Mexico

18 million Latin Americans—1 in 5 of those between the ages of 15 and 24—neither work nor attend school. Commonly dubbed “ninis” (ni estudian ni trabajan), a new World Bank report looks at this phenomenon across the region. Latin America’s share falls near the world average—far better than the Middle East and North Africa, where one in three roam the streets, but nearly double the rate of industrialized nations. It also varies by nation. In Peru there are fewer ninis than in the United States, while in Central America over a quarter of adolescents are disconnected. The majority are young poor urban women who drop out of school or the workforce after a teen pregnancy or early marriage. The men come from similar backgrounds, leaving school for a precarious job market. In general, conditions are getting better—the share of ninis fell from 23 to 19 percent of young people between 1992 and 2010. These percentage improvements come almost solely from young women, who now stay in school longer, and, when they do leave, find jobs. For men, those that abandon school struggle to find work, filling the ranks of the 2 million more ninis than in the past. Latin America’s disengaged youth threaten the region’s economic advancement. Studies show that lifetime earning power dissipates with just a few years out of the workforce, as individuals stop accumulating human capital and skills. Once excluded, many will only find work in the informal sector—where they will earn less, be less productive, and receive fewer benefits. This reinforces the region’s inequality—with most ninis coming from the lower socioeconomic ranks, they and their families will likely stay there. Excluding millions of young people also wastes Latin America’s current demographic bonus. If these countries are to grow rich before they grow old, they can’t have 18 million working age people on the sidelines. And the disconnectedness links to rising violence, particularly in Mexico, Colombia, and Central America where levels of violence and ninis spiked together. A report by the Wilson Center shows the single most predictive factor of Central American violence is schooling—the more education local youths have the less violent their neighborhood. Broader criminology studies echo this finding—that as education rises crime falls. For policymakers taking on the ninis problem, one challenge is keeping young people in school. They need to convince kids and their families that school matters, and help support this choice—in the form of conditional cash transfers, scholarships, and other policies—so that children don’t have to choose between the classroom and sustenance. Another challenge is ensuring that when kids graduate they find work. Through job training, entrepreneurship programs, and employment services, governments can help link jobseekers with companies and opportunities. The regional economic downturn, leaving so many more vulnerable, makes a response all the more important.

Last week, I had the pleasure of joining Jim Zirin on "Conversations in the Digital Age" to discuss U.S. immigration and the U.S.-Mexico relationship. Recently aired, you can watch the interview here.

In a post originally published on ForeignPolicy.com, Shannon O’Neil explains what Brazil and the rest of Latin America can teach the United States about keeping unregulated donations out of elections. On September 17, Brazil’s Supreme Federal Court ruled corporate contributions to political campaigns unconstitutional. The case, brought forward by Brazil’s bar association in 2013, ends companies’ outsized influence in electoral campaigns, contributing to the country’s ongoing efforts to root out corruption. The American political system could learn a thing or two from Brazil about the dangers of letting corporate donations run amok, as the Latin American nation works to check the private sector’s influence on its elections. Since the 2010 Citizens United Supreme Court decision, corporations have been able to contribute unlimited amounts to Super PACs (they still can’t contribute directly to candidates) backing candidates running for political office. Even worse, they can also do so through “social welfare” organizations, effectively rendering their donations anonymous. As a result, corporate and anonymous contributions have grown exponentially. As of August 4, super PACs had already raised more than ten times their take at this point in the last presidential cycle. Former Governor Jeb Bush and the super PAC that backs him brought in a combined $114 million in just the first half of this year. Campaign finance laws in the United States diverge substantially from those in Latin America, which uniformly frowns on unlimited individual donations. Despite having no shortage of wealthy, politically connected men and women, these nations limit their economic power over electoral contests. Individual contributions, in general, play a small role in political campaigns in the region. Whereas a Sheldon Adelson or George Soros can effectively buy a primary candidate in the United States via donations to outside spending groups (Newt Gingrich effusively thanked Adelson in 2012 for single-handedly keeping his campaign alive), Mexican telecom mogul Carlos Slim can only donate to parties: aggregate individual contributions in Mexico can’t rise above ten percent of total party financing. Brazil is more lax: its richest man, Jorge Paulo Lemann, can donate up to ten percent of his previous year’s income to campaigns—granted, that’s still a lot of money, but at least it’s regulated. Rather than relying on wealthy individual donors, many countries across the Western Hemisphere fund their elections with public money—over half of all Latin American democracies, in fact. And while most allow some corporate financing of campaigns, they impose more stringent limits than in the United States. Colombia forbids corporate money in presidential races. Costa Rica, Ecuador, and Paraguay have banned all corporate donations to political campaigns, due in part to worries about their power to skew the political process. Many of these electoral systems try to diminish the role of money altogether by instituting spending caps. Mexico, for one, has taken this to the extreme. For its federal deputy races, the rules limit campaign spending to roughly $85,000, or $1,400 a day. The National Electoral Institute also controls the airwaves, buying and then allocating advertising slots to candidates and parties. This brings us to Brazil, which, until recently, proved the exception to its neighbors’ rules. Brazilian companies, if they chose, could donate up to two percent of gross revenues to campaigns (equivalent to nearly $1 billion a piece for its biggest players). Construction conglomerate Odebrecht, meat processing company JBS, bank Santander Brasil, sugar and ethanol producer Copersucar, and a handful of other multibillion-dollar corporations accounted for more than ninety percent of all spending in last year’s