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The in Motion: Looking Ahead

30th Anniversary Sol M. Linowitz Forum Commemorative Volume

April 2013 YEARS SHAPING POLICY DEBATE FOR ACTION YEARS SHAPING POLICY DEBATE FOR ACTION

BOARD OF DIRECTORS

Michelle Bachelet, Co-Chair, Carla A. Hills, Co-Chair, Enrique Iglesias, Co-Vice Chair, Thomas F. McLarty III, Co-Vice Chair, United States David de Ferranti, Treasurer, United States Peter D. Bell, Chair Emeritus, United States Fernando Henrique Cardoso, Chair Emeritus, Brasil Ricardo Lagos, Chair Emeritus, Chile

Alicia Bárcena, Brian O’Neill, United States Francis Fukuyama, United States Pierre Pettigrew, L. Enrique García, Jorge Quiroga, Bolivia Donna J. Hrinak, United States Marta Lucía Ramírez, Marcos Jank, Brasil Eduardo Stein, Jim Kolbe, United States Martín Torrijos, Thomas J. Mackell, Jr., United States Elena Viyella de Paliza, Dominican M. Peter McPherson, United States Ernesto Zedillo, Mexico Billie Miller,

  

Michael Shifter President The Americas in Motion: Looking Ahead

30th Anniversary Sol M. Linowitz Forum Commemorative Volume

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Contents

Preface by Michael Shifter...... iv

Foreword by Ricardo Lagos ...... v

1. Rethinking US- Relations: Thirty Years of Transformations Abraham F. Lowenthal, University of Southern California...... 1

2. Energy in 2010–2020: Headed for a Lost Decade? Genaro Arriagada, Inter-American Dialogue...... 8 Comment by Patricia Vasquez...... 14

3. China and Latin America: What Lies Ahead? Margaret Myers, Inter-American Dialogue...... 15 Comment by Alejandro Izquierdo, Inter-American Development Bank...... 22 Comment by Barbara Kotschwar, Peterson Institute for International Economics...... 24

4. Politics of Latin America’s New Middle Class Francis Fukuyama, Stanford University...... 26 Comment by Michael Reid, The Economist...... 33

5. Social Trends in Latin America: Time to Move Beyond Growth? George Gray Molina, Development Programme...... 36 Comment by Augusto de la Torre, Bank ...... 46 Comment by Diego Sánchez-Ancochea, University of Oxford...... 48

6. Global Trends and How Latin America Should Think About the Future Sergio Bitar, Inter-American Dialogue...... 50

Contributors...... 58

30th Anniversary Sol M. Linowitz Forum Commemorative Volume iii Preface n April 1983, the Inter-American Dialogue issued its first report on the state of inter- American relations and the hemispheric policy agenda. The past three decades have Iwitnessed deep-seated economic, political, and social changes that would have been difficult to imagine in the early 1980s. Today’s regional and global landscapes bear scant resemblance to the prevailing scenarios back then. This commemorative volume reflects on the dramatic transformations in US-Latin American relations over the past thirty years and, more crucially, explores what changes should be anticipated over the next three decades. In keeping with the Dialogue’s role and mission, this forward-looking exercise seeks to inform the terms of debate and influence decision-making in the Americas. Our aim is to stimulate broad and spirited public discussion about where the is headed. The volume draws in part on several of the background papers prepared for the Dialogue’s 30th anniversary Sol M. Linowitz Forum in Washington, DC, in June 2012. That forum, which was the ninth honoring the Dialogue’s founding chair, offered an opportunity for Dialogue members to review the most germane and pressing issues in the hemisphere and to propose practical recommendations for constructive and cooperative action. The topics addressed in this volume are necessarily selective. They include a review of US-Latin American relations, the outlook for energy cooperation, the current and prospective role of China in the , the political implications of the expanding middle class, the emerging social dynamics in the region, and the impact of long-term global trends on Latin America. We are grateful to the following authors and commentators for their fine and thoughtful contributions: Ricardo Lagos, Abraham Lowenthal, Genaro Arriagada, Margaret Myers, Francis Fukuyama, George Gray Molina, Sergio Bitar, Patricia Vasquez, Alejandro Izquierdo, Barbara Kotschwar, Michael Reid, Augusto de la Torre, and Diego Sánchez-Ancochea. Special thanks are due to Joan Caivano, who directs the Dialogue’s special projects, for her superb management and coordination of this effort. Finally, this report would not have been possible without the generous support provided by the Ford Foundation, CAF—Development Bank of Latin America, and the Tinker Foundation.

Michael Shifter President

iv The Americas in Motion: Looking Ahead Foreword f the history of the past three decades is any guide, to reflect on possible changes in the hemisphere over the next three is a daunting task. Yet it is a necessary one. It is our responsi- Ibility to begin a thoughtful discussion about the scenarios that the hemisphere may confront in the future. This volume from the Inter-American Dialogue is a valuable contribution toward that goal. New political, economic, and social factors are intersecting with new actors and partner- ships—all of which are sure to profoundly shape Latin America’s future. Politically, the most salient development will be the growing demand for participation, thanks to expanding social networks that, in turn, empower new social actors. Stunning advances in technology carry huge political implications, including increased accountability. Economic changes have also been striking as Latin America evolves into a solidly middle-in- come region. Over the past decade, South American countries (except ) saw a growth rate more than double that of OECD countries. Annual per capita income in most countries is expected to reach $20,000. Yet a crucial challenge remains on how to improve social indicators and income distribution. In this respect, the United States is moving in a worrying direction as its inequalities grow larger, a shift that could also affect Latin America. As far as social policy, the work ahead will be enormous. Governments will be called to devise effective policies to not only reduce poverty but to meet the high demands and expectations of the middle class. Pursuit of these objectives will be expensive and difficult; most politicians will resist altering the status quo. Latin America will be looking with keen interest to the contrasting paradigms that have long been in place in and the United States. The changes and challenges ahead will involve new players, with , and especially China, taking on expanded roles. When the Inter-American Dialogue was created thirty years ago, China was not a consideration. How important will it be thirty years from now? Beyond dia- logue in this hemisphere, a partnership among China, the United States, and Latin America is needed. Since the “Atlantic ” involved not only countries on the Atlantic, there is no reason why a “” should not include all of Latin America. The Dialogue’s role is more fundamental than ever. Looking ahead, the focus should not only be on US policy toward the region, but rather on devising fresh and imaginative approaches— on drugs, , trade, new financial architecture, climate change—that affect the well­ being of all the hemisphere’s citizens.

Ricardo Lagos Chair Emeritus

30th Anniversary Sol M. Linowitz Forum Commemorative Volume v

Rethinking US-Latin American Relations: Thirty Years of Transformations

By Abraham F. Lowenthal

This essay is adapted from the author’s presentation (especially in , Chile, and Uruguay) sys- at the June 8, 2012, Sol M. Linowitz Forum of the tematically violated rights, and the new US Inter-American Dialogue. administration of Ronald Reagan appeared to con- done their behavior. hirty years ago, Latin America was Within the United States, immigration from gripped by a gathering financial crisis Latin America was picking up but, owing to Tand economic recession. Unsustainable domestic economic difficulties, there were calls external debts and fiscal deficits had come home for restrictionist policies. Actions by the Federal to roost. In 1982—the first year in forty that the Reserve to reverse inflation in the United States gross income in Latin America had declined— exacerbated Latin America’s economic and finan- financial institutions were faltering, and poverty cial pressures. and unemployment were rising. Import substitu- The United States was highly relevant to many tion industrialization and statist economies had Latin American problems: debt, trade, growth, largely exhausted their benefits. What was to poverty, repression, and the violent conflicts in become known as the Lost Decade was underway. . Washington’s approach to these After many years of relative calm, military con- issues was mainly structured by the Western flicts were percolating. The long-term dispute Hemisphere idea, that is, the notion that the between Argentina and the over countries of the Americas stand apart from the the Malvinas-Falklands produced the first rest of the world in a special relationship with outright military clash in memory between a Latin each other, with the United States in the , American nation and one from outside the hemi- and by the still powerful framework of the Cold sphere. Intense frictions eroded relationships War rivalry with the Soviet Union. US officials between Argentina and Chile, and , recognized that there was enormous diversity with armed conflict a real possibility. Border ten- among the more than thirty countries of Latin sions grew between Venezuela and Colombia, America and the , with their different Guatemala and , and Colombia. sizes, colonial heritages, indigenous populations, Civil wars in Central America, with escalating immigrant stock, , natural resource involvement by nations beyond the , includ- endowments, and relations with the world econ- ing and the United States, were increasingly omy. But they nevertheless tended to think in violent and deeply worrisome. The United States broad regional terms, to see the countries of Latin engaged in overt and covert military intervention America and the United States as sharing broad in Central America, breaching its own and inter- interests and perspectives, and to seek coopera- national laws. Repressive authoritarian regimes tive inter-American approaches primarily to solve

