Brazil

The Global Competitiveness Index for 2012-2013 came out this month, ranking 144 countries from around the world on twelve “pillars of competitiveness” (ranging from “basic requirements” such as institutions and infrastructure to more advanced categories such as innovation and business sophistication). In its rankings, Latin America’s countries fell pretty much right in the list’s center, with three countries (Chile, Panama, and Brazil) ranking in the top third, six countries falling in the bottom third (El Salvador, Bolivia, the Dominican Republic, Nicaragua, Paraguay, and Venezuela), and the rest spread throughout the middle. As usual, Chile took the Latin American lead (in the thirty-third spot) and received high marks for its macroeconomic environment and its institutions (and quite interestingly ranked above the United States, Norway, and Germany in the transparency of its government’s policymaking). Panama, Latin America’s fastest growing economy, came in second place at number forty and ranked in the top five globally for its accessible financial services and its widespread technology transfers. And Brazil (in the forty-eighth spot) got the bronze, with good scores for its domestic market and its business sophistication (defined as “the quality of a country’s overall business networks and … of individual firms’ operations and strategies”). By contrast, most of the Bolivarian Alliance for the Americas (ALBA) members didn’t fare so well. In particular, Venezuela was ranked not only as the least competitive in the region, but also as one of the least competitive countries in the world. The country earned the last place position globally in areas such as property rights, judicial independence, hiring and firing practices, agricultural policy costs, inflation, and the effectiveness of anti-monopoly policy. Venezuela does, however, lead the region (and much of the world) in one area: tertiary education enrollment (at 78 percent). But it is unclear how many of these educated students remain in their home country, as the Competitiveness Index also ranked Venezuela’s brain-drain as being extremely high. Where the entire region faltered was in providing quality education to its citizens. And while Chile’s education system (ranked ninety-first) has been in the news due to widespread student protests, almost all Latin American schooling garnered lackluster rankings. Perhaps even more worrisome was the incredibly low ranking of the region’s math and science education. Brazil, which just launched its Science Without Borders program (to train one hundred thousand Brazilian scientists abroad), ranked 132 in this category—below Haiti and Algeria and just besting Sierra Leone and Libya. Even further behind were El Salvador, Guatemala, Honduras, Paraguay, Peru, and the Dominican Republic. Overall, most countries in Latin America are moving, some quicker than others, in the right direction (Venezuela and Argentina are among the exceptions). Ecuador, Peru, and Mexico have been some of the region’s “most improved,” moving up a combined thirty-four spots over the past two years. Much of this rising competitiveness reflects strong economic growth, but it is also a measure of the positive social and business-related policies adopted by many Latin American governments. The report shows that while the region still faces many real challenges (including security, corruption, and infrastructure), Latin America’s steps forward have been promising, as many countries have found a way to promote inclusive economic growth while enhancing global competitiveness.

Americans sometimes think that the Chinese in Africa are ten feet tall.  But, other countries are more quietly expanding their African economic and political ties:  India and South Korea come to mind.  A must-read August 8 story in the New York Times highlights the increasingly important Brazilian presence. Brazil has the largest population of African descent outside of Africa and had close links particularly with Mozambique, Angola, and Guinea Bissau during the days of the Portuguese empire. In Nigeria, a Yoruba traditional ruler told me that he regularly visited his “subjects” in Brazil’s northeast. Brasilia’s current focus on Africa, however, is much more recent.  It is usually dated from the administration of President Lula (2003-2010) and reflects Brazil’s remarkable economic development and the search for new trade and investment venues– according to the Times, Brazil has displaced Britain as the world’s sixth largest economy.  Brazil’s presence in Africa is also diplomatic – there are now thirty-six Brazilian embassies in Africa, compared with forty-four American embassies.  Brazil also has a small aid program. In my view, the expanded Brazilian interest and presence in Africa is win-win.  Brazilian trade and investment will promote African economic development.  Brazil is a democracy:  its greatly enhanced diplomatic presence can only encourage the development of African democracy conducted according to the rule of law.  And Brazil may be able to exercise positive influence in those places where there is ambiguity about the United States, such as Angola.

