China-LAC: Enduring Challenges
How will increasing Asian investment in Latin America influence economics and politics in the region?
In 1992, in commemoration of the 500-year anniversary of Christopher Columbus’s first voyage to the Americas, Mexican writer Carlos Fuentes penned one of the most notable essays ever written on Ibero-American history entitled The Buried Mirror. In this essay, he compared the region’s troubled past to the construction of a tall building in Mexico City, a building that is never fully finished in spite of gradual, permanent progress. The construction of Latin America, he claimed, was just as incomplete. It was a work that was “advancing yet unfinished, energetic yet fraught with seemingly insoluble problems” (Fuentes 1992).
Over 20 years have passed since Fuentes’s seminal essay. Most countries in the region find themselves amid the opposite commemoration: the bicentennial of their independence. Yet it is fair to say that the image of that unfinished building continues to be the most accurate depiction of Latin American reality. Our inability to carry out plans and objectives, our difficulty in finishing tasks, our propensity to improvise and to look for the easy way out instead of finding long-term solutions continue to be the signs of our predicament.
These problems are not exclusive to Latin America, but we can think of few other places where there is such a strong sense of wasted opportunity. Latin America is a region particularly identified with unfulfilled promise, untapped potential, and unfinished business. Throughout history, some Latin American countries have stood at the threshold of success. Some have experienced episodes of unprecedented economic growth; others have attained remarkable development goals—but each time a new economic recession, a new political breakdown, a new social upheaval has undermined their achievements and set them back years, if not decades. Argentina by the first two decades of the 20th century ranked among the 10 richest nations in the world, ahead of France, Germany, and Italy. Its per capita income was 92 percent of the average of 16 rich economies, and even during the second post-war period it was still the fifth largest economy in the world. After years of economic ups and downs, Argentina’s per capita income is 43 percent of those same 16 rich economies (The Economist 2014).
But the most visible and tragic example of economic and social decline is Venezuela. By 1970, this country had become the richest in Latin America and 1 of the 20 richest countries in the world (Hausmann and Rodríguez 2013). In contrast, today, with a projected inflation of 1 million percent and a projected gross domestic product (GDP) growth rate of −15 percent for 2018,1 Venezuela is suffering a humanitarian crisis of severe shortages of food, medicine, and medical supplies, and thousands of Venezuelans flee the country daily (Human Rights Watch 2017).
This erratic trajectory of some countries in the region is evident not only in our economic performance but also in our political development. Long periods of stability and institutional consolidation in Latin America have been interrupted by episodes of authoritarian rule, repression, and human rights violations. This does not necessarily mean that progress and improvements are largely absent. Rather, it means that either positive change takes place at an extremely slow pace or policies normally fail to trigger meaningful, in-depth, transforming dynamics.
Regarding the economy, we must admit that something positive that has happened is the consolidation of macroeconomic and fiscal responsibility in most Latin American countries. A region infamous for the great volatility of its markets has enjoyed considerable economic stability, even weathering the worst effects of the 2008 economic crisis. This time around, our economies were stronger and more diversified, and our governments were more prudent and savvy. Just a few countries exhibit double-digit inflation rates, while others have received investment grade credit ratings.
Economic growth was also impressive by the beginning of the current century. Between 2003 and 2011, overall per capita income in the region rose by 3 percent on average (World Bank 2011). Our share in the world economy rose from 5 percent to 8 percent in that period (World Bank 2011). However, since 2013 the tide has turned, and optimism and euphoria have transformed into caution and concern. Ever since Latin America’s boom came to a sudden end, some countries have struggled to avoid negative growth rates while others have faced modest to minimal growth.
The most visible reasons behind this downturn were external and far from our control: prices for primary goods and commodities dropped; demand from emerging markets, particularly from China, went down; and external financing conditions became scarce and expensive. However, there were certainly more profound reasons behind the downturn such as the low productivity and lack of competitiveness of our economies2 —the internal and structural factors that have historically hindered our ability to reach sustained economic growth and social progress.
In chapter 5, Augusto de la Torre and Alain Ize deal with several of these structural elements that prevented most Latin American countries from closing the per capita income gap (converging) with the United States. As de la Torre and Ize highlight, while we need to sustain and deepen our accomplishments at the macroeconomic level, we must also make significant gains in productivity over the next couple of decades if we are to survive in an increasingly interconnected world market. To face the challenge of productivity, we need to dramatically improve the quality of our education and to align the skills we teach with the skills we require. We need to increase investment in research and development. We need to modernize our infrastructure and logistics; enhance our connectivity; lower our energy costs; grant better access to finance; and streamline our regulatory framework so that our companies can operate in an enabling, empowering environment. We must promote and perfect our public-private partnerships. We must attract high-value industries that have the potential for establishing local linkages. We must strive to insert our economies in global value chains, seeking constant productive upgrading.
