Latin America’s Moment

The Union of South American Nations (UNASUR) — an organization that once aspired to become South America’s answer to the European Union — quietly faded away last month. Deep divisions over Venezuela’s turmoil and internal leadership battles precipitated its demise. Yet its real vulnerability stemmed from something deeper: the economic isolation of its members. Unlike the European Union, Latin America’s multilateral bodies haven’t ignited commercial ties between their participants. This economic detachment not only doomed UNASUR, but has held the region back, and may keep it on the margins in the decades to come. UNASUR wasn’t the first attempt to integrate Latin America. In the 1960s the six-country Latin American Free Trade Association fell victim to protectionism. In the 1980s, a dozen nations tried again with the Latin American Integration Association, largely to no avail. In the 1990s Mercosur took center stage as a vehicle to knit South America together: Its common currency never materialized, and trade between the partners peaked shortly afterward, then again declined. Despite more than a dozen different multilateral organizations, Latin American nations remain commercial strangers. Sure, Argentina and Brazil exchange some auto parts, Colombia and Ecuador do a decent trade in paper and plastics, and Chilenos watch Mexican soap operas. But overall, less than 20 cents of every export dollar goes to one of its neighbors. Compare that with well over half of international sales in Europe or Asia. More broadly, Latin America’s regional agreements have done little to boost their members’ share of world manufacturing exports and their participation in global markets. Importantly, Latin American nations tend not to make things together. Today the vast majority of goods circling the earth are intermediary goods — parts and components being sent elsewhere to be sewn, welded, stamped, and otherwise assembled into clothes, cars, computers and thousands of other products. This shift in trade reflects the rise of global supply chains, as everyday products are increasingly made across numerous factories and even countries. These supply chains have bolstered the fortunes of many emerging markets — mostly when they worked with their neighbors. Asia’s big four newly industrialized economies — South Korea, Taiwan, Hong Kong and Singapore — jump-started their decades of near double-digit growth with Japanese outsourcing and investment. They later benefited from China’s rise. Many Eastern European nations saw their industrial base and larger economies blossom when their Western European brethren poured in after the fall of the Berlin Wall. And Mexico’s successes in cars, planes, medical equipment, and other manufacturing has been due mostly to the commercial ties born of NAFTA. Latin American nations are instead largely focused on mining the iron ore, lithium, copper and other raw materials that go into the making of steel, batteries, and electronics; or growing the soybeans, fruit, and coffee processed and consumed oceans away. Excluded from the most dynamic parts of international manufacturing chains, Latin American companies and workers are less likely to gain access to new technologies, to develop new skills and to move up the value-added ladder to higher-margin products and better-paying jobs. This isolation leaves the region less able to compete vis-a-vis other parts of the world in the making of things — not least because of the rise of other more successful regional hubs — and less able to attract global consumers to its homegrown brands. It helps confine so many nations to the middle-income trap. Without the commercial ties to keep the politics on track, diplomatic conflicts often lead either to neutered talk shops unable to resolve pressing issues — the Organization of American States’ response to Venezuela comes to mind — or to full-on institutional suspensions, a la UNASUR. Given the distances involved, South America is unlikely to be drawn into Asia’s, Europe’s or North America’s manufacturing orbits. Its nations instead should turn to their neighbors to nurture industry and boost economic growth. The legal mechanisms are there: More than two dozen regional agreements cover some 80 percent of trade. These could be expanded to include the thornier sectors that remain, and could and should be consolidated into a few broad agreements — for instance, expanding the Pacific Alliance to streamline the current thicket of rules and regulations. Governments could also make it easier for international companies to invest through tax and investment treaties with neighbors. They could tackle the outsized transaction costs shippers face from woeful infrastructure between countries. And they could reduce excessive red tape and strengthen the rule of law, enticing to any foreign investor or multinational. If Latin American entrepreneurs and businesses looked next door more often, they would finally provide a stronger economic foundation for the wider integration politicians have long discussed but never realized. View article originally published on Bloomberg. 