Alongside the tentative formal efforts at economic and political integration, people are also increasingly bringing the region together. A recent uptick in intra-regional movement—through travel, study, and immigration—has allowed Latin Americans to get to know each other better, and in the process bind together both their communities and their economies. Millions of Latin Americans head nearby for their vacations, enjoying Patagonia, Machu Picchu, and the Galapagos Islands, among other places. Brazilians are the most active international travelers (in sheer numbers) with 1.5 million people (30 percent of their travelers) headed to locales in Central or South America. Latin American students are also increasingly studying abroad within the region. More than 50 percent of Chile’s international students were from neighbors (Peru, Colombia, and Ecuador), with most opting to study professions such as business, health, and the social sciences. Immigration too has shifted. Today nearly two thirds of all South American immigrants come from neighboring countries (compared to just a quarter forty years ago). Argentina and Chile have received the most immigrants, with 70 and 90 percent coming from neighboring countries. Whole communities of Bolivians live in Argentina, Brazilians in Bolivia and Paraguay, and Colombians and Peruvians in Ecuador. Further north, over four hundred thousand Nicaraguans live in Costa Rica. These large foreign communities can at times cause tensions—such as the half a million Brazilians (nicknamed braziguayos) living in Paraguay. These mostly agricultural workers immigrated in the 1960s, purchasing some of the best land for low prices, earning the envy and at times ire of Paraguayan natives. Ecuadorians have also clashed with the hundreds of thousands of Colombians living within their borders (which they associate with rising crime rates); a Facultad LatinoAmericana de Ciencias Sociales study reported that 64 percent of Ecuadorians held a bad opinion of Colombians. Along with the size of the flows, the profile of immigrants has also been changing. While once dominated by low skilled laborers seeking better opportunities, at least half of today’s migrants to Chile, Mexico, and Panama have twelve or more years of schooling. In response to the changing flows, many countries have adjusted their policies to allow for foreigners to own land (as in the case of Mexico) or prohibiting discrimination on the basis of origin (as in Argentina). Some countries are even allowing foreign nationals to use their national identity cards next door, waving visa restrictions, and allowing social security and other accrued benefits to be transferred home. While only four Latin American countries allowed dual citizenship in 1990, at least eleven do today. The informal intersections of Latin Americans across the region pressure changes in government policies and drive Latin America’s integration. Assisted by increased travel options, relaxed visa restrictions, and better communication technologies more and more citizens have made the decision to move within the region. Strengthening ties between countries through community networks, Latin America’s people are and will be just as important for regional integration as the formal treaties their governments create.

Economic ties lead Latin America’s integration efforts. Promising some of the greatest concrete benefits—larger markets, improved livelihoods, and enhanced global economic power—leaders and communities alike have tried to integrate the region through three main means: trade, infrastructure, and investment. In the post-WWII era, governments began creating ambitious trade organizations, such as the 1960 Latin America Free Trade Association, or LAFTA, and its successor, the Latin American Integration Association, or ALADI. Both focused on (and never achieved) an integrated common market. Less ambitious (but more successful) have been the over fifty trade agreements negotiated over the past fifty years between Latin American neighbors, setting the stage for greater economic interchange. A look at the two most prominent economic-based agreements—the Southern Common Market, or Mercosur, and the North American Free Trade Agreement, or NAFTA—highlights the different paths. Created in 1991, Mercosur brought together Brazil, Argentina, Uruguay, and Paraguay, and later granted associate membership (allowing market access with no voting rights) to Chile, Bolivia, Colombia, Ecuador, and Peru (and most recently granted full membership to Venezuela). Its goal was more than just trade, envisioning coordinated macroeconomic policies as well as a functioning regional parliament. Despite the ambitious vision, intra-bloc trade peaked in the mid 1990s. Stymied by the protectionist tendencies of its two largest economies, Brazil and Argentina, regional integration through Mercosur has floundered. This dynamic contrasts with the evolution of U.S., Canadian, and Mexican integration in the wake of the 1994 North American Free Trade Agreement. Though without the breadth of Mercosur (to coordinate government policies and create new political institutions), NAFTA, nearly twenty years on, has spurred deep integration in North America. Trade between the three participants has increased three fold to over a trillion dollars. Even more telling