Global Policy Forum

Latin America's New Consensus


Conn Hallinan

Foreign Policy in Focus
October 29, 2008

When the Mexican dictator Porfirio Dí­az said the great tragedy of Mexico was that it was so far from God and so close to the United States, the comment summed up the long and tortured relationship between the Colossus of the North and Latin America.

Starting with the Monroe Doctrine in 1823, the United States has routinely dictated the hemisphere's political and commercial life and, on a score of occasions, overthrown governments it found inimical to its interests. But the world has suddenly turned upside-down.

South America now boasts the third-largest trade bloc in the world, Mercosur, which includes Argentina, Brazil, Uruguay, and Paraguay. Venezuela is in the process of joining as a full-fledged member while Chile, Bolivia, Peru, Colombia, and Ecuador have associate status, and Mexico is an "observer." Even without the coming expansion, Mercosur represents the bulk of the continent's landmass and its two most powerful economies. A dozen countries also recently formed a new political organization known as the Union of South American Nations (UNASUR); Mexico and Central America have observer status in the European Union-like entity.

Testing Newfound Independence

The global economic meltdown will sorely test this newfound independence in the coming months. In the past, if Washington sneezed, Latin America came down with pneumonia. Will the current economic conflagration derail South America's growing autonomy, allowing the United States to again dominate the region?

The economic crisis will certainly impact South America. Currency values from Brasí­lia to Mexico City have fallen. At the same time, most Latin American countries are in a better position to weather the storm than the United States, Europe, and Japan, where banks play a larger role in the economy.

"No one can avoid the events of the past few weeks," says Riordan Roett, director of the Johns Hopkins Western Hemisphere Studies Program, "but we are seeing some countries better insulated than other countries." Brazil's foreign exchange reserves, for instance, amount to more than $206 billion, which should cover the country's need for export credit until "the most acute stage" of the crisis is over, says Brazilian Finance Minister Guido Mantega. And because the government of Luiz Inácio Lula da Silva has reduced poverty, thus expanding its internal market, the country is in a better position to endure the global financial turbulence. "Brazil is not immune to the crisis," says Mantega, "but this affects the countries with problems in their banks more, and countries like Brazil less."

Argentina also has a substantial central bank reserves - $47 billion - and is hinting that it will delay replaying its $6.7 billion debt to western creditors until it can negotiate better terms. Venezuela and Brazil are leading an initiative to form the Bank of the South (BancoSur), an institution that would pool a portion of participating countries' reserves, and ultimately replace the International Monetary Fund, and its onerous insistence on cutting social and infrastructure programs as conditions for its loans, with a more development-friendly approach. Besides Brazil and Venezuela, Bolivia, Ecuador, Colombia, Paraguay, and Uruguay have signaled their interest in joining.

Venezuela has reserves of $30 billion, the largest per-capita total on the continent, says Martin Saatdjian of the Ministry of Foreign Affairs, but the government is being careful. It's considering a "minor devaluation" of the bolivar, Venezuela's currency, and "austerity spending for the next fiscal year" if the crisis "deepens and the price of oil drops," says Saatdjian. Caracas is spreading its oil wealth throughout the continent, which has cushioned the impact of the economic downturn. The fact that Venezuela bought $2.4 billion of Argentina's debt beginning in 2005 has helped Buenos Aires build a rainy-day fund.

Diversifying Trade

Starting in the late 1990s, South America stepped up its efforts to diversify trade with the rest of the world, in particular resource-hungry China. Beijing buys Chilean copper, Cuban nickel and cobalt, Brazilian and Uruguayan soy, and Venezuelan, Ecuadorian, and Bolivian oil and gas.

Trade between Latin America and China totaled $102.6 billion in 2007, and the Chinese currently plan to invest up to $100 billion over the next five years. Brazil, Chile, and Argentina have a total of $28 billion in two-way trade with China, and China is investing heavily in Chilean copper and Venezuelan, Bolivian, and Ecuadorian oil and gas. Beijing is currently negotiating a free-trade agreement with Peru. Almost half of China's foreign investment goes to Latin America. While China's economic growth is slowing down, that term is relative. Its economy is still growing at 9% annual rate, and the Chinese government is taking steps to keep growth from falling any lower.

Russia and Iran have also becoming major players in Latin America. Russian Deputy Prime Minister Igor Sechin, accompanied by business leaders, just finished a tour of Cuba, Venezuela, and Nicaragua, and the Russians are helping to develop oil fields in Venezuela, Bolivia, and Ecuador. Iranian President Mahmoud Ahmadinejad has been welcomed in Venezuela, Bolivia, Ecuador, and Nicaragua.

Still Gaining Steam

The United States, on the other hand, is saddled with the legacy of its "Washington Consensus" policy of wide-open markets. The neoliberal strategy led to ruinous debt in Latin America, exacerbating its yawning gulf between rich and poor, and financial catastrophes like the protracted Argentine collapse, which began in 1999 and impoverished half that country's population. The wreckage wrought by the Washington Consensus and the International Monetary Fund's enforced austerity sparked an economic and political revolt in Latin America that's still gaining steam.

Brazil and Argentina paid off their IMF debts ahead of schedule and concentrated on building infrastructure and alleviating poverty. The result has been a steady economic growth, with expansion this year of 4.4%, which, according to Citibank forecasts, will fall next year, but probably not more than a percentage point. In contrast, U.S. and European growth rates are projected to drop to 1.5%, or even to zero. Latin America is "a better-built boat," says the World Bank's chief economist for the region, Augusto de la Torre. Political independence is on the agenda as well.

In 2003, no South American country backed the U.S. invasion of Iraq. In 2005, South America rejected a U.S.-led Free Trade for the Americas pact. And while Washington is hostile to left-led governments in Venezuela, Bolivia, and Ecuador, the rest of the continent has rallied behind them.

Rather than looking north, countries like Brazil are increasingly developing south-south relations. In 2003, India, Brazil, and South Africa formed an alliance called IBSA (an acronym derived from the three nations' names), which met recently in New Delhi to discuss a joint approach to the current economic crisis, as well as food security and energy prices. Between them, the countries represent 1.3 billion people and three of most dynamic economies in the developing world outside of China. Trade between the three is projected to top $15 billion by 2010.

Developing countries "need to learn from the crisis to construct a new world economic order," Lula says. The economic crisis has accelerated these moves toward breaking the stranglehold the United States has had on the world of finance. There is a "new reality," says United Nations General Secretary Ban Ki Moon, "new centers of power and leadership in Asia, Latin America, and across the newly developed world."

German Finance Minister Peer Steinbruck is blunter. "The U.S. will lose its status as the superpower of the world's financial system. This world will become multi-polar.the world will never be the same again." Beset by economic crisis and bogged down in two unwinnable wars, the Colossus of the North no longer wields the clout it once had. "In the past, the door for talks with the United States on any issue had to remain open. We had no choice," a Brazilian diplomat told Southern Pulse, an internet site on Latin American security. "Now we can close it if we want."

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