De la Torre and Ize also argue that promoting exports of goods and services will be essential for Latin America to end decades of mediocre growth. To do so, we must continue to seek a smart integration into the world economy. In chapter 6 on Latin America and the world (chapter 6), Andrés Malamud argues that since the beginning of the 21st century the region is presented, perhaps for the first time, with an alternative—embodied in China—to the historic economic and geopolitical dominance of the United States. The rise of China and the extraordinary expansion of trade, investment, and financial ties between the Asian giant and Latin America were significant factors behind the economic regional growth in the early 2000s. However, this new alternative also presents significant challenges, including the risk of falling back into dependent relationships with an outside power, based on the exchange of commodities for manufactures. This is a particular concern for South America. So far, however, Latin America has been unable to come up with a common stance vis-à-vis Beijing, that would give the region more leverage to influence the terms of China’s engagement. Meanwhile, growing protectionist sentiments in the United States threaten to affect many Latin American economies, which depend on the U.S. market.
Some countries in the region are making efforts toward devising new ways of integrating with a changing global economy. For instance, the members of the Pacific Alliance have grown more consistently and have made progress in diversifying their production while promoting an open integration into the global economy and Asia-Pacific in particular. At the same time, as Ana Covarrubias points out in chapter 7, in Latin America, initiatives to promote regional integration tend to be circumstantial: new institutions and groupings are launched, but stagnate soon afterwards because of problems of policy coordination, an old-fashioned and absolute view of sovereignty, and lack of leadership from the region’s largest countries.
The second challenge we need to address is sustainable social progress. In chapter 4, George Gray Molina reveals a mixed picture: while important progress has been made in reducing income-based poverty and inequality since 2003, strong imbalances among and between countries endure. Undoubtedly, the economic success during the first decade of the century translated into social achievements. Between 2002 and 2012, poverty in the region fell from 44 percent to 29 percent, unemployment was reduced by 35 percent, and the middle class expanded from 22 percent to 34 percent of the population. Moreover, unlike other regions, Latin America managed to reduce income inequality during the same period with an overall decline of about 3 points in its Gini coefficient (ECLAC 2013). However, large segments of the population are still vulnerable to falling back into poverty in the event of external or internal economic shocks, like those affecting some nations after 2013.
To lock in the social gains, governments must invest in the expansion and improvement of public services. This is particularly important when it comes to education, which continues to be the best way to help young people— our most vital asset—enter the job market and attain social mobility. Digital technologies have spread widely in Latin America. We must ensure that they become a tool for social progress, making technology literacy a priority and redesigning the provision of public services to put the digital citizen at the center of our policy process.
But no conversation on income inequality would be complete if we do not thoroughly address the issue of our anemic and often regressive tax structures. According to the United Nations Economic Commission for Latin America and the Caribbean, the average tax revenue as a percentage of GDP in the region is less than 18 percent, yet several countries’ tax collection falls between 10 percent and 15 percent of GDP (ECLAC 2018). No country is able to provide high-quality public services with such meager incomes. And not just that—taxes in Latin America fall more heavily on those who are less able to pay them, since they are mostly indirect taxes levied on wage earners.
Tax reform is, of course, politically challenging anywhere, but there is simply no way the region will be able to leap forward without seriously examining the way states are funded. Tax reform will only be possible if business elites understand that the price they pay for having bad public services and weak public institutions is in fact way more onerous than the cost of paying higher taxes. Governments have a responsibility as well: if they are going to ask for more money, they need to prove they are able to spend it wisely, efficiently, and properly. The necessary complement to a discussion on tax reform in Latin America is a discussion on how we can increase the efficiency and transparency of our public administration, providing a real commitment to move away from the appalling corruption levels we have witnessed in the last years.
This brings us to the next challenge, one that we must highlight with particular emphasis: improving public governance while strengthening our democratic institutions and the rule of law, the cornerstones of any serious endeavor to generate political stability and build countries and societies where human dignity is fully guaranteed.
As Catalina Botero explains in chapter 2, when the last wave of democratization swept the region in the 1980s, we expected governments to embrace the rule of law and become accountable and transparent after citizens regained the right to decide their own destiny through the ballot box. Yet some countries in Latin America were unable to move past the basic outline of electoral democracies. They fell short of safeguarding freedom of the press, building a robust system of checks and balances, and enforcing accountability.³ Instead of devising new ways to expand democracy, some governments have come up with new ways to undermine it, and others just decided not to make further significant progress in this field. Botero acknowledges that in spite of the undeniable progress since the democratic transitions, there are insufficient advances and alarming setbacks.