presidential elections and some $580 million across all elections in 2014. The pay-for-play nature of these direct contributions was most visible during the 2012 election, when the construction company Andrade Gutierrez increased its political contributions by 500 times over the last election, just as federal and state governments were awarding contracts for the World Cup soccer stadiums. (Andrade Gutierrez would win one-quarter of the bids, including one for a $900 million stadium in Brasilia.) The still-unfolding Operation Carwash scandal upended this status quo. Not content with their legal campaign finance channels, major companies in Brazil overcharged state-backed energy company Petrobras for construction and service work, and then shared some $2 billion in spoils with Brazil’s political parties (as well as Petrobras executives). In the scandal’s wake, the treasurer of the governing Workers’ Party landed in jail. The lower house speaker of the National Congress and Brazilian Democratic Movement Party leader has been indicted, and dozens of other prominent politicians and party leaders are under investigation for graft. The recent Brazilian Supreme Court ruling addressed the resulting citizen outrage. Having taken on corporate malfeasance and meddling, the country now needs to rebuild its democratic political process. The United States, too, may face a similar conundrum, with corporate donations successfully dominating pay-to-play politics. What the United States and Latin America do share is a worrisome lack of transparency in campaign money flows, making it hard to know who is influencing the rules, regulations, and policy decisions affecting citizens’ daily lives. In the United States, this results from laws and court decisions shielding big donors from public scrutiny. Organizations with innocuous names like Right to Rise funnel hundreds of millions of dollars in “dark money” to causes and candidates. In most of Latin America, the lack of transparency stems not from the rules themselves but from their weak enforcement. Hundreds of millions of dollars, if not billions, flow illegally into electoral campaigns throughout the region. The public rarely gains a glimpse of these payouts. But when it does, the foul play is shocking: authorities stopping a plane full of pesos in Mexico or suitcases stuffed with Venezuelan cash ending up in Argentina. These campaign finance shenanigans breed broader systemic political corruption, as witnessed in the scandals unfolding in Brazil, Mexico, Chile, and Guatemala. All democracies struggle with the deep ties between campaign finance and corruption. In Brazil, the payoff from corporate campaign contributions has been surprisingly direct: one study estimated a fourteen-fold return on contributions to a winning candidate in the form of awarded public works projects. In the United States, the connections are usually more opaque, walking the fine line between constituency service and political corruption. And the estimated returns on investment for campaign contributions are much lower, with direct lobbying by far the most economically effective way for corporations intent on influencing policy. The challenges differ: The United States needs better rules, while Latin America needs better enforcement. All the nations across the Western Hemisphere need to improve electoral transparency—essential for democracy—enabling citizens and voters to know who gives what to whom, thereby allowing them to use their gray matter to figure out why.

In a post originally published on ForeignPolicy.com, Shannon O’Neil explains what Brazil and the rest of Latin America can teach the United States about keeping unregulated donations out of elections. On September 17, Brazil’s Supreme Federal Court ruled corporate contributions to political campaigns unconstitutional. The case, brought forward by Brazil’s bar association in 2013, ends companies’ outsized influence in electoral campaigns, contributing to the country’s ongoing efforts to root out corruption. The American political system could learn a thing or two from Brazil about the dangers of letting corporate donations run amok, as the Latin American nation works to check the private sector’s influence on its elections. Since the 2010 Citizens United Supreme Court decision, corporations have been able to contribute unlimited amounts to Super PACs (they still can’t contribute directly to candidates) backing candidates running for political office. Even worse, they can also do so through “social welfare” organizations, effectively rendering their donations anonymous. As a result, corporate and anonymous contributions have grown exponentially. As of August 4, super PACs had already raised more than ten times their take at this point in the last presidential cycle. Former Governor Jeb Bush and the super PAC that backs him brought in a combined $114 million in just the first half of this year. Campaign finance laws in the United States diverge substantially from those in Latin America, which uniformly frowns on unlimited individual donations. Despite having no shortage of wealthy, politically connected men and women, these nations limit their economic power over electoral contests. Individual contributions, in general, play a small role in political campaigns in the region. Whereas a Sheldon Adelson or George Soros can effectively buy a primary candidate in the United States via donations to outside spending groups (Newt Gingrich effusively thanked Adelson in 2012 for single-handedly keeping his campaign alive), Mexican telecom mogul Carlos Slim can only donate to parties: aggregate individual contributions in Mexico can’t rise above ten percent of total party financing. Brazil is more lax: its richest man, Jorge Paulo Lemann, can donate up to ten percent of his previous year’s income to campaigns—granted, that’s still a lot of money, but at least it’s regulated. Rather than relying on wealthy individual donors, many countries across the Western Hemisphere fund their elections with public money—over half of all Latin American democracies, in fact. And while most allow some corporate financing of campaigns, they impose more stringent limits than in the United States. Colombia forbids corporate money in presidential races. Costa Rica, Ecuador, and Paraguay have banned all corporate donations to political campaigns, due in part to worries about their power to skew the political process. Many of these electoral systems try to diminish the role of money altogether by instituting spending caps. Mexico, for one, has taken this to the extreme. For its federal deputy races, the rules limit campaign spending to roughly $85,000, or $1,400 a day. The National Electoral Institute also controls the airwaves, buying and then allocating advertising slots to candidates and parties. This brings us to Brazil, which, until recently, proved the exception to its neighbors’ rules. Brazilian companies, if they chose, could donate up to two percent of gross