of Chile as a whole. Detailed descriptions of the Chilean fiscal methods are described in the article, but the main goal was to keep fiscal measures from losing in tough times and not being abused in good times. The success of Chile has even been adopted to some degree by Germany as claimed by the author, and has kept countries like Chile and Brazil above water and in proper shape to grow in the future. For the most part, Contagion in Latin America will no longer be a symptom of the region as a whole, but only of specific countries in the Americas in the future. I recommend you read and comment on the article. The Brookings article can be found here.

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.

Mexico in 2009 has become the recipient of at least half of the most famous biblical plagues starting in 2008. This past week brought yet another earthquake to Mexico, the second this month that received some media coverage outside the country. In addition to a full scale drug war, H1N1 flu, an economic crisis, political jockeying, immigration issues, drug related and everyday corruption and a persistent high level of poverty, Mexico and its leaders could claim to have more on their plate than Barack Obama has to deal with in the US today and for the rest of his Presidency.

Debates of where the blame for much of Mexico’s ills comes from has brought in voices from opposition within and outside of Mexico, its NAFTA partners, the WHO, IMF, World Banks and the UN itself. However in a general perspective has Mexico’s leaders performed worse than most other leaders in similar positions? Felipe Calderon’s government while blamed for igniting much of the drug conflict has tried to do more to fight narcotrafficking than any other Mexican leader in the past. Support for his anti-drug initiative has come from the US and Canada and South America, and while drug markets and demand has been claimed as the root cause of Mexico’s conflict by many in Mexico and by even Obama himself, NAFTA has become collectively aligned fighting against cartels that are well entrenched from Cancun to Vancouver. While NAFTA has always been exclusively a trade agreement, heavy cooperation in fighting drugs that come through many commercial and immigration sources also is the route of much of North America’s trade wealth boom since 1994. Markets which create demand for narcotics also demand other products from Mexico, Canada and the US which are not drug related, but may open for easier access to narcotrafficking across borders. The end result is that cooperation and addressing the drug issues are the only option in reducing the drug trade in North America by maintaining strong ties between the three NAFTA neighbors. I request that if other policy alternatives are a better option that readers voice their opinion.

H1N1, or Swine Flu as it was called before the WHO’s public relations people set out to change the definition did start in Mexico despite some claims otherwise in the country of its origins, and it is still in debate who is to blame. Blame has been knocked around quite a bit in this latest crisis, starting with slow action by Calderon and Mexico’s government to voice the issue abroad, leading to the WHO’s slow action in issuing alerts, leading to practices by Mexico’s agricultural industry and large multinationals, to claims of a poor health system in Mexico that is often a stereotype of many in developed countries abroad. The political fallout will determine the end result of the Swine Flu, but what should be noted is the effective actions taken by Calderon, Mexican public health officials, industry and citizens who completely shut down the most populated city in human history numbering almost 30 million and the other 70-80 million Mexicans who quietly kept indoors and patient over more than a week in order to end the spread of Swine Flu in Mexico and abroad. This enormous feat of public health control should be awarded to Mexico who despite having so many current problems, lack of funds, and large populations to deal with was still able to better handle H1N1 than many developed countries handled SARS. While it was not able to contain H1N1 entirely, and a small outbreak in Chile and Japan has occurred recently, it will certainly be studied for generations to come in how to deal with national and international health crisis.

Some issues that have received little attention this past month have been the persistent drug war and some earthquakes in Mexico in the last few weeks. As always, immigration issues while always a constant on the borders only were addressed when Mexican immigrants got the Swine Flu or the influence of drug cartels or were linked to Mexico’s drug war in the US. These mainstay issues will likely reemerge very soon, which often ignore successes by Mexican officials and highlight possible threats to the US which vary in urgency. With deaths in Mexico easily competing with those in Afghanistan and Iraq, Mexico will likely keep its place on the front page and tv screens of many of its NAFTA neighbours…for better or for worse.

Europe and the United States had often inherited many benefits from economic growth in the pre-2008 era. One of those consequences, especially for those countries on the border or across the sea from developing nations is legal and illegal migration into their economies. Due to the recent economic troubles a lack of work has prevailed and often manual labour jobs have dwindled, leaving legal and illegal migrants with few options for employment. Signs of “reverse migration” back towards their countries of origin took hold with many illegal migrants living in the United States eight to nine months ago. Now with unemployment rates pushing 20 percent in many European countries, many immigrants in European countries are making their way back to their hometowns.