This is not to say that all countries in the region face the same odds. Despite the many challenges we share, some countries have advanced considerably, implementing open government initiatives that bring transparency and efficiency to public administration,4 increasing the participation of women in politics,5 and fighting corruption and impunity.6
The last challenge in the region I want to mention is the need to design and implement effective local, national, and regional responses to violence, drug trafficking, and all forms of organized crime. According to the United Nations Development Programme, “between the year 2000 and the year 2010 Latin America’s homicide rate grew by 11 percent, while it decreased or remained stable in most regions of the world. More than a million human lives were lost due to criminal violence during this period, that is, around 100,000 deaths per year” (UNDP 2014, v). These rates are much higher in certain segments of the population, particularly young males, which hampers the region’s prospects.
Some countries in Mesoamerica are experiencing violence on a huge scale. The situation is such that the fundamental pact of these societies—the social contract by which the state holds the monopoly of the legitimate use of force in exchange for protection and security for its citizens—has virtually collapsed in large swaths of the territory.
We know that fighting crime goes beyond law enforcement and criminal repression. Crime prevention in our countries must be linked to the development and strengthening of institutional capacities, the consolidation of the rule of law, the promotion of social justice, the fight against corruption, and the reinforcement of our justice systems. In the end, the most effective security strategy is an integral, long-term development strategy. In chapter 3, Robert Muggah analyzes the complexities of this problem and explores the deficiencies of traditional hard-line policies known as mano dura. Effective security forces are key to controlling and deterring crime, especially organized criminal networks, but they alone are insufficient. Muggah presents a compelling case for promoting “citizen security” initiatives, which aim to tackle the social causes that fuel violence in Latin America and build ties between law enforcement forces and citizens.
Latin America finds itself at a moment of enormous challenge. The region’s ability to preserve its conquests and overcome its faults and limitations will be put to a severe test. There are grounds for cautious optimism, at least for a group of countries in the region that could be able to build on the progress achieved in the past. Clearly, none of the pending tasks we have mentioned is easy to accomplish. Development will always be a somewhat unfinished goal. But there are clear signs indicating the path we need to take, and there are proven recommendations we can follow. We hold the key to unraveling over 500 years of unfulfilled promises.
1. International Monetary Fund, IMF Data Mapper; accessed September 2018.
2. It is estimated that companies in Latin America exhibit productivity rates about half that of companies in the United States. A report by the World Economic Forum (2015) found that not a single economy in the region substantially improved its productivity gap between 1980 and 2011—the years we grew the most.
3. According to Freedom House (2017), only three countries in the region enjoy free press conditions—Chile, Costa Rica, and Uruguay—while the rest have partially free press conditions or lack a free press environment. As to accountability, some nations in the region lag at the very bottom of International Transparency Indexes, such as Guatemala, Honduras, Mexico, Nicaragua, Paraguay, and Venezuela (Transparency International 2018).
4. The Open Government Partnership Initiative, a multilateral organization aiming to secure commitments from governments to promote transparency and fight corruption, has worked extensively in the Latin American region during the last decade.
5. According to the Interparliamentary Union, Latin America is the second region of the world in terms of greater women’s representation in parliamentary posts (28.8 percent), and will likely expand during the electoral cycle 2017–19 due to the parity laws and regulations adopted in several countries, which will face their full implementation for the first time.
6. The 2017 annual report published by Transparency International (2018) states that “in the last few years, Latin America and the Caribbean made great strides in the fight against corruption. Laws and mechanisms exist to curb corruption, while legal investigations are advancing, and citizen anti-corruption movements are growing in many countries across the region.”
ECLAC (Economic Commission for Latin America and the Caribbean). 2013. Social Panorama of Latin America 2012. Santiago: United Nations.
—. 2018. The Fiscal Panorama of Latin America and the Caribbean. Santiago: United Nations.
The Economist. 2014. “The Tragedy of Argentina. A Century of Decline.” February 17.
Freedom House. 2017. Freedom of Press 2017.
Fuentes, C. 1992. The Buried Mirror: Reflections on Spain and the New World. New York: Houghton Mifflin.
Hausmann, R., and F. Rodríguez, eds. 2013. Venezuela Before Chavez: Anatomy of an Economic Collapse. University Park, PA: Pennsylvania State University Press.
Human Rights Watch. 2017. “Venezuela: Events of 2016.” In World Report 2017.
Transparency International. 2018. Corruption Perceptions Index 2017.
UNDP (United Nations Development Programme). 2014. Summary: Regional Human Development Report 2013–2014. Citizen Security with a Human Face: Evidence and Proposals for Latin America. New York: UNDP.
World Bank. 2011. World Development Indicators 2011. Washington, DC: World Bank.
World Economic Forum. 2015. “Bridging the Skills and Innovation Gap to Boost Productivity in Latin America The Competitiveness Lab: A World Economic Forum Initiative.” Insight Report. World Economic Forum, Geneva.
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