XI Annual CAF Conference

On September 4 and 5, 2007, the Corporación Andina de Fomento (CAF), the Inter-American Dialogue and the Organization of American States (OAS) sponsored their annual conference aimed at identifying a working agenda for the region. Participants included CAF President Enrique Garcia, OAS Secretary General José Miguel Insulza, Inter-American Development Bank President Luis Alberto Moreno, several U.S. Congress members, Latin American policymakers, and economists specializing in the region. The annual CAF conference brings together more than 250 people—U.S.and Latin American government officials; lawmakers, leading policy analysts and journalists; and corporate and financial leaders. The aim of this sustained collaboration is to demonstrate the importance of U.S. economic and political relations with the Andean region and Latin America more broadly, and to provide a detailed review of broader hemispheric economic affairs toWashington officials and opinion leaders. During two days of discussions, conference participants examined a number of developments in Latin America. An unprecedented stretch of economic growth continues, democratic processes remain in place, and trade is flourishing, especially trade driven by commodity demand from China. But the economic good times have not brought poverty levels down to desired levels nor have governments instituted policies to sustain growth and development. A major shortcoming has been the failure of the region to generate enough formal jobs for its workers.   POLITICAL SCENARIOS Latin America’s political scene is one of activity. A Constituent Assembly in Ecuador could dramatically affect the political future of that country, while Guatemala was on the verge of presidential elections as the conference unfolded. Venezuelan president Hugo Chávez vows to take his country to what he terms "twenty-first century socialism". And Peru’s ruling party faces fragmentation within and turbulence without. Colombian president Álvaro Uribe can no longer rest on his record of dramatically improving his nation’s security; the public is now clamoring for jobs and justice. Against this backdrop, Peru, Colombia, and Panama wait to see if the U.S. Congress will approve their pending free trade pacts with the United States. Fernando Bustamante said the most important issue facing Ecuador is the September 30 election of a Constituent Assembly that will have six to eight months to deliver a new constitution. Bustamante, who is Ecuador’s minister of internal and external security policy coordination, said his country is in a state of “democratic underachievement” with an economy posting among the poorest results in the region. He said President Rafael Correa seeks deep political reform and sees a constitutional charter as a tool for boosting development and social justice within the country. Rodrigo Pardo, the editor-in-chief of Colombian weekly news magazine, La Semana, said Colombia’s political landscape was also complicated. He cited both domestic turmoil, most notably the allegations of ties between paramilitary forces and ruling elements in Colombian society, and external factors, including the state of Colombia’s relationship with the United States, as contributors. He said domestic debate that once focused on security has now been replaced with discussion about the economy, the need to reduce poverty, and inequality. The paramilitary scandal, meanwhile, has increasedU.S. Congressional scrutiny of aid to Colombia and the pending free trade agreement. Inaction on the trade accord will be viewed in Colombia as a serious failure for Uribe, Pardo said. Luis Hernando Larrazábal, executive director of Inter-American Investment Corporation, said when past economic goals in Bolivia fell short and social and political demands were not met, the door was opened to new political movements and the election of President Evo Morales.Now, as in Ecuador, there has been an outcry for greater political participation, particularly among women and indigenous people. Economically, Bolivia has not been able to diversify beyond its traditional role as a commodities exporter. Record-high reserves, GDP growth, and trade surpluses have more to do with the government renegotiation of energy supply contracts with Argentina and Brazil than long-term policies. Bolivia “needs to generate permanent sources of jobs,” said Larrázabal, who is a former minister of development planning. “Bolivianeeds agricultural improvements, technological improvements, training for productive activities, sustainability.” Michael Shifter, vice president of policy at the Inter-American Dialogue, said Peru is posting impressive economic growth and poverty levels are declining yet the country is beset with social turmoil and discord. Citing a recent rash of strikes, including work stoppages by miners and teachers, political fragmentation, and the dramatic drop in President Alan García’s popularity in polls, Shifter said: “Peru is suffering the problems of its success economically. It’s becoming more and more fragmented in political terms. And a weak and ill-prepared state is having trouble dealing with ever-increasing social demands.” Shifter offered Peru as a compelling example that economic growth and a reduction in poverty are not enough for a country. “There must be a commitment to justice and other issues,” he said. Shifter underlined García’s commitment to a free trade agreement with the United States and Peru and said its failure would be a tremendous blow to the relationship between the two nations.   