is the integration of regional supply chains. As Robert Pastor, director of the Center for North American Studies explained, “We’re no longer trading products in North America; we’re making products together.” Today 40 percent of U.S. imports from Mexico are produced within the United States—this means that even if it says "Made in Mexico" nearly half of the work was done in the United States. Facilitating the back-and-forth in North America have been networks of roads and train tracks (though with the rise in trade and with age, these are now overwhelmed). The rest of the region is much less physically linked. In South America, roads have traditionally connected communities and production sites to ports rather than neighbors, hampering intra-regional trade. Recent efforts to change this, such as a continental highway connecting Brazil through Bolivia to Peru, have foundered on environmental concerns and protests. Transnational infrastructure has also increasingly extended beyond building roads. There has been a great deal of interest (and some progress) in integrating energy matrixes. The most advanced project is the Central American Electric Interconnection System (SIEPAC), which, when completed, will run an 1800km transmission line from Guatemala to Panama, connecting the region’s electricity systems. Also on the drawing board is the South Gas Pipeline Network, which would link energy production centers in Peru and Bolivia to consumer bases in Chile, Argentina, Brazil, and Uruguay. The United States supports many of these initiatives through the Connecting the Americas 2022 program, which aims to increase electrical interconnections through transnational energy grids. Further along than these state-led efforts is the private sector and foreign direct investment. In 2010 outlays from within the region in their neighbor’s markets hit $43 billion—almost triple China’s $15 billion contribution. And in contrast to other types of investments, money flowing over neighbors borders was more apt to go into financial services, retail, and utilities—value-added activities with more positive trickle down effects for the broader economy. The rapid multilatina growth has also benefited customers. For instance, Chile’s retailer giant, Cencosud, has pushed its stores throughout the region, and now sells products to (and employs) Argentineans, Brazilians, Colombians, and Peruvians. Despite these advancements, regional integration falls short when compared to the rest of the world. The Economist shows that Latin America’s intra-regional trade clocks in at just over 20 percent of all exports, much lower than the EU’s intra-regional exports (70 percent in 2010), or Asia’s and North America’s (50 percent each). This is partly because Latin American countries still continue to trade more with the United States than with each other. But increasingly Latin American nations have also looked inter-regionally for their economic agreements, with Chile and Peru (and soon Mexico), joining the U.S., New Zealand, Singapore, Brunei, Vietnam, Malaysia, Canada, and Australia in negotiations for the Trans Pacific Partnership—which would deepen trade across the pacific countries. If it succeeds, it may signal another turn in Latin America’s economic agreements—Latin American countries integrating with one another while looking abroad together.

Latin American integration efforts have been a continuous fixture throughout much of the last century, but in recent years there has been a flurry of new initiatives, with leaders re-emphasizing regional ties. The increasing number of high-profile presidential and ministerial summits have brought renewed promises and commitments to deepen regional political, economic, social, and developmental cooperation, and have spurred the creation of new political and economic bodies tasked with uniting the region. Though in part due to a global shift toward regionalism, it also reflects the real potential benefits of an integrated Latin America. Economically, the combined markets would give the region substantially more heft on the global stage. Geopolitically, greater unity would enable these nations to garner the United States’ and other world powers’ attention, and better promote their interests in multilateral discussions and negotiations. In general, it could improve the opportunities and wellbeing of the some six hundred million Latin Americans. Latin America’s integration is also bolstered by its widespread support from average citizens. Within the region, polls show that over half of each country’s population (and in some places up to three-quarters) support both economic and political integration. Democratic politicians have played up these visions for electoral gain—most notably, Venezuelan President Hugo Chavez has drummed up support by promoting his integration initiatives (often as the way to foil perceived U.S. regional designs). But Chavez and his contemporaries are not the first leaders to make such promises. South America’s first grand integration efforts began in the early nineteenth century under the leadership of General Simón Bolivar during the wars of independence. He envisioned uniting northern South America into Gran Colombia, and creating a league of American republics with a common military, a mutual defense pact, and a supranational