30th Anniversary Sol M. Linowitz Forum Commemorative Volume 1 || Those who convened the Dialogue in problems that were of high 1982 thought that , Uruguay, , priority to the United States, and the , Washington’s priorities not those emphasized in Latin for example. Some cooperate America and the Caribbean. in Latin America closely with the United States, Those who convened the a scenario few of us imagined were off base and Inter-American Dialogue in in 1982. Washington is trying 1982 thought that Washington’s out of date. to extract itself from costly mil- concepts and priorities in || itary engagements in the Middle regard to Latin America were East and West Asia that were off base and out of date. We were deeply con- not expected thirty years ago, and it faces severe cerned about the intense US focus on Central threats from non-state adversaries that could not America, the insensitivity of the US government then be foreseen. The global predominance of the to Latin America’s mounting economic diffi- United States has begun to recede, and the once culties, and the reversal of US efforts to protect stable and prosperous European Union struggles fundamental human rights and promote demo- with sustained difficulties. China has emerged as cratic governance. And we were troubled by the an increasingly active, assertive, and powerful force frayed inter-American communications that were in global affairs. Emerging countries—India, Brazil, epitomized by Washington’s tacit, if not explicit, and others—are major engines of global eco- approval to Argentina’s military government to nomic growth. invade the Malvinas/Falklands islands, followed by US intelligence support to in its Transformations in the successful campaign against the Argentine forces. United States Our aim in convening the exchange that led to The United States, too, has changed. Its economy the Dialogue’s first report was to foster improved has steadily moved from manufacturing to ser- mutual exchange and understanding to amelio- vices, with productivity enhanced by revolutions rate the impact of the United States on the rest in communications technologies. Its population of the hemisphere and to energize US leadership has grown, mainly by absorbing unprecedented on shared concerns—those salient in Washington numbers of immigrants, and it has aged, causing and those important elsewhere in the region. more and more citizens to draw on social security We expected Latin to be mostly and health care programs. People have migrated interested in regional issues, and we concen- south and west, shifting national political dynam- trated our inter-American discussions on those. ics. Immigrants, many of them from Mexico, Everyone involved understood that the United Central America, and the Caribbean, have moved States had global interests and policies to which beyond traditional entry points to new gateway its policies in the Americas were often subordi- cities throughout the United States. Immigrants nated, but we wanted to nudge the US policy and their descendants are increasingly partici- agenda from the Cold War focus to shared prob- pating in and affecting US politics, and they will lems and prospects for cooperation. account for most of the expansion of the work- How different things are today. It is not just that force through 2050. the Cold War is over and that the Soviet Union no Many of these transformations have been pos- longer exists. Political movements against which the itive: technological innovation, increased equality United States actively intervened 30 years ago cur- of opportunity for women and ethnic minorities, rently rule in several countries of Latin America—in

2 The Americas in Motion: Looking Ahead || The authoritarian rulers who led most broader access to higher edu- of South and Central favor. Confrontational rhetoric cation and to many consumer America in the 1970s has replaced civic discourse. goods, and the remarkable The once enviable politi- strengthening of research uni- and 1980s have been cal institutions of the United versities, attracting talent from replaced by freely States have become dysfunc- throughout the world. In other tional. Political institutions of elected governments. respects, however, these have all kinds have lost public trust: been years of deterioration. || Congress, the president, parties, Now it is the United States that the media, and even the courts. has suffered a Lost Decade. Unemployment Any serious exploration of Western Hemisphere sharply in 2008-09 and has been declining very relations today must take into account profound slowly. Household income has fallen while the questions about the capacity of the United States concentration of income in the United States has to develop and sustain sound domestic and inter- greatly intensified. The top 1 percent of US income national policies. earners in 1980 garnered 10 percent of the national income; by 2007, the top 1 percent accounted for Latin America’s Progress 30 percent of earnings. Now it is the United States On the whole, the story in Latin America and the that has unsustainable levels of debt, massive fiscal Caribbean is more positive. The authoritarian rul- imbalances, and irresponsible economic policies, ers who led most of South and Central America in often pushed by special interests and the quest for the 1970s and 1980s have been replaced in most domestic political advantage. countries by freely elected governments. That said, With tax revenues down and deficits high, pub- the of governing coalitions and of opposi- lic services in the United States are starved, and the tion parties ranges broadly, as do the quality and once-vaunted infrastructure is crumbling. The qual- independence of judiciaries, , media, ity of primary and secondary education has declined and civil society organizations. State institutions in comparison with other industrial nations. The and nongovernmental organizations have devel- United States ranks in the middle of OECD coun- oped and strengthened, albeit at different rates and tries on tests of reading skills and science and well with quite diverse characteristics. Political institu- below the OECD average in mathematics. tions have become more participatory and repre- Economic downturn, worsening inequity, sentative in several countries, and military rule and unraveling social cohesion, and decreased eco- pervasive impunity are less common. But insti- nomic competitiveness have contributed to tutional checks on executive authority have been accelerating political deterioration. Economic severely weakened in some countries, and lack of and political divisions have been exacerbated accountability is still widespread. by deepening cleavages between the coasts and Continuing a trend already visible thirty years the heartland, rural and urban, immigrants and ago, most Latin American countries have become anti-immigrants, religious and secular, and among more populous, urbanized, literate, and mod- citizens of different income levels, genders, sexual ern. Infant mortality rates have declined, life orientations, and age cohorts. With the consolida- expectancy has lengthened, and access to pota- tion of media enterprises and the fragmentation of ble water, sewage services, electricity, and com- media markets, polarization is growing as many munications services have all expanded. Broad citizens are exposed only to the arguments they access to primary and secondary education has

30th Anniversary Sol M. Linowitz Forum Commemorative Volume 3 || Economic growth, demographic been achieved, although its transitions, and social skilled and educated workers, quality is inconsistent and, on constrained markets, lack of mobility have produced the whole, remains severely innovative capacity, and the inadequate. Economic growth, a significantly inability to convert technolog- demographic transitions, and ical advance into commercial expanded middle class. social mobility have produced a viability. These problems, if not significantly expanded middle || confronted, will threaten the class that is reshaping econom- region’s future competitiveness. ics, society, and politics in many countries. Latin America’s deep inequalities of wealth and Economic transformations in Latin America, income persist, but they have been somewhat especially in the past fifteen years, have been attenuated in recent years (while equity has been striking. The 1980s were very difficult. The 1990s worsening in the United States). Wider distri- saw several years of good growth in a number of bution of the benefits of expanded growth has countries as liberal market-opening policies took reduced extreme poverty. This has been achieved hold, but the limits and vulnerabilities of the in large degree through social programs, higher Washington Consensus approach—liberalization, minimum wages, and conditional cash transfers openness to foreign investment, privatization, to the poor. and deregulation—also became evident. Efficient Underlying these positive achievements has states, strong and independent judicial institu- been the emergence in a number of countries— tions, and effective regulation are needed to make Brazil, Chile, Colombia, and Peru foremost markets work well. among these—of a high level of previsibilidad, that Impressive economic growth has taken place in is, stability of expectations about the rules of the the past ten years, especially in . game and about the procedures by which these At the heart of this growth has been modern- rules can be altered. This stability of expectations ized , focused on both traditional and has unleashed creative energies of all sorts—not nontraditional export products; the development only those of investors, foreign and domestic, of niche sectors targeted at the changing global but also of students, parents, nongovernmental economy; major development of natural resource organizations, and governments. Confidence in endowments, much of it attracting international the operating framework facilitates longer-term investment; significant (but still insufficient) and more rational decisions by all. It is much investment in infrastructure; and the export of easier to overcome cortoplacismo—a short-term commodities, manufactured goods, and services approach—and to build viable policies and insti- by multilatinas, the Latin American-based multi- tutions for the medium and long term. nationals that operate across the globe. Although The picture is not all bright, of course. Many some countries still export mostly primary prod- countries of Latin America and the Caribbean ucts to a few select markets, many have diversi- remain plagued by violence, although it is no fied their exports by sector and by destination, longer caused by interstate conflict or internal with much-improved terms of trade. civil wars. The remnants of insurgent movements Although these developments have produced hanging on in Peru and Colombia are largely economic dynamism that was hard to imagine contained. Today’s violence, responsible for as thirty years ago, some sub- remain mired many deaths in Central America as during its in poverty, and many countries face bottlenecks brutal civil wars, arises from crime, organized due to inadequate infrastructure, insufficiently and unorganized, from the response of criminal