revenues to campaigns (equivalent to nearly $1 billion a piece for its biggest players). Construction conglomerate Odebrecht, meat processing company JBS, bank Santander Brasil, sugar and ethanol producer Copersucar, and a handful of other multibillion-dollar corporations accounted for more than ninety percent of all spending in last year’s presidential elections and some $580 million across all elections in 2014. The pay-for-play nature of these direct contributions was most visible during the 2012 election, when the construction company Andrade Gutierrez increased its political contributions by 500 times over the last election, just as federal and state governments were awarding contracts for the World Cup soccer stadiums. (Andrade Gutierrez would win one-quarter of the bids, including one for a $900 million stadium in Brasilia.) The still-unfolding Operation Carwash scandal upended this status quo. Not content with their legal campaign finance channels, major companies in Brazil overcharged state-backed energy company Petrobras for construction and service work, and then shared some $2 billion in spoils with Brazil’s political parties (as well as Petrobras executives). In the scandal’s wake, the treasurer of the governing Workers’ Party landed in jail. The lower house speaker of the National Congress and Brazilian Democratic Movement Party leader has been indicted, and dozens of other prominent politicians and party leaders are under investigation for graft. The recent Brazilian Supreme Court ruling addressed the resulting citizen outrage. Having taken on corporate malfeasance and meddling, the country now needs to rebuild its democratic political process. The United States, too, may face a similar conundrum, with corporate donations successfully dominating pay-to-play politics. What the United States and Latin America do share is a worrisome lack of transparency in campaign money flows, making it hard to know who is influencing the rules, regulations, and policy decisions affecting citizens’ daily lives. In the United States, this results from laws and court decisions shielding big donors from public scrutiny. Organizations with innocuous names like Right to Rise funnel hundreds of millions of dollars in “dark money” to causes and candidates. In most of Latin America, the lack of transparency stems not from the rules themselves but from their weak enforcement. Hundreds of millions of dollars, if not billions, flow illegally into electoral campaigns throughout the region. The public rarely gains a glimpse of these payouts. But when it does, the foul play is shocking: authorities stopping a plane full of pesos in Mexico or suitcases stuffed with Venezuelan cash ending up in Argentina. These campaign finance shenanigans breed broader systemic political corruption, as witnessed in the scandals unfolding in Brazil, Mexico, Chile, and Guatemala. All democracies struggle with the deep ties between campaign finance and corruption. In Brazil, the payoff from corporate campaign contributions has been surprisingly direct: one study estimated a fourteen-fold return on contributions to a winning candidate in the form of awarded public works projects. In the United States, the connections are usually more opaque, walking the fine line between constituency service and political corruption. And the estimated returns on investment for campaign contributions are much lower, with direct lobbying by far the most economically effective way for corporations intent on influencing policy. The challenges differ: The United States needs better rules, while Latin America needs better enforcement. All the nations across the Western Hemisphere need to improve electoral transparency—essential for democracy—enabling citizens and voters to know who gives what to whom, thereby allowing them to use their gray matter to figure out why.

The first decade of the 21st century was a good one for Latin America. A recent Pew Research Center report estimates that some 63 million individuals entered the middle class, measured as earning between ten and twenty dollars a day. Add in the 36 million more members of the upper-middle class, and 47 percent of those in South America—a near majority—are no longer poor. Mexico brought over 10 million people into its middle ranks during the decade, raising the combined share of the middle and upper classes to roughly 38 percent of the population. George Gao, "Latin America’s Middle Class Grows, but in Some Regions More Than Others," 2015. Unsurprisingly, the commodity boom helped. Demand for oil, soybeans, copper, iron ores, and numerous other raw materials boosted investment, increased exports, and created jobs. Abundant global capital and easy credit spurred public and private consumption, lifting consumption of the middle even more, and supporting expanding retail sectors and employment. Government policies, in particular conditional cash transfer programs such as Oportunidades in Mexico and Bolsa Familia in Brazil reduced inequality and poverty as well. With historically low unemployment rates and rising real wages, the middle thrived. World Bank, "World Development Indicators," 2015. World Bank, "World Development Indicators," 2015. Slowing growth since 2013 is now reversing some of these gains. With Brazil, Argentina, and Venezuela already in recession, the IMF projects regional growth of just half a percent for 2015. Falling commodity prices and higher public and consumer debt levels mean exports and consumption are down. As nations search for new growth engines, weak schools, bad infrastructure, and limited R&D investment leave them with few easy short-term options. Governments too are limited in their ability to fill the gaps, given increased debt loads and relatively weak tax collection. The report is somewhat pessimistic about the prospects for this newly emerging middle class. Many live paycheck to paycheck, and are deeply indebted. In Brazil, average household debt—mostly high interest consumer credit—now stands at 46 percent of disposable income. One study estimates that 14 percent will fall back into poverty in the coming decade. The prognosis is not all bleak. Central America, which missed the earlier uptick, could see its middle class grow. And recent data from Mexico shows poverty continuing to decline in many of its northern states (even as it rose overall). Interestingly, the positive results in many Mexican states and hopes for Central America’s middle ranks depend on U.S. trade ties. The United States remains the world’s largest consumer market, its draw heightened as China falters and the EU stagnates. And U.S.-Latin America exchanges are more likely to rely on manufactured goods and services than raw materials, another benefit as these nations work to protect and expand their middle income sectors. Whether countries are able or not to expand these ties, the coming decade will prove much harder for the region, both for those that gained and those that did not, during the boom.

