Saturday, June 30, 2012

Mercosur suspends Paraguay and includes Venezuela, 29 June 2012

During their biannual summit meeting on 29 June, the leaders of Brazil, Argentina and Uruguay decided to suspend Paraguay till elections are held in April 2013 to elect a new president in Paraguay. This is a punishment to the Paraguayan Congress which removed 
President Lugo from power on 22 June through a constituitional coup.
The three leaders also decided to admit Venezuela as a new member of Mercosur from 31 July. The proposal for Venezuelan membership had been pending for ratification by the Paraguayan senate for the last six years. While the other three countries had ratified Venezuelan admission, it was the Paraguayan right-wing dominated senate which refused to ratify. Now they have been taught a lesson.
Parguay has also been suspended from the 12-member South American Union called as UNASUR
The ideal solution would have been to restore Lugo to the Presidency. But since this is difficult, given the current circumstances, Mercosur has taken recourse to the second best option. I wholeheartedly support and applaud this.
However, Mercosur has rightly decided not impose economic sanctions against Paraguay.This means that trade will continue. Paraguay has no other option but to accept and suffer this isolation.
The entry of venezuela, the Saudi Arabia of Latin America, adds weight to Mercosur and increases its importance. However, the leftist radical Chavez might give more political headache to Mercosur than the rightist Paraguayan Congress.
Mercosur agreed to allow individual members to raise tariffs on imports from outside the bloc to up to 35 percent on 200 products to protect local industry.  Brazil and Argentina are likely to make use of this agreement.

Friday, June 15, 2012

ECLAC mid year report on Latin America –14 june 2012

In the " Macroeconomic Report on Latin America and the Caribbean" issued on 14 June, ECLAC ( Economic Commission for Latin America and the Caribbean) maintains its 3.7% growth forecast for the region, following a growth rate of 4.3% in 2011. While making this projection, the report has taken into account the euro zone risk factors, a slowing Chinese economy, precarious growth in the United States and the potential for oil price increase due to geopolitical conflict.  

Other highlights of the report:
The main driver of growth was domestic demand, not external demand. Private consumption remained buoyant on the strength of rising employment and real wages, continuing expansion of lending to the private sector 
In 2012, the fastest growing economies will be Panama (8.0%) and Haiti (6.0%), followed by Peru (5,7%), Bolivia (5.2%) and Costa Rica (5.0%), Venezuela (5.0%), Chile 4.9%, Mexico 4.0%, Argentina 3.5% and Brazil 2.7%   
With domestic growth outpacing external growth and a general worsening of the terms of trade, imports of Latin America are expected to climb by 10.2% during the year, outstripping a 6.3% rise in exports. As a result, the trade surplus would go from 1.3% of GDP in 2011 to just 0.7% of GDP in 2012. The current-account deficit will be 1.7% of GDP as against 1.2% in 2011.  
Unemployment in the region will touch a record low of 6.5% in 2012. Employment continued to rise in 2012, the quality of employment improved, real wages grew and, as a result, consumption and domestic demand jumped. In sum, the positive labour trends of 2010 and 2011 remained in place.
Inflation maintained its downward trend and in April 2012 stood at an annual rate of 5.5%, compared with 6.7% in March and 7% in December 2011. Venezuela and Argentina are the only exeptions with double digit inflation of over 20%
In case the global economic scenario worsens beyond the current expectations, the Latin American countries have an array of policy instruments at their disposal to address such a scenario and the fiscal room for manoeuvre to implement a countercyclical policy that would contain the immediate effects of the crisis on their economies.