SECURITY AND GOVERNANCE Ana Mercedes Botero said security ranks at the top the list of problems that most concern Latin Americans. Despite economic growth, crime and violence continue to escalate. Regionally, the economic cost of violence represents 12 percent of GNP, according to Botero, who heads the office of external relations at the Corporación Andina de Fomento. In the Andean countries, the level is 13.8 percent. Gustavo Fernández, Bolivia’s former minister of foreign affairs, cited two factors affecting regional security: the strengthening of countries' autonomy and the role the United States takes in conflicts. Traditionally, Fernández said, the United States has intervened in domestic policy and politics but has not involved itself in cross-border conflicts, including disputes over territory and maritime rights. The region’s current economic expansion has allowed countries to build their international reserves, cut their debt to the World Bank and development agencies, and decrease their dependence on outside voices – including the United States. He said intra-regional alliances, some formal – such as Mercosur – and some more casual, are also causing shifts in the region. It such an alliance that is tackling the security issues confronting Haiti. Juan Gabriel Valdés outlined the lead role the region is taking in a United Nations mission to Haiti. It is significant, he said, that the U.N. Stabilization Mission in the Caribbean country is led by Latin America, not the United States. “It is an association within the region that is historically unheard of, and it reflects an important development looking forward to the future,” said Valdés, who heads the mission. He described Haiti as a “failed state,” a fragile country where the rule of law has not been restored, political forces remain at loggerheads, and basic services need rehabilitation. No solution will come until the root causes of Haiti’s problems are addressed, he said.  He said investment will need to be part of the solution. Ana María Sanjuán, a professor at the Universidad Central de Venezuela, said most Latin American countries have given police the responsibility for controlling crime and violence. Police response has been inadequate, especially in countries with drug-trafficking networks, and yet no reforms have been undertaken to address the causes or magnitude of the crime problem. She also noted that few studies are conducted or government statistics collected to help understand the depth of the problem. Sanjuán said constitutional reforms are necessary to democratize institutions and create citizen participation, at the same time as governments need to take radical positions against drug trafficking. Guatemala’s vice president, Eduardo Stein, discussed security from the perspective of an elected official involved in government policy addressing crime and violence. Speaking just days before Guatemala’s presidential election, Stein said the central theme of the political campaigns had been security. He detailed the rising problem of organized crime and youth gangs, ormaras. “When we talk about organized crime in Central America today, we’re talking about highly sophisticated criminal operations that operate in a transborder manner,” Stein said. “Because they are outside the law, they have no regard for the regular frameworks in any of the countries. They have access to the latest technology in communications, transport and weaponry.” He noted that in some areas of Central America, as well as Ecuador, Peru, and Colombia, these criminal networks serve as “Robin Hoods,” taking care of the poor residents in the areas where they operate. Drug cartels no longer threaten elected officials but, instead, put forward their own candidates for political office – a trend that deeply threatens the legitimacy of the government   THE U.S. AGENDA IN LATIN AMERICA Five U.S. Congress members and the deputy U.S. trade representative spoke to conference participants about what to expect from theUnited States, especially in terms of trade agreements, immigration, and aid. U.S. Rep. Nita Lowey has sponsored a bill in the U.S. House of Representatives that would earmark more money for development aid toLatin America. The Democrat from New York said the region’s No. 1 recipient of U.S. aid, Colombia, had not seen cocaine trafficking go down despite the so-called war on drugs. “In my opinion, the drug war cannot be won without addressing the social problems that feed it,” she said. At the same time, she said the United States needs to pay attention to security and economic issues in Mexico, which is one of the United States’ most important trade partners. She called for more attention to education in Mexico. U.S. Rep. Xavier Becerra, who has supported past free trade agreements, said he will no longer vote for agreements that do not require adequate worker or environmental protections. The California Democrat was critical of current U.S. policy in ormer minister of the presidency in Chile, acknowledged that energy will be on the hemisphere’s agenda for some time but added that Latin America’s energy sector is not without problems. He cited reduced crude production in Venezuela and inadequate investment in Ecuador and Mexico.Bolivia has enormous gas reserves but it needs significant investment to expand its production capacity. Argentina, which has Latin America’s highest per-capital consumption of gas, is not engaged in new exploration. He also said the corporate structures of state energy companies will affect their performance. He referred to Petróleos de Venezuela as one extreme of a troubling corporate structure in which the president of the nation runs the company. Brazil’s Petrobras, on the other hand, is remarkably efficient. “[Petrobras] is state owned but it operates like a private company, trading on world stock markets, he said. “There is private investment but without any management rights.” He said joint ventures are more likely between companies structured like Petrobras, but he added that regulatory standards set up to protect national products may hamper integration. Meanwhile, Alfred Szwarc, senior advisor to the board of the Brazilian Sugar Cane Industry Union, predicted that biofuels would be the energy source that will mitigate the region’s fuel problems and help alleviate poverty through job creation. Brazil’s leadership in the ethanol arena is evidenced by innovation coming out of that country.  