2015 is shaping up to be the anti-corruption year for Latin America. After resigning last week in the face of a growing corruption scandal, Guatemalan President Pérez Molina now faces trial and potentially jail. Investigations into government corruption have disrupted politics as usual in Brazil, Chile, and Mexico, while scandals continue to unfold in Argentina and Panama. The Dickens quote "it was the best of times, it was the worst of times” is perhaps too dramatic, but differences in how the cases are playing out across the region are quite striking. In Brazil and Guatemala, wide-ranging investigations have led to prosecutions and convictions of many of the nations’ most connected political and economic elites. In contrast, in Mexico, President Peña Nieto, the first lady, and the finance minister were recently cleared of conflict of interest allegations, and in Chile, President Bachelet’s son, Sebastián Dávalos, has so far evaded criminal charges in an influence-peddling scheme. The divergent outcomes are due in part to the differing nature of the alleged crimes. In Brazil and Guatemala, officials are charged with embezzling public funds. Through the use of wiretaps, email monitoring, and financial forensics, Brazilian prosecutors traced the flows of hundreds of millions of dollars that private companies overcharged the state-led energy company Petrobras for construction and service work, and then distributed among themselves and into political party coffers. And the Guatemalan president and the vice president are accused of running a customs fraud operation, pocketing tens of millions of dollars in import duties. The Chilean and Mexican cases on the other hand are about profiting from political access. In Chile, Caval, a company half-owned by Bachelet’s daughter-in-law, received a $10 million loan from Andronico Luksic through his Bank of Chile the day after Bachelet was reelected president. Her daughter-in-law and son then used the money to flip real estate, using insider information to buy land that was expected to quickly soar in value when the local government reclassified it for commercial development—reaping $5 million in profit. In Mexico, the president, first lady, and finance minister purchased homes from Grupo Higa, a construction conglomerate awarded hundreds of millions of dollars in public works contracts. The alleged links in both cases between favorable financial terms and political favors—and wrongdoing—are more difficult to prove than the embezzlement schemes. The divergent outcomes also reflect the importance of independent and tenacious prosecutors. Brazilian attorney general Rodrigo Janot and his team have gone after dozens of high profile suspects, including Eduardo Cunha, head of Brazil’s lower house of Congress; construction magnate Marcelo Odebrecht; and former President Lula da Silva, despite pushback from many economic and political leaders (President Rousseff has repeatedly supported the investigations). The enterprising Guatemalan attorney general Thelma Aldana has found a sophisticated and willing partner in the UN-backed and independent International Commission against Impunity in Guatemala (CICIG), using its ten years of experience building corruption cases to take on the nation’s highest ranking officials. This hasn’t been the case with Chile’s and Mexico’s more halting and limited prosecutorial investigations. In Chile, prosecutors have been slow in advancing the case against the Bachelet family, hindered by Dávalos ordering his computer erased before leaving the presidential offices at La Moneda. No whistleblowers have come forward; his former coworkers maintain their silence. In Mexico, the federal comptroller, an office created by and reporting to the president, led the investigation and limited its scope from the beginning. The comptroller cleared the president, the first lady, and the finance minister after determining that the property transactions pre-dated the administration and contract terms weren’t changed once they took office. In finance minister Videgaray’s case, the comptroller further decided that the intent to purchase (which occurred before he assumed his current office) mattered more than the signing and notarizing of documents. The investigation revealed the actual closing occurred months later and the cashing of the check didn’t happen until a few days before the Wall Street Journal broke the story. As Latin American nations work to break out of the middle-income trap, and struggle to grow in the face of global economic headwinds, the ability to take on corruption will increasingly matter. Corruption favors connections over quality, stifles entrepreneurship, and scares away foreign direct investment. This seems to be a lesson two of Latin America’s most open economies have yet to learn.