4 The Americas in Motion: Looking Ahead || Although equity indicators for Latin cartels to redoubled efforts America have Latin American nations have by governments to destroy or been building new regional improved, the region badly wound them, and from economic and political orga- the incapacity of weak states continues to be the nizations without the partic- to protect citizen security. This ipation of the United States. world’s most unjust. violence is also notably high in Intra-Latin American sub-re- Venezuela, Mexico, Brazil, still || gional and regional initiatives— in Colombia, and in parts of the , UNASUR, and Caribbean. Far from offering practical solutions, CELAC—have captured the attention of many the United States is seen as one of the causes, .1 The Organization of American owing to its national demand for narcotics, its States (OAS), the Summit of the Americas, and insistence on criminalizing the drug trade (and other Pan-American institutions have weakened, thus perhaps making it more violent), and its role their missions and effectiveness in question. as a source of arms for Latin American criminals, Thirty years ago, many in Washington were still drug cartels, and youth gangs. deeply concerned about the involvement of the Although equity indicators for many Latin Soviet Union in the Americas, its close ties with American countries have improved, the region Cuba, support for the Sandinistas in Nicaragua, continues to be the world’s most unjust. Recent solidarity with the FMLN in El Salvador, and links gains in income distribution have been accom- with Peru’s military. Now there is no Soviet Union, plished in a period of bounty. Whether they will and ’s presence in the Americas is modest survive a downturn if and when the commodi- and limited. ties boom wanes is uncertain. Major segments of By contrast, China was of little economic con- the population—especially the indigenous, Afro- sequence in Latin America thirty years ago. Today descendants, and the rural poor—remain seri- it is the most important trading partner for several ously disadvantaged in many countries. Support South American nations and the largest interna- for democratic governance and for market-ori- tional investor and lender for a few. China’s pres- ented policies is limited and precarious where ence in the Western Hemisphere surpasses that popular frustrations are high. ever achieved by the former Soviet Union, by Nazi Germany, or by any other extra-hemispheric pow- Latin America in a ers since Latin American countries achieved their Thanks to Latin America’s undeniable (although independence from colonial rule. A number of uneven) social, political, and economic prog- Latin American countries have also developed sig- ress over the past thirty years, several countries nificant economic relationships with Japan, Korea, in the region are now active players in interna- India, and . Commercial relations tional affairs. Brazil is the standout, but Mexico, Chile, Colombia, Argentina, and Peru are also 1 MERCOSUR (or MERCOSUL in Portuguese) is a the common market arrangement involving Argentina, Brazil, no longer marginal on the world stage, nor are , Uruguay, and Venezuela as full members, Bolivia Venezuela and Cuba. Latin American countries as an accessing member, and Chile, Colombia, Ecuador, and Peru as associate members; UNASUR (UNASUL in Por- are reaching out, politically and commercially, in tuguese) is the Union of South American Nations, a security , Asia, Europe, and the , often and political organization comprising the 12 South American nations with an affiliated South American Defense Council pursuing interests and policies independent of— on security questions; CELAC, the Community of Latin and even contrary to—those of the United States. American and Caribbean States, incorporates all countries of the Americas except Canada and the United States.

30th Anniversary Sol M. Linowitz Forum Commemorative Volume 5 || Mexico, the second largest trading partner with Europe continue to be of the United States, In more recent years, how- substantial, with efforts in both ever, it has become clear that sends 80 percent of directions to enhance them. the diverse countries of Latin Mexico and the closest its exports north. America are embarked on dif- neighbors of the United States ferent journeys. There are many || in the Caribbean and Central variants, but the fundamental America remain intimately tied divide splits two clusters: the to the United States—ever more so in demo- Bolivarian Alternative countries and the rest. graphic, labor market, commercial, financial, and The Bolivarian Alternative countries (Cuba, cultural terms. Mexico, the second largest trading Venezuela, Bolivia, Ecuador, Nicaragua, and per- partner of the United States, sends 80 percent of haps Argentina) are committed to more inclusion- its exports north; its economy depends on tour- ary and equitable approaches to development. ism, remittances, and investment from the United They are profoundly suspicious of globalization States, as well as from the returns on growing and market capitalism, and they prefer plebisci- Mexican investments in the United States. More tary democracy to liberal representative insti- than 10 percent of Mexico’s labor force works in tutions. Most of the other countries, including the United States. New levels of cooperation and some of the more influential nations, are trying to of conflict on many matters—intermestic issues at adjust to globalization by harnessing the dynamic the boundary of international and domestic pol- energies and substantial resources available from icy, with facets of each, and causes and impacts on global capitalism. But they are also trying to both sides of increasingly porous borders—make counter capitalism’s negative effects on equity and managing these relations particularly challenging. social cohesion through redistributive policies The key issues are not traditional foreign policy and by strengthening the institutions and coun- questions but, rather, , education, terbalances of effective democratic governance. narcotics, violence, law enforcement, drivers’ These two clusters, heterogeneous within each licenses, retirement communities, medical insur- group, are in practice more fuzzy than absolutely ance benefits, and many other practical matters. distinct, and they are works-in-progress rather The countries of South America, meanwhile, than settled ideological models. Countries in enjoy much more diversity in the number and both clusters combine pragmatic and ideological quality of their international relationships than elements. In different ways, all seek better terms they did thirty years ago. South Americans are, of engagement with international capital and to thus, less inclined to look first for inter-American improve the terms of economic exchange with approaches to broader global questions. the rest of the world. Countries in both clusters respond tactically to domestic pressures and Different Paths to international constraints and opportunities, The vision of Latin America as a coherent and rather than conform to consistent templates or increasingly unified region, which was problem- rigid dogma. And all these countries are shaped in atic from the start, was reinforced in the early part by the personal qualities and circumstances 1990s when it was common to see Latin American of individual political leaders, by the legacies of countries as traveling at different rates in the same their historical experiences, and by their diver- direction on the same path, with Chile in the lead. gent institutions.

6 The Americas in Motion: Looking Ahead || Synergies exist on trade, energy, climate Looking Forward change, public health, require changed mindsets and attitudes in both countries.2 higher education After thirty years of transfor- The time has also come for mations, the United States is an and infrastructure focused efforts to encourage aging society with diminished synergy between the United development. international power and influ- States and Brazil on a broad ence. It badly needs to invest || range of issues not confined in education and infrastructure, to this hemisphere: respond- restore fiscal solvency, expand exports, and revi- ing to climate change, preventing and containing talize its political institutions. The United States is global , curbing nuclear proliferation, juxtaposed in the Western Hemisphere with Latin strengthening the institutions and arrangements American and Caribbean countries that, on the for global governance, and reforming international whole, are strengthening and diversifying their rules and practices for trade, finance, investment, economies, bolstering their institutions, expand- intellectual property, and the transfer of technol- ing their middle classes, and actively engaging in ogies. There are also huge opportunities to build productive international relationships. cooperation in higher education with initiatives The coming years could be auspicious for that would pay handsome dividends over time. inter-American cooperation, not because of US At this stage, the countries of Latin America philanthropy nor Washington’s fear of regional and the Caribbean are not natural followers of US trends or of external influence in Latin America, ; they define their own interests and forge but because transformations in the Americas, north their own approaches. Policies and attitudes of and south, create potential synergies and mutual presumption and imposition by the United States opportunities. On issues ranging from trade to no longer work. Institutions such as the OAS that energy, climate change to public health, higher rely on notions of fundamental harmony in the education to infrastructure development, the com- Americas need to be rethought. Strengthening ing years could see unprecedented exchange. the OAS requires more than changing personnel, An important opportunity now exists to refash- budgets, or administrative practices. It calls for ion one of the most important bilateral relations in joint exploration by Latin American countries, the the world: between Mexico and the United States. United States, and Canada of the specific issues Complementary demographic, economic, social, on which concrete regional programs, or cooper- and political trends in the two countries may make ation in broader global arenas, make sense. More it possible to build cooperation on an intimate and generally, that is the challenge of inter-American sustained basis within a broad range of issues: infra- relations after thirty years of transformations. structure development, energy production, higher education, public health, migration and labor mar- kets, border management, and citizen security. New concepts, policies, norms, and institutions will be needed to manage this increasingly vibrant but 2 For an important statement about these needed changes, see Robert Pastor, The North American Idea (Oxford Univer- complex relationship. Building these, in turn, will sity Press, 2010).

30th Anniversary Sol M. Linowitz Forum Commemorative Volume 7 Energy in Latin America 2010–2020: Headed for a Lost Decade?

By Genaro Arriagada

atin American politics is known for mirages The Vulnerabilities of Central that obscure the severity of problems and America and the Caribbean defer their solution. This is what seems to L When it comes to energy, Latin America exhibits be happening with energy issues. The energy sec- tor had been cited time and again as being among many weaknesses. the most problematic in the Americas, sparking In terms of energy, there is not one Latin numerous statements, speeches by heads of state, America but several. One is energy-rich South and a few summits. In the middle of the last America, flush with diverse resources, includ- decade, however, this mindset changed. On the ing abundant oil, hydroelectricity, gas, , and strength of Brazilian success in the pre-salt fields, non-traditional renewable energy sources. That confirmation of Venezuela’s ultra-heavy crude contrasts with the energy-poor regions of Central oil reserves, and hopes, albeit still vague, about America and the Caribbean, which include twen- shale gas, Latin America has begun to emerge ty-three nations with an energy deficit (where as a successful region. There is optimism that in domestic consumption exceeds national output) this decade and the next it will play a crucial role and only one, , with a sur- in world energy, and that its exportable surplus plus. Only two of the countries, Guatemala and could relieve China’s fuel shortages. Cuba, produce oil, though not enough to satisfy This optimistic, self-satisfied view today internal demand. appears questionable. Overall, energy problems In many of these nations, oil accounts for in the region—notwithstanding individual coun- upwards of 60 percent of the energy mix. These try or industry successes—have, if anything, countries have no gas at all except Trinidad and worsened. The future is bright in terms of poten- Tobago, which has a significant exportable sur- tial, but in the past ten years the concrete results plus. Hydroelectric resources are modest but are among the few sources of primary energy avail- have been mediocre. The region’s contribution to able. In the poorest countries, such as Nicaragua alleviating the world’s energy plight, at least in and , traditional biomass, normally a sign of this decade, was an optimistic illusion that is now severe poverty, makes up more than 40 percent of being derailed by tough realities. The reasons for the energy mix. optimism will likely continue to fade, barring Energy shortfalls impose a severe constraint on major political changes. development and social progress. At one time these difficulties were mitigated by a joint Venezuela- Mexico initiative (the San José Accord), which supplemented the region’s energy resources. But it