parliamentary assembly. This dream, and Bolivar’s presidency, ended in 1830. After World War II, integrationist efforts reemerged. In 1947 nineteen nations (which later became twenty three) signed the Inter-American Treaty of Reciprocal Assistance (also known as the Rio Treaty), where they vowed to defend each other against outside aggression. The Organization of American States (OAS) followed in 1948 (building on a previous turn-of-the-century institution), promising to promote social and economic development through a four-pronged emphasis on democracy, human rights, security, and development. In the late 1950s the hemisphere came together to form the Inter-American Development Bank (IDB), designed not only to encourage economic development but also to advance regional integration through its internal Institute for the Integration of Latin America and the Caribbean (INTAL). In 1960, Argentina, Brazil, and Mexico led their neighbors in the creation of the Latin American Free Trade Association (ALALC), the first attempt at a regional intergovernmental body. Its goal was to establish free trade throughout the whole region in twelve years (it failed). This effort was renewed in 1980 by the Latin American Integration Association (ALADI), which promoted a more gradual approach to creating a common market (it is still officially in the works). Sub-regionally, Bolivia, Colombia, Ecuador, and Peru came together to create the Andean Community (CAN) to promote Andean integration in 1969. In the late 1980s onetime rivals Argentina and Brazil, began negotiating agreements that evolved into Mercosur (bringing in Uruguay and Paraguay along the way). Bilateral relations have advanced as well, with over fifty trade agreements signed with neighbors in as many years. Yet despite the lofty rhetoric and the proliferation of dozens of agreements, a real question remains—whether there is anything to show for all these integration efforts. Many dismiss the weight of these bodies. Even Secretary of State Hillary Clinton warned that without changes the OAS, one of the longest-standing regional organizations, could soon become irrelevant. The numbers too question the importance of the neighborhood. For instance, the region’s economies still depend more on the United States, the EU, and increasingly Asia than on their neighbors. The next series of blog posts will look at the current state of affairs in different areas of integration: economic (including trade and regulation), political, and social (students, tourists, and migrants). Overall while the dream of regional integration still inspires, it largely remains just that. Nevertheless, there have been significant changes on the ground in the last decade. The development of new political and social organizations, and, as importantly, informal integration through investment, studies, and the workplace has and will continue to have a significant effect on how Latin American countries cultivate closer ties, and, more broadly, the paths future integration efforts may take.

In the most recent July/August issue of Foreign Affairs, many people including Richard Lapper, Larry Rohter, Ronaldo Lemos, and myself respond to Ruchir Sharma’s May/June article “Bearish on Brazil,” which predicted that Brazil’s rise would end as soon as global commodity prices leveled out. In my piece, “Stability is Success,” I argue that while it is true that challenges remain for Brazil, its recent reforms and social programs have helped develop the economy and middle class in such a way that the country will no longer rise and fall solely on the basis of external market fluctuations. Ruchir Sharma ("Bearish on Brazil," May/June 2012) argues that Brazil’s incredible rise over the past ten years has depended on the sale of commodities, and that as commodity markets begin to slow, so, too, will Brazil’s growth. Sharma correctly notes that in the coming years, Brazil will likely need to confront a decline in commodity purchases from China. But he fails to recognize that economic stability has also driven Brazil’s growth. Throughout the late twentieth century, Brazil suffered from failed stabilization policies and devastating bouts of hyperinflation. In 1994, however, Brazil introduced a new currency, the real, which has kept inflation in check. Around this time, the government also began lowering tariffs, opening up markets, and privatizing industries, policies entrenched over the next decade by former Brazilian President Luiz Inácio Lula da Silva. These reforms convinced local and international skeptics that Brazil would not return to the days of closed markets and inflation—an evolution that, more so than the commodity craze, has spurred Brazil’s economic boom over the last decade. Sharma argues that the very measures Brazil has taken to reach this stability will hold the country back. In particular, he claims that Brazil’s spending on welfare programs, such as Bolsa Família, an initiative that provides cash transfers to low-income parents who get their children vaccinated and keep them in school, has reduced inequality at the expense of development. Yet history suggests that to achieve sustainable growth, governments must care for the young, the old, and the less fortunate. European countries and the United States began building their own social safety nets at far