2015 is shaping up to be the anti-corruption year for Latin America. After resigning last week in the face of a growing corruption scandal, Guatemalan President Pérez Molina now faces trial and potentially jail. Investigations into government corruption have disrupted politics as usual in Brazil, Chile, and Mexico, while scandals continue to unfold in Argentina and Panama. The Dickens quote "it was the best of times, it was the worst of times” is perhaps too dramatic, but differences in how the cases are playing out across the region are quite striking. In Brazil and Guatemala, wide-ranging investigations have led to prosecutions and convictions of many of the nations’ most connected political and economic elites. In contrast, in Mexico, President Peña Nieto, the first lady, and the finance minister were recently cleared of conflict of interest allegations, and in Chile, President Bachelet’s son, Sebastián Dávalos, has so far evaded criminal charges in an influence-peddling scheme. The divergent outcomes are due in part to the differing nature of the alleged crimes. In Brazil and Guatemala, officials are charged with embezzling public funds. Through the use of wiretaps, email monitoring, and financial forensics, Brazilian prosecutors traced the flows of hundreds of millions of dollars that private companies overcharged the state-led energy company Petrobras for construction and service work, and then distributed among themselves and into political party coffers. And the Guatemalan president and the vice president are accused of running a customs fraud operation, pocketing tens of millions of dollars in import duties. The Chilean and Mexican cases on the other hand are about profiting from political access. In Chile, Caval, a company half-owned by Bachelet’s daughter-in-law, received a $10 million loan from Andronico Luksic through his Bank of Chile the day after Bachelet was reelected president. Her daughter-in-law and son then used the money to flip real estate, using insider information to buy land that was expected to quickly soar in value when the local government reclassified it for commercial development—reaping $5 million in profit. In Mexico, the president, first lady, and finance minister purchased homes from Grupo Higa, a construction conglomerate awarded hundreds of millions of dollars in public works contracts. The alleged links in both cases between favorable financial terms and political favors—and wrongdoing—are more difficult to prove than the embezzlement schemes. The divergent outcomes also reflect the importance of independent and tenacious prosecutors. Brazilian attorney general Rodrigo Janot and his team have gone after dozens of high profile suspects, including Eduardo Cunha, head of Brazil’s lower house of Congress; construction magnate Marcelo Odebrecht; and former President Lula da Silva, despite pushback from many economic and political leaders (President Rousseff has repeatedly supported the investigations). The enterprising Guatemalan attorney general Thelma Aldana has found a sophisticated and willing partner in the UN-backed and independent International Commission against Impunity in Guatemala (CICIG), using its ten years of experience building corruption cases to take on the nation’s highest ranking officials. This hasn’t been the case with Chile’s and Mexico’s more halting and limited prosecutorial investigations. In Chile, prosecutors have been slow in advancing the case against the Bachelet family, hindered by Dávalos ordering his computer erased before leaving the presidential offices at La Moneda. No whistleblowers have come forward; his former coworkers maintain their silence. In Mexico, the federal comptroller, an office created by and reporting to the president, led the investigation and limited its scope from the beginning. The comptroller cleared the president, the first lady, and the finance minister after determining that the property transactions pre-dated the administration and contract terms weren’t changed once they took office. In finance minister Videgaray’s case, the comptroller further decided that the intent to purchase (which occurred before he assumed his current office) mattered more than the signing and notarizing of documents. The investigation revealed the actual closing occurred months later and the cashing of the check didn’t happen until a few days before the Wall Street Journal broke the story. As Latin American nations work to break out of the middle-income trap, and struggle to grow in the face of global economic headwinds, the ability to take on corruption will increasingly matter. Corruption favors connections over quality, stifles entrepreneurship, and scares away foreign direct investment. This seems to be a lesson two of Latin America’s most open economies have yet to learn.

Hillel Soifer’s new book, State Building in Latin America, presents an interesting historical perspective on today’s current state capacity in Latin America, and why some countries are so much better able than others to not just control territory but also to deliver for their people. Somewhat dispiritingly, he finds that state capacity, measured in terms of education, health care, military mobilization, and other indicators has changed little over the last century. Government agencies’ abilities haven’t deviated much, despite the rise and fall of conservatives and populists, of democrats and dictators, of economic booms and busts. None seem to have fundamentally altered the ability of states to provide public goods. Those that were strong in 1900 are strong now; those weak then remain so. So what made the difference? He lays out two factors that emerged in the nineteenth century: whether political elites tried to build a strong state and then whether they succeeded. These in turn depend on other causes. The decision to try depends on whether elites clustered in one or in many cities or regions. Those with a single center were more likely to see state building as the way to “order and progress,” extending the center toward the periphery. Those with multiple hubs of economic and political activity were less likely to develop a coherent ideology, much less one that involved building up the central government. For those countries that did embark on a state building mission, other factors determined whether it worked or not. If the national government sent out its own bureaucrats to deliver services, the state grew in abilities and reach. If they left it to local elites, little happened. He then shows how these arguments apply to four cases: Colombia, Peru, Chile, and Mexico. Colombia never tried to create a stronger state; Peru tried and failed; Mexico and Chile both tried and succeeded to varying degrees. Soifer’s empirical chapters draw on government archives, newspaper announcements, immunization records, school enrollments, and many other sources, tracing the efforts and outcomes to try and build up the central government’s capacity. In his exhaustive research, he finds some interesting kernels that shed light on today’s pressing topics. For instance in Mexico in the late 1800s, school systems developed differently by state. In Michoacán and Guerrero local elites controlled the rollout, and enrollment stagnated, even back then. In Sonora and other northern states, the building out of their educational systems was turned over to bureaucrats from out-of-town; the number of kids entering school surged. These trajectories led to the deep divides that continue today and are at the center of the current struggle to reform Mexico’s education system. With “nation building” an at times uneasy part of U.S. foreign policy, Soifer’s carefully constructed argument and analysis provides insight into why it is so hard to do. It isn’t a lack of resources that many bemoan. It is oftentimes alliances with local elites. While they may quell unrest in the short term, they also can undermine the project itself, elevating challengers rather than allies in the quest to build government capacity. His work shows too that ideas matter: without leaders committed to a stronger state little will occur, whatever the intentions of outside participants and donors. For Latin America, his work leads to a clear eyed but somewhat pessimistic conclusion. The World Bank, Inter-American Development Bank, IMF, and others routinely identify the same set of factors as holding the region back: bad infrastructure, poor schools, weak rule of law, inequality, low productivity. Soifer’s conclusions suggest the usual policy recommendations—doling out concessions and forming public-private partnerships, writing new textbooks and instituting teacher evaluations, or retraining police and rewriting judicial rules—won’t change things. The challenge is a more fundamental one of capacity. And the question remaining is are there other paths than those he expertly illustrates to creating a better and stronger state.