8 The Americas in Motion: Looking Ahead || In Cuba, disruption of Venezuelan supplies is no longer in force. At present, and subsidies could is stagnant: 6.8 million barrels albeit with differences that are per day (mbd) in 2000 and 6.9 trigger a crisis akin to important to spell out, similar mbd a decade later. In 2000, aid comes from the Venezuela- the “special period” Latin America’s share of world led PetroCaribe alliance, an oil production was nearly equal of the 1990s. initiative launched under the to its share of world reserves. presidency of Hugo Chávez. || Ten years later, the ratio had In the case of Cuba, Venezuela dropped by half: a scant 9 per- provides oil subsidies similar in form and scale to cent of production versus 17 percent of reserves. those once delivered by the Soviet Union. This Venezuela, the country with the largest reserves, initiative is now threatened by several factors, had the poorest production performance, with including the decline in Venezuela’s exportable an 800 thousand barrels per day drop during surplus, the country’s broader economic chal- the period. Prospects in Mexico look even worse. lenges, the change of government in , Both reserves and production dropped by 500 and the massive debt owed to PetroCaribe by thousand barrels per day between 2000 and recipient countries. For whatever the reason, a 2010. The good news comes from Brazil, where significant reduction in the flow of oil assistance the share of world production rose to 2.7 percent, would be a harsh blow to Central America and from 1.7 percent, during the decade. the Caribbean. In Cuba, disruption of Venezuelan The rest of Latin America is less important as supplies and subsidies could trigger a crisis akin regards energy production. Colombia is a recent to the “special period” of the 1990s when Soviet success story, but its prospects are uncertain aid ceased. because of the small size of its proven reserves. As a result of mismanagement, Argentina is an oil Stagnation of Oil Production and exporter-turned-importer. Although Ecuadoran Decline of Exportable Surplus production is stagnant, sheer reserve size could eas- ily allow it to triple without overtaxing resources. A review of South American oil industry perfor- mance over the past decade gives more cause for concern than for enthusiasm. Proven Reserves and Oil Production by As a share of the world total, South America’s Region (Share of World Total) proven reserves went from nearly 9 percent in 2000 to more than 17 percent in 2010. If these 2000 2010 figures are disaggregated, however, the outlook Reserv. Prod. Reserv. Prod. is less encouraging. Apart from Venezuela, the Middle East 63 32 54 30 region’s reserves amount to only 2 percent of South & Cent. 9 9 17 9 the world total and have hardly grown at all in Amer. the decade. Brazil accounts for more than half of Europe & 10 20 10 22 the growth, and its share is set to increase sig- Africa 8 10 10 12 nificantly. Mexico’s reserves, in contrast, have 6 19 6 17 dropped to 0.8 percent of the world total from Asia-Pacific 4 10 3 10 1.2 percent. Total 100 100 100 100 The data on production are even more disturb- Mexico 1 5 1 4 ing. Indeed, energy production in Latin America Source: BP Statistical Review of World Energy, June 2011.

30th Anniversary Sol M. Linowitz Forum Commemorative Volume 9 Production Minus Domestic Consumption (thousand barrels per day)

2000 2010 Production 2010/2000

1. Surplus energy countries Argentina 385 94 - 168 Colombia 476 563 + 90 Ecuador 281 269 + 86 Venezuela 2,680 1,706 - 768 Mexico 1,500 964 - 492 Subtotal 5,322 3,596 2. Deficit energy countries Brazil 750 467 + 869 Chile 233 305 0 Peru 53 27 + 57 Other South & Cent. Amer 930 1,043 + 1 Subtotal 1,966 1,842 3. Balance (1-2) 3,356 1,754

Source: BP Statistical Review of World Energy, June 2011.

Stagnant production and increased domestic Obstacles for Hydroelectricity demand have made a significant dent in Latin America’s exportable surplus. The following table Over the past fifty years, hydroelectricity has compares production and consumption for both been the most distinctive—and, possibly, the oil exporters and net importers. most promising—characteristic of Latin America’s The balance is disappointing. The exportable energy production. The enormous role of this surplus fell by 33 percent in a decade and, had energy source sets Latin America apart from all it not been for Brazil’s production surge, Latin other regions. Hydroelectricity accounts for America’s surplus would be irrelevant. Surpluses slightly more than 6 percent of the world energy capable of meeting increased demand in other mix, but it claims a full 26 percent of the Latin parts of the world would be insufficient despite American mix. It generates more than 50 percent the fact that Latin America has the world’s larg- of all electricity produced in eleven countries. est proven reserves outside the Middle East. The In Peru, , and Brazil the figure is 80 situation could change, but declining production percent; in Colombia and Venezuela it is 75 and in Venezuela, Mexico, and Argentina and stagnant 67 percent, respectively; and in Paraguay and production in Ecuador are not the result of cir- Uruguay it is 99 percent. cumstantial events. Rather, they are the result of But Latin America’s hydroelectric sector has structural factors that are hard to rectify. Difficult been losing ground. From 1966 to 1986, the political decisions will be required to implement sector more than quadrupled. In the decade that needed reforms and place Latin America’s energy followed, it grew by 50 percent. From 1996 to 2006, however, it expanded by only 33 percent sector on a more productive course. and, over the past five years, its growth has been a meager 1 percent a year.

10 The Americas in Motion: Looking Ahead Energy Mix 2010 (Consumption, %)

Oil Gas Coal Nuclear Hydro Renew

Middle East 51.4 47.0 1.2 0.0 0.4 0.0 100.0 South/Cent. Am. 46.7 21.5 3.8 0.8 25.5 1.7 100.0 Europe/Eurasia 31.3 34.3 16.4 9.2 6.5 2.3 100.0 Africa 42.0 25.3 25.5 0.8 6.2 0.2 100.0 North America 38.2 27.2 19.7 7.7 5.6 1.6 100.0 Asia-Pacific 27.7 11.2 52.1 2.9 5.4 0.7 100.0 World Total 33.6 23.8 29.6 5.2 6.5 1.3 100.0

Source: BP Statistical Review of World Energy, June 2011.

Several factors have been advanced to explain In order to keep the mix clean, hydroelectricity the decline. First, there is the argument that many use must be maintained at current levels. Failing of the most suitable rivers, and within them the that, the slack will be taken up by fossil fuels, nota- best sites, are already in use; the remainder are less bly coal, the cheapest energy source of all. Chile is important and less profitable. This is true in the a case in point. It has rich hydroelectric potential United States and in Western and but continues to depend on fossil fuels for most of but not in Latin America, where the hydroelec- its primary energy needs. As a result, imports of tric potential remains enormous, so much so that fossil fuels increased fivefold from 2003 to 2011, less than an estimated 25 percent of potential is and all the power stations constructed since 2004 being effectively used. Another explanation is that are gas- or coal-based. The notion that non-con- low oil prices, much like in the 1990s, have made ventional renewable energy (NCRE) can fill the dams seem less attractive. But this is challenged gap, although highly desirable, is hard to realize, by the fact that oil prices are four times higher at least on this scale. In fact, the share of NCRE is than they were five years ago. Strictly speaking, very small (1.8 percent of the mix), with Brazilian in Latin America, the strongest foes of hydroelec- ethanol accounting for 70 percent of the total. tricity are increasingly influential environmen- Increasing NCRE is an essential policy objec- talist groups that almost always and everywhere tive, but executing it is not easy. It usually oppose construction of large dams. requires heavy subsidies without which current NCRE technology cannot prosper. Many of its The Trend Toward a Dirtier proponents, as commendable as their efforts may Energy Mix be, show little realism in opposing coal, nuclear The energy consumed in Latin America is the energy, and hydroelectricity all at once. To claim cleanest in the world for two reasons. The first and that the gap left by freezing these sources can be most important is hydroelectricity. Second is the filled within a decade by increases in NCRE is fact that the share of fossil fuels in the energy mix wishful thinking. is the lowest in the world: 72 percent versus an Rejection of large dams, opposition to coal and 87 percent world average. Within that total, and nuclear energy, and the development of NCRE underlining the cleanliness of the regional mix, the will be the focus of a civic debate of the utmost role of coal —“the dirtiest fossil fuel”— is minor: 4 importance. It will determine the success or fail- percent versus the 30 percent world average. ure of energy policies in the coming decade.

30th Anniversary Sol M. Linowitz Forum Commemorative Volume 11 Energy Mix 2010 (Consumption, %)

(1) (2) (3) (4) Fossil Nuclear Hydro+Renew (1-3) South/Cent. Am. 72.0 0.8 27.2 100.0 (44.8) Europe/Eurasia 82.0 9.2 8.8 100.0 (73.2) North America 85.1 7.7 7.2 100.0 (77.9) Asia-Pacific 91.0 2.9 6.1 100.0 (84.9) Africa 92.8 0.8 6.4 100.0 (86.4) Middle East 99.6 0.0 0.4 100.0 (99.2) World Total 87.0 5.2 7.8 100.0 (79.2)

Source: BP Statistical Review of World Energy, June 2011.