In a New York Times article this week an analysis of why and how European migrants are returning home was published. The focus of the article was on migrants in Spain, often coming from Eastern Europe and South America to work in an economy that was the source of the EU economic boom since 2000. Spain and Ireland were known as the two EU countries in the last few years that have benefitted from innovative and continuous economic growth after the year 2000. The rate of inter-EU and immigration from abroad expanded their economies, population and cultures in return. Now many immigrants to Spain have become the first to leave the country with an unemployment rate of 17.4 percent. Responses to these issues have come from many sources. The Czech Government, in an attempt to ease the pressures on Czech émigrés has offered 500 Euros to help their citizens return to the Czech Republic. In Spain, the Spanish Government has offered legal immigrants from South America their unemployment payment in one lump sum if they agree to leave Spain and not return for three years. Many others have simply left back to their home countries without any assistance as one migrant to Ireland said: “it is much easier to be at home with family and with friends and not to have a job,” she said, “than to be here and not to have a job.”

Problems in places like Europe and the US might be difficult, but problems from the Economic Crisis in Eastern Europe and South America have not been much better. This week the World Bank and IMF have been working out methods and strategies to help economies in the developing world and now even developed countries in dealing with financial problems worldwide. While unemployment rises and the debate carries on within global financial institutions, problems in developing nations continue to rise and develop into massive crises as the result of increased poverty. One notable example is the conditions in Mexico. With a full scale drug war competing with deaths in Afghanistan and Iraq combined, losses from the financial crisis and the current Swine Flu taking hold in Mexico, reverse immigration may have unknown consequences as a result of millions of people not being able to cope within their home country or their new country. While unemployment rates in the US and Canada are no where near 17 percent like in some European countries, the difference in the economic structure of the systems in North America may not provide decent paying jobs which help families to survive an economic crunch for more than 8 months or so. In the end, policies to help stabilise developed and developing economies might help some people, like those returning to South America from Spain in providing some living expenses for a few months or a few years.

This week’s New York Times published a fascinating article about a topic that many experts on Latin America should find very intriguing. The article titled Deals Help China Expand Sway in Latin America by writers Romero and Barrionuevo was an analysis of China’s growing influence in Latin America, with examples of how Chinese liquid investment in many large projects in the Southern Cone and Andean region seek to take American influence via multilateral organisations and FDI and divide the regions investment among the US, EU, China and the rest of Asia.

Since the admitting of China to the WTO and the drastic change in global trade and manufacturing flows, China has become a benefit to some in Latin America and less of a benefit to others. The New York Times article goes into many examples of how Chinese FDI seeks to fund many large projects in the region, from a development fund in Venezuela, to a hydroelectric project in Ecuador and providing Argentina $10 billion in financial loans and Brazil’s national oil company a similar amount to ensure future projects will send a guaranteed percentage of future oil to China. Relations between the US and many of its southern neighbours often have been strained politically in places like Venezuela and Bolivia, or have been tied in with economic restrictions such as Argentina’s relationship with many international financial institutions which set high risks for investment in the country, often funded and controlled by US investment policy within those institutions. For some in Latin America, Chinese investment is not only a good alternative, but can equal the amount invested by the IMF, World Bank and the US itself as noted in the article.

Concern from American officials will likely become greater as China seeks to displace any US and European FDI and by-pass conditions set by many international institutions that often placed Latin American and other developing countries into a position of forced policy measures. Chinese investment, most notably in Sudan and other parts of Africa, Latin America and Asia are starting to become an alternative source of funds for many countries which prefer to receive investment, but do not want conditions on their local policies, namely those which affect human rights and those connected to poverty reduction strategies. A benefit to a country like Argentina, who’s loan defaults in the past has placed it in a position where poor investment ratings still linger from 8 years ago, have received Chinese investment without major sacrifices at this point. However, places like Sudan, who are responsible for one of the largest ignored genocides since Rwanda receive not only Chinese investment in developing their oil industry, but are also suspected of receiving arms which some have connected to human rights violations in Darfur. Investment without any restrictions or a moral compass was not always practised by those in the West; especially during the colonial period, but the international investment community must decide how investment should be dealt with in the future to avoid mass slaughter of innocent communities, whether it be Chinese FDI or from the West.