This report reconfirms my optimism and confidence about the resilience and strength of the New Latin America 

Tuesday, June 12, 2012

Pacific Alliance - yet another Latin American bloc

12 JUNE 2012
Gateway House
The Pacific Alliance, yet another bloc in Latin America
The newly-formed Pacific Alliance bloc seems more like a political club to counterbalance the Atlantic-facing, Brazil-led Mercosur group. However, the bloc accounts for 30% of India’s trade with Latin America. Can India engage the group so it is not left out from their Asia focus?
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The Presidents of Chile, Colombia, Peru and Mexico signed an agreement establishing a regional group called as “Pacific Alliance” in their summit meeting on 6 May at the Paranal observatory in the Atacama desert of Chile. The Presidents of Costa Rica and Panama, who attended the summit as observers, have expressed interest in joining this new bloc. The Pacific Alliance idea was initiated by Alan Garcia, the then President of Peru in April 2011 in the first summit he had convened. It took two more summits to give shape and finalize this new regional integration.
Chile’s President Sebastián Piñera, in his speech at the signing ceremony said, “[the] Pacific Alliance is much more than a Free Trade Agreement. It is an Agreement of deep and broad integration that involves the exchange of goods, services, investment, people, and at the same time is committed towards physical, infrastructure and energy integration.” Colombian President Juan Manuel Santos described the new bloc as “one of the most significant processes towards integrations that have taken place in Latin America.” The Alliance is starting with free movement of goods and people by the end of 2012. The bourses from Lima, Bogota and Santiago joined together and formed in 2011 an integrated exchange known as Mila, which will soon have Mexico’s main stock exchange too. 
The new economic bloc has a combined population of 204 million (36% of Latin American population), GDP of $1.7 trillion (35% of region’s GDP) and global trade of $1045 billion which is half of the region’s global trade.
Chile, Colombia and Peru are already part of the Andean Community, which is one of the oldest and best institutionalized among the five Latino regional blocs, namely, Mercosur, UNASUR, SICA and NAFTA. The Andean Community , which has its own secretariat and development bank, was wrecked by Venezuelan President Chavez who pulled Venezuela out of this group in 2006 as part of his personal fight against the then Colombian President Alvaro Uribe. The exit of Venezuela was followed by the entry of Chile in the group. However, the Andean Community’s future remains uncertain because of the political incompatibility between the leftist-led Bolivia and Ecuador on the one hand and the right of centre-led Colombia and Chile on the other side. Mexico is part of NAFTA and eighty percent of its trade is with U.S. and Canada.
The four member countries of the Alliance have some common features: All four of them have investment grade markets. They are more open economies, outward looking and are keen to diversify their trade and economic partnerships. Chile and Mexico have signed the maximum number of FTAs (Free Trade Agreements) with other countries around the world. Peru and Colombia are following their examples. All four of them have FTA partnerships with U.S. 
There is also political convergence between the four members of the Pacific Alliance. Chile, Colombia and Mexico have centre-right governments. The Peruvian President Ollanta Humala, although a leftist, has emerged as a pragmatist, following the example of Brazil’s Lula.
But there is no great complementarity in trade. The intra-alliance trade is insignificant and less than three percent of their combined global trade. Most of their trade is with external partners. In contrast, Mercosur countries do significant trade (20% of their trade) with each other. Another obstacle for integration is the fact that geographically they are not contiguous.
The Pacific Alliance has not spelt out if they plan to set up institutions such as secretariat and common parliament. Nor have they set any time table for a customs union or common external tariff. 
It seems that the Pacific Alliance bloc is more of a political club. It is perceived as a new force to counterbalance the Atlantic-facing and Brazil-led Mercosur group ruled by leftist Presidents. Besides forming Mercosur, Brazil had taken the initiative to form the Unasur group in 2008, bringing together all the twelve countries of South America. They went further and created CELAC ( Community of Latin American and Caribbean States) in 2010, in a clear challenge to the Washington-based and U.S.-led Organisation of American States (OAS ). Apart from asserting their autonomy through these integrations, the South American leftist Presidents managed to defeat the U.S. proposal to form FTAA (Free Trade Area of the Americas) under which the whole hemisphere was to be made as a common market in which sub-regional groups such as Mercosur were to be dissolved.  The climax of this Latin American assertion of independence and refusal to be the U.S. backyard was demonstrated dramatically at the Mar del Plata Summit of the Americas in 2005 when the U.S. stood completely isolated in the hemisphere and found its FTAA proposal shred to pieces. With this background, the U.S. is seen as the hidden hand behind the formation of the Pacific Alliance to divide the region, hobble the growing Latin American autonomy and counter the rising leadership profile of Brazil. 
The rivalry of the new alliance with Mercosur was let out by President Calderon of Mexico, who mentioned in his speech, “Even when we are less in population and in the size of our economies compared to our brothers from Mercosur, we export double in volume and value than Mercosur. We have an extraordinary potential.” The Peruvian and Colombian Presidents downplayed the Mercosur rivalry saying that Pacific Alliance was not directed against any other group.
One of the stated objectives of the Pacific Alliance is to increase trade with Asia. The Alliance is planning a FTA with ASEAN. Chile and Peru have signed FTAs with China, Japan and Korea, while Colombia and Mexico are in the process of negotiating FTAs with China, Korea and Japan.  
India does not have FTA with any member of the Pacific Alliance except for a PTA with Chile. Indian exports therefore, face disadvantage in the markets of the Pacific Alliance vis-à-vis those who have FTAs. It is, therefore, imperative that India should take the initiative to sign PTAs or FTAs with members of the new Alliance. India’s trade with the Pacific Alliance in 2011 was $7.7 billion of which exports were $3.1 billion and imports $4.6 billion.  The trade with Pacific Alliance countries is 30% of the total trade with Latin America. There is potential to double India’s exports to the growing markets of the new Alliance in the next three years. Chile and Peru are important sources of copper and other minerals while Mexico and Colombia are sources of crude oil for India. Although Brazil is the most important strategic partner in Latin America, India should consider engaging the Pacific Alliance (keeping in mind Brazilian sensitivity) so that it is not left out from their Asia focus.
R. Viswanathan, who has just retired as Ambassador to Argentina, is an expert on Latin America. His email:
This article is part of the Ambassadors views’ section, a collection of articles featuring eminent Indian diplomats.