The Need for Political Definitions will depend on government decisions, legislative reform governing electricity, adaptation of reg- This rundown illustrates the main characteristics ulatory frameworks, new pricing systems, and shaping regional energy issues—and points toward integration within the industry. Action on each possible solutions—but it is by no means an exhaus- of these requirements will be complicated by tive inventory of Latin America’s energy weaknesses. pushback from powerful pressure groups that Other major factors could be mentioned, including feel threatened by the higher level of competi- issues around pricing and subsidies. tion attendant on integration. Since new actors With its massive resources, Latin America will enter the market, some producers—and not should have an extremely promising future. because they are inefficient—will be displaced Scarcity is not an obstacle to rapid energy sector and lose influence. growth nor are oil prices or lack of technology. If attention shifts to hydroelectricity, deci- Rather, the hurdles that the region must clear to sion-making will clearly move from the financial develop a dynamic energy sector are institutional centers in which the projects’ technical aspects and political in nature. are assessed to the realm of politics. Political Central America and the Caribbean require decisions must strive to balance the demands special attention. Institutions such as the Inter- of energy security with tighter environmental American Development Bank (IDB) and the World regulations and the interests of groups that feel Bank should be directing their programs to these adversely affected by energy projects. Those who countries. It makes no sense to focus on energy-rich oppose dams not only raise intellectual objec- South America. Assistance for sector development tions, but they fuel what amounts to a social should not concentrate on any one component of movement that joins environmental groups with the mix, but on a broad portfolio of energy sources agrarian communities and . (oil, gas, coal, hydroelectricity, traditional biomass, They are connected to each other internation- geothermal, and NCRE) as well as, most impor- ally and see themselves as part of a broad strug- tantly, on energy integration both within these gle reaching from Río Papagayo in Mexico to sub-regions and with Mexico and Colombia. in Chile, covering Río Madeira in Brazil Technical studies for integration within Central and the Inambari and Pakitzapango dams in Peru America have been completed, but many obsta- along the way. cles mark the path to implementation. Progress

12 The Americas in Motion: Looking Ahead || A Latin America that freezes hydroelectric Governments are forced to development would be company is guaranteed. Such devise solutions since a Latin openness forces these companies plunged into an energy America that agrees to freeze to submit to most of the control, hydroelectric development crisis and end up with transparency, and accountabil- would be plunged into a major ity standards governing inter- a dirtier energy mix. energy crisis and would end up national private enterprise. The with an energy mix that is sub- || prime determinant of national stantially less clean. oil companies’ performances is Latin America has to break with thinking that usually institutional in nature. claims a clean energy mix is one in which NCRE The next big battle for oil in Latin America will predominates. This is not true for any country or not be fought in the oilfields but in the ministerial region on . The countries that rank highest cabinets and parliaments where decisions will be on Yale University’s Environmental Performance made on reforming national oil companies and Index have done so without relinquishing any the energy sector in general. In this regard, what source of energy; they assign major roles to happens with Mexico’s national energy company hydroelectricity, nuclear energy, and NCRE. On PEMEX—the great model of a state firm from average, the latter accounts for no more than 8 the 1940s and 1950s, with its rigid monopoly, percent of the mix. its dependence on finance ministers, and its high To end the current stagnation of oil production, levels of clientelism—will have huge influence in institutional and political stakeholders must again the region. At the same time, the worsening insti- play a key role. In the realm of Latin American tutional and productive decline at PDVSA will energy—especially oil and gas—national oil com- make its reform inevitable, sooner rather than panies are the largest players. Underpinned by later and irrespective of the government in power. growing resource nationalism, they will continue As regards gas, the development of shale gas in that role for decades to come. Acknowledging is worthy of careful note since there are enor- that reality will start, rather than preclude, a mous reserves in Argentina, Brazil, and Mexico. debate on the oil sector’s institutional arrange- Exploitation of reserves has not been addressed ments since it is evident that there is no single in those countries. If it were, it could bring about model of a state-owned oil company. For example, large-scale changes in the regional energy outlook. both Brazil’s Petrobras and Venezuela’s PDVSA are Finally, there is a need to revise the concepts state-owned, but they interact very differently that traditionally have shaped the of with their respective governments, differ radically oil between the United States and Latin America. in terms of their corporate governance and links It is widely believed in some US quarters that to society and the private sector and, last but not a shale gas revolution, as well as increases in least, are markedly distinct in their efficiency and domestic oil production and improvements in economic performance. energy efficiency, will put the United States on a In some countries, state-owned oil companies path to virtual self-sufficiency. If true, then, obvi- have both a business and regulatory role. In oth- ously, the importance of Latin America—espe- ers they do not. Petrobras and Ecopetrol are open cially Venezuela—will wane. If Mexico, in turn, to private investors who share in their ownership does not successfully engage in energy reform in and results through shares traded in world stock the short term, it will become a net importer of markets. For both, however, state control of the energy from the United States.

30th Anniversary Sol M. Linowitz Forum Commemorative Volume 13 Comment by atin America’s energy Patricia I. Vasquez they will affect their lives, how matrix depends upon they will be compensated—is L hydroelectricity, the not only a legal requirement result of an abundant freshwater supply and but also a moral duty. decades of policies aimed at developing infra- It is usually not true that local populations are structure around hydro-energy. Yet the region is opposed to development. Remote, marginalized moving away from that platform and increasing communities openly demand better schooling for its dependency on dirtier sources of energy. The their children and improved health care. What they region’s coal consumption, for example, went up oppose are imposed decisions. If people are going by more than 7 percent last decade, from 20.1 to be relocated to open the way for a hydroelec- million tons of oil equivalent in 2000, to 29.8 tric project yet are destined to remain in the dark million in 2011, according to the BP Statistical because it is unprofitable to expand the electric grid Review of World Energy 2012. to their community, then most certainly they will Is Latin America shooting itself in the foot with oppose the project. More often than not, commu- regard to energy? nities depend on information from the civil society Latin America should enforce, not reduce, hydro- to make up their minds about an energy or natural electricity—part of a clean and economically advan- resource project. Inaccurate assumptions or incon- tageous power mix—as its main source of energy. gruent agendas may result in civil society discourse But support for dam construction today is not a pop- that does not convey the real picture or that fails to ular move; politicians would rather stay away from match the demands or needs of local communities. dams, particularly during the electoral season, owing When the private sector is involved, companies to strong opposition that has emerged in recent years make efforts to reach out to local communities and to from environmentalists, indigenous people, and local fund some of their basic needs: a school, a . communities. Opposition to hydroelectricity proj- But these privately funded social development pro- ects in Latin America does not come out of the blue. grams are usually not sustainable in the long term. A Memories of forced displacements with no compen- sort of paternalistic dependency develops when the sation and of hydroelectric constructions social development agenda results from a top-down done under corrupt governments are still fresh. And company effort rather than from a bottom-up partic- of course, there is always someone who benefits from ipatory mechanism with the community. Educating the conflict and tries to stir the controversy behind the population is fundamental so that they can put the scenes to keep it going. Paradoxically, oppo- forward their demands, make informed judgments, sition to dams leaves dirtier energy sources as the and remain updated about projects that directly alternative. concern them. It would be useful to create spaces Burying the controversy under the carpet for where these issues can be debated, such as at uni- political reasons is a poor approach. There has versities, through the media, or in schools. been no concerted effort to understand the dis- There is no such thing as a conflict-free energy putes and much discussion has been confronta- project, but intense reactions can be prevented or tional. All stakeholders should take a step back mitigated when the debate involves an educated to examine the source of the conflict, which population with a space to express its views and is not one but a combination of issues. On the grievances. Setting up this framework, however, part of governments, transparency is sometimes would call for a political commitment—and that an endangered species. However, informing the is the piece that is often missing. population of the pros and cons of projects—how

14 The Americas in Motion: Looking Ahead China and Latin America: What Lies Ahead?

By Margaret Myers

n 2001, more than a decade ago, China’s China has become a top trading partner, a major then-President Jiang Zemin predicted that the investor, and an increasingly active lender for I21st century would be one of Chinese-Latin various countries in the region. In terms of American cooperation “in all areas, hand in hand.” trade, according to the United Nations Economic While broad-based bi-regional cooperation is a Commission for Latin America and the Caribbean long way off, China’s economic engagement with (ECLAC), China is now more important for South Latin America has been one of the major sur- America’s growth than the United States. prises in terms of regional economic development Latin America’s external relations over the over the past few decades. At the end of the Mao course of the next thirty years will be equally era, just over thirty years ago, China was of little difficult to predict. There is little certainty with economic consequence to most Latin American respect to China’s future development—and even nations. At that time, Chinese restaurants, immi- less so in terms of its global engagement. Moving grant communities, occasional Communist party- forward, however, few would envision a Latin to-party exchanges, and other forms of political America absent of Chinese involvement. The interaction formed the basis for China’s limited Asian power has become an established economic engagement with the region. presence in the region. The intensity of Chinese- Relations between and Latin America Latin American economic engagement may in the 1970s and early 1980s instead were dom- decline somewhat as China’s breakneck growth inated by Japan, which sought greater access to begins to slow, but it is unlikely to backtrack con- natural resources following the 1973 oil crisis. siderably. Japan, after all, has maintained strong Like China’s more recent engagement, Japan’s economic linkages to Latin America despite initially consisted of inter-industry trade and decades of economic stagnation. It still surpasses public-private ventures involving raw materials, China in terms of investment. such as , metals, grains, wood, and salt However China-Latin America relations develop deposits. Japan’s foreign direct investment (FDI) over the next few decades, the challenge for Latin in Latin America, much like China’s current mix, American nations, as ECLAC’s Osvaldo Rosales was focused on resource acquisition or directed has argued, will be to avoid a modern version toward offshore accounts in the Caribbean. of the center-periphery relationship that histori- Few would have predicted only thirty years ago cally limited the region’s development prospects. that Chinese economic activity in Latin America Responsibility increasingly will fall to the region’s would eventually surpass that of Japan—or even policymakers, national and local leaders, and that of the United States and Europe, in certain even the private sector to improve regional com- cases. Over the course of only a decade, however, petitiveness and achieve “win-win” relationships