Mexico’s national GDP numbers remain lackluster. In 2014, the country grew 2.1 percent, and forecasts for 2015 predict a modest 3 percent increase. Yet these numbers mask the great diversity within and between the nation’s thirty-two federal entities. The Bajío region experienced Asian rates of growth last year—Queretaro up 14.3 percent, Aguascalientes 14.2 percent, Guanajuato 7.4 percent, and Jalisco 3.7 percent. Home to auto and aerospace hubs, these states receive increasing shares of foreign direct investment. Think tank México ¿Cómo Vamos? expects these states to continue to drive economic growth numbers going forward. Many of Mexico’s northern states saw strong upturns as well. Nuevo Leon, home to industrial city of Monterrey, grew 5.4 percent in 2014. In Chihuahua, Coahuila, and Tamaulipas close ties to a recovering United States seemed to outweigh continuing security challenges, with combined growth edging out the nation’s average. In contrast, Mexico City and the State of Mexico, comprising over a quarter of national GDP, grew just 1 percent. Southern states Chiapas and Oaxaca trailed the national rate as well. Guerrero and Michoacán were boosted temporarily by influxes of government funds for disaster relief and security respectively, but their longer term growth rates remains below average. These four states score the lowest on the United Nation’s human development index. And falling oil prices have hit the energy-rich southern states, in particular Tabasco and Campeche. These differing trends threaten to aggravate already deep economic divides, creating virtuous and vicious circles in terms of infrastructure, education, and opportunities. Federal efforts to redistribute wealth, specifically the Fondo Regional which provides grants for lesser developed states, maintains a MXN$6 billion budget (roughly US$400 million), not nearly enough to overcome ingrained disparities. These differential growth rates have the potential to shape regional and national politics. Economic expansion didn’t temper voter dissatisfaction this time—the Partido Revolucionario Institucional (PRI) lost the Queretaro governorship to the Partido Acción Nacional (PAN), and Nuevo Leon to the independent Jaime “El Bronco” Rodriguez. But as Mexico looks to twelve governor races in 2016, notably in Oaxaca, Puebla, Tamaulipas, and Veracruz, local economic growth rates will surely matter. So too will good governance—a dominant issue behind the 2015 results. And as the race for the 2018 presidency begins (already Margarita Zavala, Miguel Ángel Mancera, and Andrés Manuel López Obrador have publicly put forth their names), it needs to be a party, not just a candidate, who most convincingly promises to bring growth and governance to broader Mexico to stop the fragmentation of the political system.