Saturday, May 12, 2012

Report on Asia-Latin America relationship

On 5 May 2012, the Inter-American Development Bank (IDB) and the Asian Development Bank’s ADB Institute issued a joint report, “ Shaping the Future of the Asia-Latin America and Caribbean (LAC) Relationship,”  at the ADB’s Annual Meeting in Manila, Philippines. This is the first-ever comprehensive study on the subject covering trade, investment and cooperation which are growing rapidly.

Highlights of the report:

Asia- LAC trade has grown at an annual rate of 20.5% in the last decade reaching 442 billion dollars in 2011

Asia has emerged as Latin America's second largest trading partner accounting for 20.8 % of LAC's trade ( it was 10.4% in 2002) as against the US share of 34% and EU 13%.

LAC's share of Asias's trade has doubled to 4.4%

China, Japan,Korea and India account for 90% of Asia's trade with LAC while China alone constitutes 50% of it. Japan was the predominant partner of LAC trade in the past with 77% in 1980 which has declined to 18% in 2010. India's share in 2010 was 6.1%.

LAC account for 8% of China's trade, 6% of Korean trade, 5% of Japanese and Indian trade.

Brazil, Mexico, Chile and Argentina account for 80% of LAC's trade with Asia. Brazil leads with 31% followed by Mexico 28%, Chile 15% and Argentina 7%.

Trade with Asia form 40% of Chile's total trade, 30% of Brazil's trade, 30% of Peru, 20% of Argentine trade, 18% of Mexican and Colombian trade.

Commodities such as iron ore, copper, soy, oil, sugar, paper pulp and poultry form 70% of the total Asia-LAC trade. Share of iron ore 16.6 %, copper ore 13.4%, refined copper 11.3%, soy beans 9.8%, crude oil 7.6%, oil meal and cake 2.5%, sugar 2.3%, wood pulp 1.9% and poultry 1.6%. These are 2010 figures.