30th Anniversary Sol M. Linowitz Forum Commemorative Volume 15 || A drop in Chinese growth to 7.5 percent with China and other part- would reduce institutions. A Bank of America/ ners. Efforts to address Latin Merrill Lynch study suggests commodity prices and America’s enduring competi- that a drop in Chinese growth to tiveness and productivity chal- exports to China by only 7.5 percent would reduce lenges are increasingly critical commodity prices and Latin up to 10 percent and as the region deepens relations American exports to China by not only with China, but with 3 percent respectively. up to 10 percent and 3 percent, India, Japan, Korea, Russia, and || respectively, with hydrocarbons other global powers. and metals exporters bearing the brunt of the slowdown. Further slowing of growth Chinese Economic Growth and would be especially detrimental to Ecuador, Relations with Latin America Venezuela, Peru, Chile, Colombia, Argentina, and Brazil, according to most calculations. As the world’s second-largest economy, with The possibility of an economic “hard landing” expected trade in the amount of US$4.8 billion by in China is not so far-fetched. The country faces a 2015, China’s stability and economic prosperity wide range of economic challenges that will prob- factor into most any global economic calculation. ably intensify in coming years. Local debt, public China-Latin America relations, driven largely by sector inefficiencies, banking sector vulnerabili- trade, are similarly linked to China’s development ties, geographical disparities, rampant official cor- prospects. As has been the case since the formation ruption, high unemployment, resource scarcity, of its “going-out strategy” in the 1990s, China’s environmental concerns, and inflation are all pos- external relations will continue to be shaped by sible destabilizing factors. They threaten China’s domestic developments, including the likelihood growth and Chinese Communist Party credibil- of slowing GDP growth over the next few years ity. Sustained growth over the next few years will associated with an overhaul of China’s develop- require careful economic and social planning on ment model. With this in mind, one might imagine the part of China’s new leadership, but recent three distinct scenarios for China-Latin America political turmoil suggests a lack of agreement on relations over the next decade and beyond. the way forward. The first, which has received considerable Extensive economic correction in China over attention in Latin American media, involves a the next decade would be accompanied not only dramatic slowing of Chinese growth and a related by a marked decrease in Chinese global trade and decline in Chinese demand for Latin American investment, but also a possible decline in other commodities. Growth as low as 3 percent by the forms of engagement. China has intensified its soft end of the decade, as predicted by a handful of power initiatives in Latin America in recent years. economists, could lead to global misfortune. In Confucius Institutes, and culture centers Latin America, it would deal a catastrophic blow funded by the central government, are now prev- to major commodities exporters, to regional pros- alent throughout the region. CCTV en Español perity more broadly, and to burgeoning China- is broadcast in various countries. And China’s Latin America relations. People’s Liberation Army has engaged in human- A drop in Chinese growth of only 1 percent- itarian assistance around the region. A Chinese age point is associated with an approximate 2 economic “hard landing” would reduce not only percent decline in the growth of commodities prospects for Chinese economic engagement prices, according to reports from several financial

16 The Americas in Motion: Looking Ahead || Much of China’s cooperation and but also China’s military pres- cultural engagement half of 2012 as promoting ence, educational initiatives, continued resource-intensive in Latin America is media-related efforts, and cul- domestic investment. tural activities in the region. intended to curry Sustained demand and high Much of China’s cooperation commodity prices would likely favor in the region’s and cultural engagement in prolong the China-related eco- Latin America is intended resource-rich countries. nomic boom in parts of Latin to curry favor in the region’s || America. They might also resource-rich countries. Work encourage deeper economic toward this end is much less necessary in the face collaboration and expanded political, social, and of declining demand for raw materials. educational cooperation. In many cases, bilateral A second, much more optimistic, scenario envi- educational, cultural, scientific, and technical sions China-Latin America relations progressing cooperation have accompanied China’s deepening much as they have over the past decade, with economic engagement with the region. But preser- engagement based predominantly on existing vation of the existing composition of trade between trade complementarities. This scenario assumes China and Latin America—in which Latin America continued high rates of economic growth in China exports mostly commodities and imports man- and corresponding high levels of demand for ufactured goods—would present ongoing chal- raw materials and agricultural commodities. It is lenges for Latin American policymakers. Concerns based on an assumption that China’s demand for in the region about de-industrialization, export non-agricultural commodities will remain high, “primarization” (export of higher proportions of spurred on by resource-intensive infrastructure, primary goods), environmental degradation, and the industrial sector, and affordable housing pro- insufficient technology spillover have all accom- grams specified in China’s 12th Five-Year Plan. panied China’s growing engagement over the If implemented, these ambitious infrastruc- past decade. These concerns will persist so long ture projects will require sustained import of raw as China’s economic activity is perceived to be materials from around the globe. At current rates resource-driven and focused predominantly on the of consumption, China is self-sufficient in only region’s primary sectors. five of the nineteen major minerals. And imports A third scenario, and one that is favored by of iron ore, crude oil, and now account most economists and major financial institutions, for more than 20 percent of the country’s total assumes a slight decrease in China’s GDP growth imports. In 2011, China’s and iron in the coming years as China promotes consump- ore imports were as high as 63.14 million tons tion-driven economic growth over its current and 177.17 million tons, respectively; that rep- investment-heavy model. Slowing of this nature resents increases of 11.4 percent and 14.3 per- comes as no surprise; it is already taking place to cent over the previous year. Goldman Sachs has a certain extent. Premier Wen Jiabao alerted the adopted a bullish outlook for both China and Chinese public to the prospect of slowing growth industrial commodities based on China’s massive nearly two years ago in his 2011 Government urbanization efforts and Beijing’s continued focus Work Report. The 2012 Government Work Report on affordable housing construction. Others see announced a further decline in growth to 7.5 per- China’s surge in social financing over the second cent over the course of this year, and predicted

30th Anniversary Sol M. Linowitz Forum Commemorative Volume 17 || Facing uncertainty at home, China an average of 7 percent growth is reevaluating its predicted a drop of 8.5 percent between 2011 and 2016. in iron ore prices over 2012 as economic involvement Growth in the 7 percent range growth in Asian produc- is more “sustainable” than pre- in the region, tion weakened. vious record rates, according to The economic relation- especially its high- China’s leaders. ship between China and Latin By most all accounts, a near 1 risk engagement. America is rather established percent decline in China’s GDP || at this point. Latin America growth rate over the course of will continue to look to Asia the year still implies fairly high rates of demand and elsewhere to diversify its economic partner- for certain Latin American commodities, albeit at ships. Of interest, though, is whether a slight lower levels than in previous years. This is espe- dampening of Chinese trade and investment cially the case with agricultural commodities. will encourage more pronounced anti-China Despite a nationwide focus on improving agricul- sentiment in the region. The economic benefits tural intensity, China’s production capacity remains of engagement with China have justified deals limited. Desertification and environmental degra- with the Asian giant even in the face of public dation further threaten the country’s food security. opposition. Certain political parties and interest Toxic chemicals have contaminated as much as 10 groups in Mexico, Brazil, Venezuela, Ecuador, percent of farmland, according to some estimates. and much of the Caribbean have expressed As a result, at current levels of demand, China concerns about China’s effect on their coun- will soon import 13 percent of its agricultural tries’ long-term economic well-being. Criticism goods. This bodes well for Latin America’s agri- of China was especially evident in the lead-up cultural giants, some of which already are doing a to recent Venezuelan and Ecuadoran presiden- commendable job of promoting their agricultural tial elections. These arguments could hold more exports in the Chinese market. In 2011, Argentina weight if the impact of slowing growth in China negotiated protocols with China for the export becomes increasingly apparent. Anti-China sen- of meat, corn, limes, peas, and apples. Ecuador timent might also increase in the event of rapid reportedly signed an agreement in 2011 to export expansion of Chinese trade and investment. But 3,000 tons of cocoa to China. Chile, Colombia, although China’s broad-based urbanization efforts , and others are also looking to expand are likely to sustain demand for Latin America’s agricultural exports to China. raw materials for the time being, decelerating China’s recent slowdown from its 8.9 per- Chinese growth in coming years would indicate a cent annualized growth rate has yet to lead to a leveling, and not a rapid expansion, of economic reduction in purchases, according to Brazilian engagement in Latin America. officials. There are some indications, however, Criticism of the relationship is not unique to Latin that slowing Chinese growth is already affecting America. Facing an uncertain economic environ- demand for and prices of construction-related ment at home, China is reevaluating its economic commodities and equipment. China’s curb on involvement in the region, especially its high-risk property sales and plans to shift the economy engagement. Its preferred status in Venezuela won’t toward a consumption-driven model have been be guaranteed in a post-Chávez political environ- associated with a 20 percent decrease in iron-ore ment. And the $36 billion in loan agreements nego- prices between 2011 and 2012. Australian firms tiated between Chávez and China’s policy banks