This post was co-authored by Gilberto Garcia, research associate for Latin America Studies at the Council on Foreign Relations. How can countries boost productivity and economic competitiveness? Many economists and business leaders turn to economic clusters as an answer. English economist Alfred Marshall first wrote about clusters—the geographic grouping of firms in the same or similar industries—at the turn of the twentieth century. He saw numerous entrepreneurs drawn to particular locations due to physical endowments, and their parallel efforts leading to whole new industries—think California vineyards, Texas oil, or Maine lobster. Proliferation and proximity then brought other advantages: developing a pool of skilled workers, and attracting industry suppliers. As a cluster grew, firms would specialize on a particular step of the production process, increasing their productivity and profits. A century later Harvard Business School professor Michael Porter picked up the idea, envisioning clusters as a way for firms to become or stay competitive in the global economy. For him, the biggest advantage is that proximity enables cooperation. In addition to the workforce and supply chain benefits, firms are more likely to come together to form active business associations, to work with local governments to invest in infrastructure, and to partner with local universities to tailor coursework and research. In the United States, Silicon Valley is the most successful example—with the interaction between startups, large corporations, local governments, and world class universities creating trillions of dollars in wealth and redefining daily life through inventions including the smartphone (Apple), streaming home video (Netflix), and online social networking (Facebook). Many of Latin America’s most promising sectors came about through clustering as well. The aerospace industry in Queretaro, Mexico began with Canada’s Bombardier in 2006, initially attracted by low wages. The state and federal government then worked to attract other producers through tax incentives, cutting bureaucratic red tape, and new trade agreements. The government started a new Aeronautic University, and together with the companies, developed curriculum and shared tuition costs. More than a dozen aerospace companies now operate in the city, bringing in some $500 million in foreign direct investment over the last five years. In 2014 Mexico’s aerospace industry exported more than $6 billion, supporting 45,000 direct jobs and at least twice that number indirectly. In Chile, business and government came together to expand and transform the salmon farming industry. Like minded companies came together to form Salmonchile, a business association that established industry standards and sought out new markets, in particular the United States. The public-private Chile Foundation backed pioneer firms, funded R&D, and passed on best practices to other emerging producers. Over time, Chile’s salmon clusters acquired know-how and developed new technologies, increasing production. By 1992, Chile became the second-largest global salmon producer, and by 2014, exports topped $4 billion, second only to copper. Other Latin American efforts have failed. In the 1970s and 1980s as Brazil opened its markets, shoemakers in Rio Grande do Sul grew rapidly, making leather shoes for numerous large U.S. buyers. Supported mostly by their international clients, numerous Brazilian firms upped production and improved quality. Yet by the early 1990s, these same firms were undercut by cheaper Chinese shoes. With little inter-firm cooperation or support from the government, the potential cluster lost its edge, falling behind in output and never expanding into shoe design or branding. Can, and if so, how can nations create these dynamic ecosystems? Chile is trying with Start-Up Chile, a government program that gives $40,000 and a temporary one-year visa to foreign entrepreneurs to begin their ventures in the Southern Cone nation. Now five years old, it boasts few successes. The young companies are hindered by the short time horizon and limited local venture capital money (a few of the best can receive another $100,000 in financing). 80 percent of participants leave after completing the program, many headed to the United States. If history is a guide, successful clusters grow locally and organically. Still, there is a role for governments to play in nurturing economic constellations. To start, they can protect property rights and open markets through free trade agreements. They can invest in education—including creating higher educational institutions equal to those in other nations (today no Latin American university makes the world’s top 200 as measured by Times Higher Education). And they can boost infrastructure spending, now just half of the 5 percent of GDP the World Economic Forum recommends. State and local governments in particular can encourage and work with local business associations, invest in public works and supportive zoning, develop specialized educational curriculum and training, and fund research and development. In all these efforts policymakers need a long time horizon, as changes and benefits often appear slowly. Yet it is these local custom initiatives that can constitute “smart” industrial policy, and provide promise as Latin America’s nations insert themselves into global markets.

Yesterday, Mexicans headed to the polls to vote for 500 federal deputies, 17 state legislatures, 9 governors, and more than 300 mayors. Corruption and security dominated many local discussions. And both new and old tactics emerged to influence votes. On the positive side, IMCO, a Mexican think tank led a 3 for 3 campaign, asking candidates to disclose their assets, potential conflicts of interests, and proof of paid taxes. While fewer than 400 of thousands of candidates participated, the effort and demand are a start toward greater transparency and accountability. Less encouraging, violence spiked in the lead up to elections. Several candidates and many campaign activists were murdered on the campaign trail. In the states of Chiapas, Guerrero, and Oaxaca protestors—many led by the CNTE teacher union—stole, burned, or disappeared ballot boxes. And in the week before the elections the Partido Revolucionario Institucional (PRI)-led administration decided to make the final push from analog to digital television, handing out free TVs to potential voters. Still in the end, the National Electoral Institute (INE) and the special prosecutor for electoral crimes (FEPADE) found that less than one percent of polling sites had been disrupted. The biggest news was in Nuevo León, where independent candidate Jaime Rodríguez “El Bronco” beat out the PRI’s Ivonne Álvarez for governor, garnering half of all votes. El Bronco benefited from his colorful rhetoric, bad behavior on the part of the current PRI governor Rodrigo Medina and his family, and general dissatisfaction with the establishment parties. The PRI and the Partido de la Revolución Democrática (PRD) split the governorships in violence-torn Michoacán and Guerrero, the former electing Silvano Aureoles (PRD) and the latter Héctor Astudillo (PRI) for six year terms. In Mexico’s capital, home to over twenty million citizens, preliminary results indicate the PRD took six of Mexico City’s delegations, one more than offshoot party Morena headed by Andrés Manuel López Obrador. The PRI won three delegations and the Partido Acción Nacional (PAN) won two. Morena also beat out the PRD for control of Mexico City’s legislative assembly. At the federal level, the PRI and its Green and New Alliance party allies won somewhere between 246 and 263 seats, giving it a near to slight majority in the lower house. An internally divided PAN, the left’s split, and a recovering economy helped maintain the status quo. It is likely the coming days will bring numerous challenges to individual races, testing the somewhat new INE’s and the electoral court’s (TEPJF) ability to adjudicate fairly and strengthen their independence and authority. It is also unlikely that the PRI’s victories—assuming they hold—will jumpstart a government battered by corruption scandals, low approval ratings, and strong-armed by a teacher’s union. And the implementation of its many structural reforms—education, telecommunications, financial, antitrust, and energy among others—hang in the balance.

