Development in Andes Depends on Pending Trade Agreements

By Sara Enright
March 14, 2007

Event: The Unsettled Andes: Current Economic and Political Issues
Featuring: Marcelo Guigale, World Bank, and Patrick Esteruelas, Eurasia Group.

The U.S. government and private sector should continue to invest in Andean countries, despite recent political and economic turmoil, according to Marcelo Giugale, Director for the Andean Region at the World Bank, and Patrick Esteruelas, an Andean specialist with the Eurasia Group. During a presentation organized by the Inter-American Dialogue, Giugale encouraged stakeholders in the Andean region to be patient and appreciate the context of the changes in the region, which include greater political inclusion, demands for wealth redistribution, and fiscal discipline as a result of globalization. Esteruelas added that improving trade relations would be the best way for the United States to positively influence the region.

According to Giugale, previously marginalized populations in the Andes have become increasingly involved in politics, leading to greater democratic representation as well as greater challenges. "Reforms, when they are participative, are a lot more sustainable, but they are also much harder to carry out," Giugale said. For this reason, he predicted that the most successful presidents in the region will pursue a narrow reform agenda.

In addition to greater political participation, Andean countries are seeing an irrepressible demand for the redistribution of wealth. Although politicians like Presidents Hugo Chávez of Venezuela and Evo Morales of Bolivia champion generous domestic social programs, Giugale believes that three other recent developments will be most likely to reduce inequalities in the region: a collapse in fertility rates, the advent of asset taxation, and, he predicts, the end of widespread subsidization.

Additionally, global competition has pushed Andean businesses and governments to become more disciplined about repaying debts, more concerned about creating quality business environments, and more vigilant against corruption. Giugale posited that businesses in the region will soon have to become even more efficient once China, now the main trading partner and investor in the Andes, becomes a competitor. However, he argues that the trade preferences the Andean countries have with the United States will protect the region's businesses from the full brunt of Chinese competition.

Esteruelas argued that increased political activism in Andean countries and dependency on high revenues from commodity exports are potential causes for concern in the Andean economy. He believes that Venezuela's economic growth is unsustainable, as the government depends heavily on high oil revenue to sustain a "warring mix" of fiscal expansionism and state interventionism. While the high inflation rate is already causing problems, Esteruelas predicted that Venezuela will face further financial trouble if the price of oil falls to below $50 a barrel.

Esteruelas also voiced concerns about other Andean nations. He fears that Ecuador is headed towards a political crisis if it is unable to resolve the critical splits within its Congress and Supreme Court, and warns that it will set an "extremely dangerous precedent" if it decides to default on its debts. Despite the recent paramilitary scandal, Esteruelas is optimistic that Colombia will continue to attract international investment and trade, due to the political stability and institutional strengthening under President Uribe. Lastly, Esteruelas argued that Peru has the most positive economic outlook of all the Andean countries because of its stable political environment, but that further development depends greatly on whether it will expand trade agreements with the United States.