18 The Americas in Motion: Looking Ahead || Argentina and Brazil have embraced will face scrutiny in the coming protectionist measures April 2011 to boost economic years. Even commodities-backed and trade linkages with the in response to Chinese loans—the China Development Pacific region. The sixth in a Bank’s preferred lending mech- manufacturing sector series of China-Latin America anism—may prove overly risky Business Summits was held in competition. in Venezuela, where the political Hangzhou in October 2012 to situation is precarious at best. || create linkages among nearly 1,000 Chinese and Latin Latin America’s Diverse American firms. Recognizing the transforma- China Policy tive effect of Chinese trade, Costa Rica initiated It is fair to say that Latin America’s short- and and later enacted a free trade agreement (FTA) mid-term economic prosperity is tied—for better with China. Peru and Chile have done the same. or worse—to China’s economic growth prospects. Colombia is now in the process of conducting For certain Latin American countries and sectors, its own feasibility study for an FTA with China. fluctuations in Chinese demand could mean the And Chile is presently negotiating an FTA with difference between continued high rates of growth Hong Kong. If signed, it will be Hong Kong’s first and economic misfortune. This is especially the with a Latin American nation. Outward-oriented case for Latin American metals exporters, which policies should position these countries to reap are most susceptible to demand fluctuations. the benefits of enhanced trade, FDI, and financial Concerns about slowing Chinese growth (as well integration. China’s effects on the environment, labor stan- The region’s policy responses are also informed dards, industry, and domestic institutions) have by complex domestic and sub-regional political led to a wide variety of policy responses across the dynamics. Venezuela, Ecuador, Cuba, and, to region over the past decade. a lesser extent, Bolivia look to China (as well as Latin American countries derive varying degrees to one another) for aid, finance, and even con- of economic benefit from Chinese engagement. As sultation on macroeconomic policy and financial a result, China-related policies differ from coun- matters. Ecuador and Peru face substantial resis- try to country. For example, Mexico and Central tance to Chinese activity from their indig- America benefit significantly less from trade with enous populations. And Brazil’s labor-friendly China than their South American counterparts. government is alternately welcoming of Chinese Mexico has an 11:1 trade deficit with China; most engagement and beholden to industrial special of the region’s commodities exporters maintain interests. In economic terms, regional responses a surplus. Mexico’s relationship with China over have ranged widely, from expanding trade liberal- the past decade has not been one of immediate ization to full-fledged protectionism—with every- “mutual benefit” or of ease, necessarily. thing in between. Though increasingly reliant upon commodities Argentina and Brazil, most notably, have exports and high commodity prices for economic embraced decidedly protectionist measures in growth, Chile, Peru, and Colombia, in particular, response to Chinese manufacturing sector com- are making respectable progress toward deep- petition. While unable to impose direct tariffs ening economic cooperation with China and due to its Mercosur affiliation, Argentina’s gov- Asia more broadly. Peru, Chile, Colombia, and ernment has implemented a series of policies over Mexico signed the Pacific Alliance agreement in the past few years to restrict foreign imports. This

30th Anniversary Sol M. Linowitz Forum Commemorative Volume 19 || Chinese demand enabled action is leading to higher costs Latin America to macroeconomic policy in these for consumers and taxpayers. countries will prevent longer-term emerge from the Both Argentina and Brazil have gains from Chinese lending. proposed caps on foreign - global economic crisis While Latin American coun- holdings, largely in response to tries have adopted a wide range relatively unscathed. booming production of responses to China’s grow- and growing Chinese inter- || ing presence, few are imple- est in overseas land purchases. menting the sort of structural, Following a 35 percent surge in Chinese imports in competitiveness-enhancing measures so often 2011, Brazil’s President Dilma Rousseff initiated a prescribed for long-term economic prosper- series of preferential tax policies for domestic pro- ity. Persistent demand for commodities exports ducers as part of the “Plano Brasil Maior” indus- coupled with soaring commodities prices has trial policy. The country’s September 2011 tax on enabled certain countries to achieve high rates imported vehicles generated concern at the World of growth without the need for painful compet- Trade Organization (WTO), which has noted a itiveness-enhancing reforms. In the absence of global trend toward protectionism in the aftermath (often politically unpopular) structural change, of the financial crisis. The Chinese have expressed however, the region’s long-term growth pros- concern about protectionist trends in recent aca- pects aren’t especially promising. Latin America’s demic publications and policy documents. manufacturers have been dealt a severe blow, and China also remains a top target of antidump- commodity-centered development is not optimal ing authorities in Argentina, Brazil, and Mexico, in the long run—even with sustained demand. which emphasize trade imbalances brought about Furthermore, the region’s new trade linkages still by an undervalued Chinese currency. Following assume considerable export of raw materials and termination in 2011 of trade barriers protecting agricultural goods. Expansion of trade based on Mexican enterprises from low-priced Chinese primary commodities will promote continued goods, the Mexican government vowed to con- high rates of growth only in a best-case global tinue fighting unfair Chinese trade practices in economic scenario—one in which the Eurozone the WTO. The relationship is such that China has muddles through, the United States continues come to expect retaliation against certain manu- its slow economic recovery, China grows at rela- factured exports. Its 12th Five-Year Plan identifies tively high rates, and demand for Latin America’s a growing need for mutually beneficial “win-win” exports remains high. trade relations to avoid protectionist measures. If Latin American nations are planning at all with For yet another set of countries, China assumes respect to China, they are not anticipating a worst- a role of last-resort financier. According to a report case scenario. The expectation, instead, appears to published in 2012 by the Inter-American Dialogue, be more of the same in terms of trade and economic China has provided approximately $75 billion in demand from China—even though most bets are loan commitments to Latin American countries since on further slowing and fluctuations in demand as 2005, with the vast majority going to Venezuela, China prepares to overhaul its economic growth Ecuador, Argentina, and Brazil. Commodities- model. Referencing severe air pollution in China’s backed loans have financed large-scale infrastructure northeast, even the strongly pro-Party Global and social projects in Venezuela and Ecuador, in par- Times urged China to reevaluate its growth model. ticular. However, weak institutions and questionable Without rebalancing and reforms, as Morgan

20 The Americas in Motion: Looking Ahead || Latin America will not be able to Stanley’s Stephen Roach recently depend on China in development as prescribed in argued, the days of the auto- its 12th Five-Year Plan and the event of another matic Chinese soft landing may 18th Party Congress foreign be over. China’s future economic economic crisis— policy pronouncements. development will depend in large Looking ahead, most would especially if China’s part on the leadership’s ability to anticipate further expansion implement much needed eco- slowing growth of China-Latin America rela- nomic and institutional reform is the culprit. tions. China has begun work- in the coming years. ing with the Inter-American Chinese demand enabled Latin || Development Bank and through America—and the region’s com- regional organizations like modities exporters, in particular—to emerge from ECLAC and the Community of Latin American the global economic crisis relatively unscathed. and Caribbean States (CELAC) to develop stron- Latin America will not be able to depend on ger partnerships and more balanced relations with China in the event of another economic crisis, the region. This is a positive step and evidence of however—especially if China’s slowing growth China’s commitment to a long-term presence in is the culprit. Furthermore, despite promotion Latin America. But the onus is on regional lead- of “mutually beneficial” and “win-win” policy in ers to establish favorable agreements with China most all of its overseas dealings, China’s motiva- and to seize upon current high rates of growth tions for engaging the region—whether in terms to develop a robust long-term growth agenda. By of trade, investment, culturally, or otherwise—are most accounts, continued progress will require firmly linked to its own domestic interests. The implementation of difficult structural reforms very premise of China’s “going-out” strategy (the and competitiveness-enhancing measures. While country’s policy for firm-led overseas engagement) Chinese growth may very well hover in the 7 to 8 is to realize China’s long-term economic and percent range for years to come, it would be pru- social development. China’s global engagement dent to plan for a less rosy scenario. remains driven by its leaders’ plans for domestic

30th Anniversary Sol M. Linowitz Forum Commemorative Volume 21 Comment by argaret Myers does Alejandro Izquierdo Despite this long-run trend, a very good job in China’s recent slowdown has Mpresenting possible had an impact on several scenarios for China’s economic future while try- commodity prices. Agricultural and raw materials ing to assess their likelihood, their potential effect fell 12.6 percent in 2012, metals were also down on Latin American countries, and their impact by 18.6 percent, and iron ore prices dropped a on China-Latin America relations. As Myers notable 23.4 percent. This apparently large sen- acknowledges, growth in Latin America to a large sitivity of commodity prices to Chinese growth extent was due to favorable external factors, one is partly due to the lack of demand by industrial of them being quite positive terms of trade.1 A countries, many of which are now in recession or substantial share of Latin America’s expansion growing only slowly. However, this sensitivity may came from growth in commodity prices, pushed become more relevant as China and other BRIC up by rising demand from China as foreign direct countries assume a larger share of global trade investment and purchasing power increased. because, as mentioned in a recent Inter-American A question lingers in Myers’ work: Will this Development Bank report, imports in BRIC coun- trend continue? The answer is not straightfor- tries have a larger commodity component (25 per- ward. Much of the increase in Chinese consump- cent of total imports) relative to those of industrial tion is related to greater purchasing power that, countries (15 percent of total imports).3 in turn, can be explained by the widespread shift Could China’s recent slowdown turn into very of workers from relatively unproductive agricul- low growth? This doesn’t seem the most likely tural jobs to more productive coastal-urban jobs. scenario. In addition to the long-run trend men- In 1990 only 2.6 of every ten individuals lived tioned above, so far the Chinese government has in urban areas; today roughly five out of ten do.2 successfully coped with international shocks. This trend will most likely continue, although Even during the global crisis of 2008-2009, pri- agricultural workers will be temporarily absorbed vate consumption stayed above its pre-crisis trend. at a slower rate, the result of the lack of growth by This occurred mainly as a result of policies geared large trading partners such as the United States toward increased government investment, leaving and Europe, which accounted for close to 40 per- domestic consumption trends pretty much intact cent of trade before the recent global economic at a time of global despair. This does not mean crisis. China’s ratio of rural-to-urban dwellers is that there are no threats. Many will argue that still high when compared to large but richer econ- skeletons remain in the domestic banking system, omies like the United States, where the urban-to- in part because of potentially bad loans to public rural ratio is eight out of ten. Therefore, even with enterprises and government agencies. And inter- the slowdown, there is room for China to further national reserves, which could be used to support absorb workers into urban areas—with subse- the banking system, accounted for more than 55 quent increases in productivity and demand. This percent of credit to the private sector in 2008, but trend pushes in favor of Chinese growth. are now down to 33 percent. What should Latin America expect as a result of China’s recent slowdown? One clear 1 Research supporting this statement can be found in “Booms and Busts in Latin America: The Role of External message is that the region should not rely on Factors,” by E. Talvi, A. Izquierdo, and R. Romero, IDB Work- ing Paper 631, (2008). 3 See IDB annual macroeconomic report “One Region, Two 2 Source: World Development Indicators database, World Speeds: Challenges of the New Global Economic Order for Bank. Latin America and the Caribbean,” March 2011.