Foreign direct investment (FDI) in Latin America fell in 2014, down 16 percent to $159 billion according to the latest ECLAC report. This outpaced global declines closer to 7 percent, and fell far behind other emerging markets, which saw investments rise 5 percent on average, and 15 percent in Asia. The declines in part reflect the lumpiness of FDI—last year’s $13 billion acquisition of Modelo beer in Mexico by Anheuser-Busch InBev inflated the overall take, compounded by this year’s $5.6 billion divestment of América Móvil by AT&T; otherwise, this year’s numbers would be roughly on par with previous years. It also reflects the end of a commodity supercycle—mining investment returns in particular have been falling and helped bring down the overall average return on FDI in the region to 5 percent from a 9 percent high in 2006. Brazil leads, with $62 billion or nearly 40 percent of total flows, followed by the Pacific Alliance countries—Mexico, Chile, Colombia, and Peru. These five received 80 plus percent of all investment from abroad. While the amount of money coming in fell, the destination mix is more encouraging. Almost half funded services, 36 percent went to manufacturing, and the rest to natural resources. The majority of investments financed medium-high and high technology projects—including automotive investments in Mexico and Brazil among others—in sectors that are more likely to bring benefits to the broader economy in terms of technology, education, and indirect job creation. While much has been made of Chinese interest in Latin America, the numbers show actual money on the table still trails far behind the Netherlands (20 percent), the United States (17 percent), and Spain (10 percent). Asian FDI totals just 6 percent—though Chinese companies did close three of the top twenty deals in 2014. The profits on Latin America’s now substantial foreign owned capital stock (after decades of FDI) have soared from less than $20 billion in 2002 to over $100 billion today. Multinationals on average repatriate roughly half of these profits, reinvesting the other part locally. This has put pressure on the current accounts of Chile, Colombia, and Peru, among others, and potentially their currencies, particularly if the investments don’t contribute much to productivity and economic growth. Looking ahead, 2015 FDI will likely flag along with Latin America’s economies, particularly in Brazil. Mexico may be the exception, where expanding auto manufacturing, some loosening of service sector regulations, and the opening of its energy sector could boost investment. And overall Latin American nations need more money in the years to come for transport infrastructure, telecommunications, and electricity, whether from domestic or foreign funds. With regional savings remaining low, FDI looks to be the most likely source.

In 2010, the homicide rate in Mexico’s Ciudad Juarez rose to over 250 per 100,000 inhabitants making it the most dangerous city in the world. Other crimes—extortions, kidnappings, and carjackings—also increased dramatically. By 2014, these rates had plummeted. The 424 reported murders still outpaced 2006 figures, but were just 14 percent of the 3,084 murders four years earlier. Last month, CFR hosted Javier Ciurlizza, program director for Latin America and the Caribbean at the International Crisis Group (ICG), Jorge Contreras, founder and coordinator of the Fideicomiso para la Competitividad y Seguridad Ciudadana, and Alejandra de la Vega, coordinator of the Mesa de Seguridad y Justicia de Ciudad Juarez, to discuss Ciudad Juarez’s recovery and potential future. According to a February 2015 ICG report, violence escalated due to three factors. First, drug cartels militarized as the value of and competition for plazas increased, and law enforcement efforts quickly followed suit. U.S. policy changes—the elimination of the ban on assault rifles, greater deportations of ex-convicts, increased border patrol—as well as a spike in cocaine prices, also played a role. Lastly, the 2008 financial crisis led to a loss of some 90,000 maquiladora jobs, providing the cartels and their gangs with easy recruits. In response, many Ciudad Juarez residents and civil society groups rallied together. They created hotlines to report kidnappings, tracked crime to share with and prod the police into action, and reached out to officials at all levels of government, finding and working with reformers while demanding the removal of the corrupted. In the wake of the 2010 Villas de Salvarcar massacre of fifteen people, the federal government turned its attention and resources to Ciudad Juarez. The federal Todos Somos Juarez initiative brought some $400 million to the city, mostly for health, education, and economic development programs. On security, the national government worked closely with state and local counterparts, as well as with citizens and civic groups through a Mesa de Seguridad y Justicia, developing strategies to cut crime. The business community also endorsed a surcharge of 5 percent of their payroll taxes to fund citizen led safety efforts, including collecting independent crime data. Combined with an economic recovery and what many analysts depict as the Sinaloa cartel triumph over its rivals, violence declined dramatically. The discussion ended focusing on whether Ciudad Juarez provides lessons for other cities struggling with insecurity. Some aspects—the long history of civic engagement, the huge influx of federal resources—are hard to replicate. But others, including Mesas bringing together the government, private sector, and civil society leaders, could perhaps gain traction. And International Crisis Group comparisons also show that there isn’t just one path—Medellin, Colombia’s recovery came from top-down state led interventions and investment in transportation, infrastructure, and public spaces. As Mexico struggles to reduce violence in Acapulco, Morelia, Reynosa, and other cities, the federal government would do well to try to understand and then emulate the lessons of Ciudad Juarez.