Asia and LAC have signed 18 FTAS which are operative. The number of FTAs will increase to 30 by 2020. Chile has signed 6, Peru 4, Panama 2, Taiwan 4, Singapore 4, China 3, Japan, Korea and India 2 each.

Asia and especially China and India will continue to need the Latin American resource imports ( minerals, agriproducts and crude oil) in the long term since they face increasing shortage of land and water while at the same time their GDP growth is high and consumption  is growing.  China has lost 20 % of its crop land in 1975-2009 due to urbanization and faces more desertification of soil. India can hardly avoid the prospect of import of food and minerals in the long term although the current imports are not significant.On the other hand LAC has 140 million hectares of surplus land which could be brought under cultivation and has abundant water reserves. Africa has, of course, 200 million hectares ..but agriculture has to start from a scratch unlike the advanced development of farming in South America.

Asian investment in LAC is becoming significant. China has focussed on mining and oil while Korea, Japan and India are into manufacturing. Compilation of official investment figures complicated due to the fact that some of them have been routed through tax havens.

Brazil, Mexico and Chile are the leading investors in Asia although the figures are modest.

Asia can learn fro Latin American success in poverty alleviation through conditional cash transfers, pension fund systems and agricultural technologies and best practices. Latin America can learn from Asia's manufacturing, IT services, education and export promotion.

The report has highlighted the challenges for future including trade imbalances, commodity dependence and asymmetry in trade baskets. 

The two regions have reached a new level of development decoupling somewhat from the EU-US axis and their problems. They have common challenges such as poverty alleviation, education and health. There is need for greater focus by governments, business, think tanks and academics on the growing strategic importance of Asia to Latin America and vice versa.

Full report 

I compliment IDB and the ADB for this timely initiative and excellent report.

Monday, May 7, 2012

FDI in Latin America increased in 2011 to a record 153 billion dollars

Despite the global uncertainties and the deepening crisis in Europe, Foreign Direct Investment ( FDI) increased in Latin America and Caribbean by 31% in 2011 from 2010,  reaching a record 153 billion dollars, according to the study released by ECLAC, the UN organization last week.

Latin America was the region that recorded the highest percentage increase in FDI inflows in 2011, increasing its global share to 10%.

This is yet another evidence of the macroeconomic stability, resistance to external turbulence and the continuing and growing investor confidence in the region.

The YPF takeover by Argentina and the Bolivian nationalization of the Spanish power distribution company are isolated episodes and are not indicative of any trend. ECLAC predicts high FDI in 2012 too.

Highlights of the ECLAC report:

Brazil received the highest FDI with 66.6 billion dollars followed by Mexico ( 19 bn ), Chile ( 17 bn), Colombia ( 13 bn), Peru ( 8 bn), Argentina ( 7 bn ) and Central America- 8 bn

Services sector received 45% of inflows followed by manufactures-38% and natural resources-18%

Europe was the largest source of FDI in 2011.

It is interesting to note that the share of foreign banks in Latin American banking has increased from 11% in 1995 to 35% in 2010. Foreign share in the banking of Mexico is the highest with 70%, followed by  Uruguay-54%, Peru-42% and Chile-40%.

Outward investment by Latin America fell to 22 bn $ in 2011 from 45 bn in 2010. This is due to the fact that the Brazilian companies focussed more on the domestic market last year. Chile had the most outward FDI with 12 bn $. Mexico invested outside 10 bn, Colombia  8 bn and Argentina - 1.5 bn.

The Brazilian industrial development bank BNDES is in the forefront supporting the global expansion of Brazilian multinationals. It had provided 22 billion dollars to six Brazilian companies JBS, Marfrig, Oi, BRF, Fibria and Ambev in addition to continuing support to other companies.

The profit repatriation of foreign companies from Latin America has increased from an average of 20 bn $ in the period 1998-2003 to a high of 93 bn in 2008.

There was no significant big ticket Indian investment in Latin America in 2011 although there has been modest investment by some companies. Some Indian firms have shown interest and the existing companies are keen to expand their operations.