lower levels of per capita income than those of emerging-market states today, thus expanding productivity and boosting demand. Indeed, numerous studies conducted by the World Bank and others suggest that the reduction of inequality in middle-income countries, such as Brazil, actually boosts economic progress. What is more, several studies of Brazil itself, performed by Fundação Getulio Vargas, a Brazilian research institution, demonstrate that Bolsa Família has increased self-employment and domestic consumption. Other studies, such as ones conducted by the International Food Policy Research Institute, show that the children of the families that receive aid from Bolsa Família are healthier and spend more time in school—offering the best hope for the increase in skilled workers that Sharma prescribes. Meanwhile, Sharma compares Brazil to China, arguing that Brasília has restrained development whereas Beijing has promoted it. Yet in making that contrast, Sharma overlooks the disparate levels of average income between Brazil and China, especially for the poor. According to the International Monetary Fund, per capita income in China, where GDP has risen rapidly over the past two decades, remains less than half of that in Brazil. And over the past ten years, the average income of Brazil’s bottom 20 percent has grown by around 10 percent, the same rate as China’s total GDP growth. Brazil has also outperformed China in enlarging the size of its middle class. According to a study performed by the Brookings Institution, roughly half of Brazil’s population is now considered middle class, compared with less than ten percent in China. Brazil has brought so many people out of poverty not just by selling commodities but also by diversifying its economy, expanding its financial and service sectors, and reducing inequality. Such policies have created a strong base of domestic consumers that has helped power Brazil’s economic rise and tempered the effects of external shocks, such as the 2008 global financial crisis. Despite all of this, Sharma mentions the Brazilian middle class only once. Brazil faces many problems, from poor education and infrastructure to a complex bureaucracy and complicated tax regulations. The question is whether the country can solidify its gains and attain long-term growth—an outcome that will depend on far more than commodity markets. Click here to read Ruchir Sharma’s response to this piece, as well as his reaction to Richard Lapper’s, Larry Rohter’s, and Ronaldo Lemos’ articles.

Last year foreign direct investment (FDI) in Latin America continued its surge, topping $150 billion, an all time high for the region. According to the Economic Commission for Latin America and the Caribbean’s report “Foreign Direct Investment in Latin America and the Caribbean,” the inflows climbed 31 percent—the most of any region and three times Asia’s growth rate—and now represent just over 10 percent of total global investment (breaking into the double digits for the first time as well). While nearly all countries gained, the largest recipient, unsurprisingly, was Brazil. There, investments rose by 37 percent, and in a change from the past, flowed mostly into the manufacturing and service sectors (the largest single investment coming from the German conglomerate ThyssenKrupp’s construction of a $7 billion steel exporting plant). Inflows to Mexico and Central America were also led by manufacturing and services (including tourism, banking, and the automotive sectors). Only in South America (excluding Brazil), did most of the investment remain in commodities and natural resources. Despite tough times at home, Europe led with some $35 billion in investment. Anecdotes suggest that the profitability of Latin American subsidiaries and operations have helped keep some European companies afloat (for instance the Spanish banks Santander and BBVA). Following in total inflows was the United States, and, if taken in the aggregate, other Latin American states (which invested nearly $23 billion). Interestingly, these countries, Japan, and Canada all outpaced China’s involvement. The report also touches on the quality of FDI flows, and its potential to transform Latin America’s economies for the better through job creation, technology transfers, capacity building, and the like. Here the story is better than in the past, but still cautionary. More investment (now over one-third) went into what can be considered medium-high tech sectors, such as chemicals, autos, and machinery. Most of this uptick occurred in Latin America’s largest economies, Brazil and Mexico. The study also shows that investment in high end technology and research and development remains small (less than 5 percent) and concentrated in Brazil. Foreign direct investment is a useful gauge of investor confidence and, indirectly, potential economic growth. Here Latin America’s decade of macroeconomic stability, natural resource endowments, and expanding domestic markets (due to a growing regional middle class) have drawn increased attention and dollars. The challenge for the region is to funnel the growing investment to benefit its citizens alongside these international companies and investors, creating jobs, enhancing learning, and increasing productivity in ways that will let Latin America compete globally in the long term.