Investment in Latin America has often been seen in a different light, depending on the attention Latin America has been paid during various American administrations. The Summit of the Americas this weekend comes on the heels of one of those moments in history where Latin America is becoming re-engaged, at least for the first few months of the Obama Presidency until there are added problems in the Middle East once again. The issue often seems not only one of Economics vs. Security, but one of the Americas being seen as one complete investment block/FTAA vs. a source of illegal immigration and narcotics. Often this debate plays out using clear statements of interest, referring to Latin America as a region described as America’s backyard as opposed to statements linking narcotics, illegal immigration and terrorism in much of US media on Latin America. A debate on US policy always accompanies the region, wavering as Latin America fades in and out of their sphere of influence with attention due accordingly. This challenge does have a distinct element however in 2009, as Mexico continues to fight a full scale drug war and continues its very close economic ties to the US, and Cuba and the US opening dialogue between Raul and Fidel Castro and the Obama administration. These issues may keep the US tied to regional policy until those issues lose interest, as has always been the case. Luckily some policies linked with security and partnership often pay off, as Colombians have seen in 2008-2009 and some successes with Plan Colombia and in Mexico with the Merida Initiative, not always a media attention grabber, but long term policy nonetheless.

Likely future Chinese investment may re-ignite the debate on trade with Latin America if it is seen as a major threat. The US must decide in the end where it wishes to develop its trade policy as those in the Americas seek to promote their own investments abroad if the US does not wish to pursue major investment and trade in the Americas. Debates on NAFTA and trade agreements with countries like Colombia must be taken as policies which benefit not only the United States, but the Americas region as a whole. In reality, trade between those countries in South America had on average less than 40% of their trade with the US and a significant amount with the EU and Asia. China has now displaced the EU as the second largest investor. Countries such as Canada, America’s closest trading partner has signed trade agreements beyond NAFTA, with Chile, Costa Rica and are discussing an FTA with Colombia and even the EU. According to writers such as Khanna and Zakaria, the US must consider its role in the Americas as its leader and develop its interests beyond security in the region if it is to maintain investment in a strong United States. China as a matter of investment policy is often not competing in places where the US have established strong investment ties, but in those areas where the US have been absent. The next decade of American policy towards the Americas will likely been discovered in the Summit of the Americas this weekend, determining the viability of a Fortress Americas in future US investment policy.

Fareed Zakaria GPS this past Sunday brought one of the most popular leaders in Latin America to English speaking viewers with an interview with Brazilian President Luiz Inacio “Lula” da Silva. With questions of the economic crisis, oil, relations with Cuba, Venezuela and Bolivia as well as Brazil’s role as one of the world’s largest emerging markets and role as the healthiest economy among the BRIC nations, Lula’s words will likely have an effect beyond Brazil and well beyond Latin America as a whole.

Recent discoveries of oil off the coast of Brazil, technology, industry and the traditional agro-economy in Brazil has taken the country out of economic chaos of the 1990s into a position of becoming the next China or India of the Americas. While Brazil has taken a hit in the latest economic troubles worldwide, Brazil stands out with Canada as the two countries in the Americas where a fracture of the financial system has not been considered an eventual conclusion by its government, experts and media. Despite what some call an overly positive outlook that Lula has on Brazil, the methods and conservative financial regulations which developed from past economic crisis will aid Brazil, and might save it from the worst effects of the economic downturn and gives Lula an interesting position when speaking on the economic crisis. When asked about AIG and the current problems in the US, Lula cited greed as the culprit, and suggested that greed and the culture of greed would always result in a worse situation for Americans and others worldwide, unless something is done to change that reality.

The election of Obama according to Lula comes with the realization that Brazil and the US share a similar characteristic as nations which often are more powerful than their neighbors, and hold the obligation to offer a hand to those who are smaller. His metaphor for the situation comes from his love of boxing, where he suggested that if one is weaker and falls during a match, it is not the weaker one on the floor who should offer his hand to the larger, it is the one who has the power in that situation who should offer his hand, referring to Obama’s opening of dialogue with Cuba and in response to Fareed’s question about how Obama should handle Chavez and his anti-US approach in various speeches and policy options. Lula’s perspective is an interesting one. As an incredibly popular leader who considers himself a socialist, albeit maintains many conservative economic policy reforms, Lula has positioned himself as a powerful diplomatic voice between the divisions between the traditional economic elite and socialist/populist leaders which often create large divisions in most other Latin American countries. His interview on GPS likely is a move towards bringing in closer ties with Obama, while placing Brazil as an intermediary between the US, Bolivia, Venezuela and Cuba and allowing Brazil to become a responsible regional player on the road to becoming an important international economic player. The ability for Lula and Brazil to cross boundaries is not an easy role to assume, but the ideas expressed from its leaders is a promising one, especially if Brazil is to become the mortar holding together the reputation of emerging economies in the near future.

Click here for Fareed Zakaria’s interview with Brazilian President “Lula” da Silva