Wednesday, April 11, 2012

From Borges to Paz

This has been published in the World Economic Forum blog on 11 April 2012

Borges's story " the garden of forking paths" was the inspiration for the title of the latest BID report, " The world of forking paths – Latin America and the Caribbean facing global economic risks ". The story is about the revelation of a labyrinth that had many paths which forked again and again providing many alternative realities. The Borgesian fiction is becoming a reality...In thecurrent Latin American economic story, many labyrinths are opening. European labyrinth, US labyrinth, Chinese and Indian ones too. Without getting lost in the labyrinths, the Latin Americans should play their part smartly and find their best way forward.

In the past, the Latin Americans suffered from dependencies and had blamed the external forces such as cold war and washington consensus. They sought a new indigenous development model based on their own strengths and problems. They have found one in the Brasilia Consensus which is a pragmatic and balanced combination of pro-poor and pro-market policies.
For the first time in the history, Latin America is politically and economically strong, confident and autonomous enough to decide its destiny internally and externally. The region has withstood the recent global crisis without too much adverse impact and passed the test of its resilience against external shocks. The global rebalancing caused by the emergence of BRICS and the post-western world give the space and time for Latin America to find its own place. So now it is time for this New Latin America to think and plan for the long term.

It is this new context which provides the background for the theme " Regional transformation in a new global context " of the meeting of the WEF on Latin America being held in Puerto Vallarta on April16-18, 2012.

Octavio Paz's " The labyrinth of solitude" could be an inspiration for the Puerto Vallarta meeting. Paz has interpreted India to the Latin Americans through his book " Vislumbres de la India". In his poem, " A tale of two gardens " Paz makes a connection between his childhood garden in Mixcoac and the garden of his Ambassadorialresidence in New Delhi and sees complementarity between India and Mexico. There is a larger and long term complementarity and potential partnership between the New India and the New Latin America which could be one of the topics for the WEF meeting.

Saturday, March 31, 2012

The world of forking paths – report by InterAmerican Development Bank (IADB) March 2012

" The world of forking paths – Latin America and the Caribbean facing global economic risks " is the title of the report IADB released during its annual meeting in Montevideo this month. The report has projected different global scenarios and their possible impact on Latin America. They have also given some policy recommendations to the Latin American governments.

The major factors which will impact the region are: commodity prices, Chinese growth, European crisis, inflow of capital, the role of foreign and particularly European banks in the region and US recovery. A deceleration of Chinese growth is likely to affect producers of metals more than producers of grains.

The report concludes, " while the world is one of forking paths and it is impossible to know which alternative will become a reality, Latin America has good reason to be optimistic thanks to the new set of tools it has developed and the experience it has gained deploying them effectively". This is based on their following assessment:

-The region has made substantial economic progress both in terms of growth and in the ability to respond to external shocks.

-Many of the region's economies have achieved reduction in external public debt and increase in a greater proportion of public sector debt issued in local currency, have been able to use effective countercyclical fiscal policies, have greater possibilities of employing the exchange rate as a shock absorber while maintaining stable prices and have deployed several macro-prudential tools.

On the other hand vulnerabilities remain due to excessive commodity dependence of most South American countries, capital inflow and credit boom and the role of the European banks.

I must compliment the IADB for choosing the most appropriate and interesting title for their report. The inspiration for the title is " The garden of forking paths " a story written by the famous Argentine author Jorge Luis Borges. The story is about the revelation of a labyrinth that had many paths that forked once and then forked again and again providing many alternative realities. The main characters in the story is a Chinese professor acting as a German spy in England and his ancestor who wanted to construct a vast and intricate labyrinth in which all men would lose their way.

Fiction is becoming a reality...In the real Latin American economic story, the Chinese are playing a similar important role, opening many labyrinths, as in the Borges fiction. The Latin Americans should not get lost in the labyrinth. They should play their part smartly and find their best way forward...