The PRI is dead, long live the PRI!  As Mexico hurtles toward a momentous election this July, the storied Institutional Revolutionary Party that dominated the country for nearly a century seems doomed. Sadly, however, while the PRI may implode, the clientelist system it created — and that holds Mexico back — will likely roll on. Things weren’t supposed to turn out this way. President Enrique Pena Nieto was going to be the PRI’s savior. After the party’s heavy legislative losses and dismal third-place showing in the 2006 presidential race, the photogenic governor used his political lineage, his made-for-TV personal story, and a revitalized party machine to win the 2012 election by some 3 million votes, and make the PRI again the largest party in both houses of Congress. After 12 years out in the cold, the PRI looked as if it was back and had adapted to a more democratic era. Yet now, Pena looks to be the PRI’s final executioner. Polls portend the PRI’s imminent dissolution. Its presidential candidate Jose Antonio Meade ranks a low third with voters — many surveys put fewer than two in 10 Mexicans in his corner. At the state level, the party trails the others in all but Campeche, which holds less than 1 percent of the country’s population. It looks to surrender more than 30 of its current 55 Senate spots, and upwards of 100 seats in the House, leaving it third in terms of size and influence in a new Congress. At best it could win one of the nine governorships up for grabs this July, leaving it in control of roughly a dozen of the nation’s 32 states, compared to every single one 30 years ago. The PRI’s decimation is all the more shocking given its famous adaptability and resilience. The key to its longevity was its big-tent model, enabling it to incorporate, mollify and ultimately control different interest groups. By creating official pillars for labor, peasants, and professionals and bureaucrats, the PRI ensured that political conflicts occurred within the party and were mediated by it, not the government. Thus, even when particular sides lost, the party, as the final and indispensable arbiter, still won. And the promise that loyal losers would be compensated if not rewarded politically in the next round kept the game going for years. The PRI reinforced this control by manipulating the press through a mix of lavish advertising budgets, personal payoffs and control of newsprint paper. It bought business support though handouts, subsidies and concessions. Its clientelism extended to individuals: Local PRI leaders mobilized voters with washing machines, building supplies or even just a meal given away at a campaign rally or the polling stand.   The PRI was never above manipulation at the ballot box — more than once it may have lost the vote but won the election. At times it resorted to outright repression, mostly of leftist opposition. But its real brilliance and staying power came from organizing and buying off society and interests. Out of the public eye and realm, these backroom negotiations and cold hard cash enabled it to tighten its grip. Since the start of the 21st century, this system looked to be faltering. Democratic competition took away the PRI’s near political monopoly, diminishing its hold over office seekers and public pots of money. Rising violence and insecurity washed away the belief in the PRI’s ability to “get things done.” And corruption scandal after corruption scandal revealed the seedier side of these clientelist exchanges. Yet here’s the thing: Even as frontrunner Andres Manuel Lopez Obrador has railed against the PRI’s “mafia of power,” he is attempting to re-create his party of Morena in its image. To his political tent, AMLO has invited teachers’ unions and labor leaders, most notoriously former mining union head Napoleon Gomez Urrutia, currently exiled in Canada due to allegations of stealing $55 million from a workers’ trust fund. AMLO has assiduously cultivated rural workers and organizations, and reached out to religious conservatives. He is wooing the PRI’s rank and file, and converted many party notables to his side, including former ministers of the interior Manuel Bartlett and Esteban Moctezuma Barragan, by implicitly offering a pass on past misdeeds. And like many of his PRI brethren before, he has no use for independent voices from civil society or the media, accusing them of being part of the larger power mafia and of protecting rather than fighting corruption. Rather than change Mexico’s political system, AMLO looks to reinforce it. True, if he wins, his new political apparatus is unlikely to last as long as the PRI. Mexico has profoundly changed: Its economy is more open, diversified, and private sector-driven than during the PRI’s mid-20th century heyday. Citizens have access to more information, and voters count themselves more independent than in the past. And Morena won’t achieve the monopoly of power at all levels of government that the PRI wielded for decades. Yet AMLO and Morena’s strategy shows that the system of channeling competition and conflicts through back rooms rather than democratic processes and branches of government is proving surprisingly resilient. This way of politics will continue to hold Mexico back, as it relies on clientelism and corruption rather than legislation and rule of law. The PRI may soon die. Unfortunately, the system it spawned looks set to prosper. View article originally published on Bloomberg. View article in Spanish on El Financiero.