Since 2005, Brazilian jet-maker Embraer has been producing a crop duster fueled by ethanol. The motorcycle industry is talking with Brazilian bio-fuel experts. U.S.-based Dow Chemical Co. recently announced a partnership with Brazil to produce plastics from ethanol. And Brazilian petrochemical company Braskem is also investing in bio-plastics. Szwarc said alternative energy development would not only benefit energy exporters, but also the region’s energy importers, such as the Dominican Republic, Jamaica, and Central America. David Rothkopf, visiting scholar at the Carnegie Endowment for International Peace, said technological changes and rising oil prices have caused a sea change, opening the door to dramatic new energy investment and regulation as well as a recalibration of every country’s energy portfolio. Like Szwarc, he predicted that the energy arena would be an important employment creator. Although the Americas are now the focus of much innovation, that dominant position is not guaranteed. Rothkopf said the Europeans lead the world in overall green energy development thanks to government subsidies. And China is investing in green energy. The region will have to foster research-and-development education, investment in new fuel sources, and other pioneering policies to remain competitive.   CHALLENGES FOR THE REGION Latin America’s challenges include issues of democracy, among them the strengthening of some democracies and the weakening of others, new social movements, and discredited traditional parties and institutions, according to CAF President Enrique García. He said the region must reconcile stability and equity with micro issues. It faces doubts about whether free trade agreements with the United States will be approved. Against this backdrop are issues related to security, crime, and immigration. Guillermo Perry, the World Bank’s chief economist for Latin America and the Caribbean, said recent economic gains show a shift in the impact of the United States on the region.  He said Latin America is more resilient than in the past, with higher national reserves and lower debt. Countries are prepared to go for years without new credit to pay debts, they are less exposed to currency risks, and the commodity markets that Latin America is feeding remain strong. He acknowledged that Mexico and Central America will feel the effects of a U.S. slowdown more than other countries in the region, but overall he said the impact will be mild. There is some infrastructure progress in the region but not enough. Educational advances have been made, but they are scattered. And because of internal conflicts, investment is paralyzed in many countries. Perry said these factors could dilute the potential gains of the economic boom. Miguel Rodriguez Mendoza, former deputy director-general of World Trade Organization, linked the erosion of regional integration to Latin America’s declining importance in the global economy – and said this is a factor that sets the region apart from Asia. In the 1990s, some 25 percent of Mercosur’s total trade was commerce among its member countries. That now has dropped to 17 percent, according to Rodriguez Mendoza. A similar falloff has occurred within the Andean Community, where member-country trade accounted for 15 percent of all commerce in 1990 but now is just 10 percent. In Asia, by contrast, 40 percent of trade is intra-regional. He said countries would be better prepared to confront challenges if they were better integrated, adding that integration is not limited to multi-nation trade blocs but can encompass non-traditional options, such as accords between state companies. Latin America’s weakness is its inability to move forward, according to Alberto Padilla, anchor of the “Economia y Finanzas” program on CNN en Español. He called for countries to continue with the second generation of reforms, to attack poverty, to establish clear laws and regulations for investors, and to reform labor laws. Most countries have taken some advantage of the commodity boom, but they have also missed many opportunities. George Ronald Gray Molina, human development advisor and report coordinator for the United Nations’ Development Programme for Bolivia, said Latin America has not embraced strategies to increase growth and reduce poverty, at the same time that the region has fallen short in the creation of value-added products and niche markets. In Bolivia, he said those markets should include “green trade, fair trade, [and] energy trade.” Pointing out that a third of Bolivia’s population has migrated to urban areas, with an accompanying rise in access to education and infant survival rates, he noted that there is no accompanying increase in higher-paying jobs. He blamed the country’s export profile, which is dependent on silver and tin mining, as well as natural gas exploitation, and called for countries to move away from exports based on cheap labor and an abundance of natural resources. Teodoro Petkoff, a longtime figure in Venezuelan politics and editor of daily newspaper Tal Cual, sparked a lively debate by characterizing the United States as the most important challenge for Latin America. Petkoff criticized the United States for exaggerating the destabilizing power of Venezuelan President Hugo Chávez. He said Chávez is a serious threat to Venezuelans and their institutions, but he is neither a threat to the United States nor to the region. Despite Chávez’s socialist rhetoric, Petkoff said, the Venezuelan president is an old-style caudillo who is putting tight controls on the society, injecting government and politics into sports and culture, using schools as an instrument of politicization, increasing the military presence in the government, and trying to control the press. He said crime and violence in Venezuela has reached untenable levels. Petkoff acknowledged that poverty levels have declined and the country now has more social safety nets, but he said the poor still don’t have jobs.