22 The Americas in Motion: Looking Ahead forever-increasing commodity prices to generate commodity exports on their own are unlikely to growth. Latin America’s commodity exports may generate sustained growth. remain high—most likely as a result of the struc- This brings me to the next question: What tural changes underway as China and other Asian should Latin America do—in terms of poli- economies participate more actively in global cies—with the proceeds from the commodi- demand—but the upward push in commodity ty-price bonanza? To begin with, large upswings prices is likely to wane for a while, and incentives in commodity prices may very well bring Dutch to growth stemming from this source are likely disease effects, making non-tradable goods more to decline. expensive, raising production costs, and erod- Has the recent commodity bonanza worked for ing competitiveness. It was clear when the boom everybody? As Myers clearly states, Mexico and started—and even clearer now—that resources Central America—mostly net commodity import- derived from the commodity price bonanza ers—have benefited less from trade than coun- should be invested in areas that will make the tries in commodity-exporting South America.4 In region more productive. Governments will need fact, the former group has experienced declining to think about policies such as facilitating invest- terms of trade on average. But it is not all bad ment in better roads and port infrastructure—for news for this group. China’s prosperity has been example, by promoting public-private partner- accompanied by rising wages in coastal areas, a ships—or that support R&D activities leading factor playing against Chinese competitiveness. to innovation and increases in total factor pro- Consider the case of Mexico. According to JP ductivity. They also need to think about working Morgan, the ratio of Mexican-to-Chinese salaries on frameworks that will promote reallocation of was about 4-to-1 in 2001—making it difficult for workers from small, informal, and less produc- Mexican firms to compete against their Chinese tive firms into large, formal, and more produc- counterparts. The ratio has now narrowed to tive firms.5 As indicated in a recent only 1.2-to-1. This, coupled with proximity to report, in contrast to the Japanese expansion that the United States, makes Mexican industry look led to the Japan-Tigers connection, there is little much more competitive in the eyes of interna- evidence so far that China is fostering productiv- tional investors. ity growth in the region as Japan did for the East How should Latin America approach Chinese Asian economies in the past. That means Latin expansion and the region’s commodity-export-led America will need to work harder on raising pro- growth? Myers ascertains that soaring commodity ductivity by means other than the China-Latin prices have enabled certain countries to achieve America connection.6 high rates of growth without the need for pain- ful competitiveness-enhancing reforms and that a robust long-term growth agenda should be devel- oped. Does this mean that commodity exports should be discouraged? Quite the contrary. They should be part of a larger growth agenda that embraces this expansion while recognizing that

5 See “The Age of Productivity,” IDB Dialogue in the Ameri- 4 See IDB annual macroeconomic report “One Region, Two cas (2010) for a discussion on worker allocation. Speeds: Challenges of the New Global Economic Order for 6 See “Latin America’s Growth Prospects: Made in China?” Latin America and the Caribbean,” March 2011. World Bank LAC Report, September 2011.

30th Anniversary Sol M. Linowitz Forum Commemorative Volume 23 Comment by argaret Myers’ Barbara Kotschwar natural resource base to the excellent paper detriment of non-Chinese M“China and Latin users and consumers around America: What Lies Ahead” provides an infor- the globe. This scenario would guarantee contin- mative overview of the China-Latin America ued discussion—likely with supporting evidence dynamic, grounding this relationship in historical on both sides of the argument—about whether perspective and offering three reasonable lenses China is perpetuating a new era of resource curse through which to view the future. All of these outcomes, with diversion of revenues to cor- lenses underscore a main message about how vul- rupt elites, poor labor and environmental prac- nerable Latin America is to external factors. tices, and marginalization of local populations in Myers’ first scenario, her doomsday case, has regions with oil or minerals. It also would have China’s growth slowing dramatically, with the implications for global climate change discus- commensurate plunge of commodity prices on sions. China’s enhanced economic activity, much whose continued rise many Latin American econ- of it based on Latin American resources, will have omies have become so reliant. This scenario pre- a significant impact on the environment. How dicts a “hard landing” for China and, in response, much will Latin American countries be pressured a diminution in China-Latin America relations as to side with their trading partner in subsequent China struggles with scarcity. This scenario has climate talks? worrying implications for Latin American growth. The third scenario, a much-tempered version This scenario is cautionary enough, even without of the doomsday scenario and Myers’ most real- explicitly taking into account the impact that istic one, incorporates cautions from the first two such a slowdown of the global growth engine scenarios. An interesting point is the evolution of will have on the rest of the world. Should China’s China’s approach to Latin America. Now, after a growth slacken significantly, world growth will be decade of intense engagement, Myers implies that pulled down as well, affecting other major Latin China is increasingly differentiating among Latin American trade partners and doubly impact- American countries, seeing some, like Venezuela, ing Latin America. Given that their own growth as too high risk. It will be interesting to see her will also be affected, trading partners such as follow this line of thought, to examine whether the United States, the European Union, or large such differentiation will lead to customized treat- emerging economies would be unlikely to step ment of countries and, if so, whether this will into China’s place. affect relations among Latin American countries. Myers’ “halcyon” scenario—projected by the A common theme in all three scenarios is Latin status quo—links Latin America’s economic for- America’s strong dependence on China. Myers’ tune to continued high growth in China, con- reference to Latin America’s experience with Japan tinued high commodity prices, and a continuing in the 1970s ad 1980s is instructive: At that time, reliance on China. All is not and honey in fear of a natural resource curse and of preda- this scenario, however. While Myers highlights tory investment also abounded. What this paper the positives, including continued and ramped underscores is the importance of external factors up cooperation, particularly educational, social, to Latin America’s growth and development and cultural, scientific, and technical, negatives the unpredictability that this brings to the region. abound. In this world, debate will continue Whether the main economic partner is the United around whether China is “locking up” the world’s States or Japan or China, the region’s policymakers

24 The Americas in Motion: Looking Ahead || China’s enhanced economic should be wary, keeping a close activity, much commodity financing) arrange- eye on rainy day measures in ments? Countries such as those of it based on Latin the event that economic part- in the Pacific Alliance are mak- ners fall upon hard times or American resources, ing a concerted effort to smooth shift attention elsewhere. out the bumps in their trade will have a significant Myers has set herself—and her relations by harmonizing com- colleagues at the Dialogue—a impact on the mon provisions, cumulating robust research agenda, one environment. rules of origin where possible, that I look forward to following. and signing common FTAs. In What happens as China plays || contrast, MERCOSUR members an increasingly influential role have fewer links to Asia. What is in world policies? Will Brazil, potentially embold- the impact of the current bifurcation in economic ened by new oil wealth and already starting to orientation between the Pacific-oriented countries take on China in matters of currency, expand its and the MERCOSUR countries? challenger role? What is the best way to engage Finally, I welcome Myers’ call to Latin American China? Do countries that enter into formal insti- policymakers to address their competitiveness tutional agreements (as of this writing three have and productivity challenges, particularly as they entered into free trade agreements with China) deepen their relations with Asian countries and have greater certainty and predictability in their their integration into the international system. relationship than countries such as Brazil, which This seems key under any of the three scenarios. rely more on less formal or case-by-case (such as

30th Anniversary Sol M. Linowitz Forum Commemorative Volume 25 The Politics of Latin America’s New Middle Class

By Francis Fukuyama

erhaps no development portends positive fundamentally committed to liberal democracy political change as much as the growth of and economic growth driven by market forces. Pthe middle class across a range of coun- This kind of society and politics has already tries in Latin America. This phenomenon of the begun to emerge in countries like Chile, Brazil, past decade is closely related to another trend, Colombia, and Mexico. However, while the the notable decline of income inequality for the shift in Latin America’s social structure has been region as a whole. encouraging, it is too early to count these gains The political implications of a growing middle as permanent. Even if a strong middle class does class are potentially enormous. Latin America, as emerge, the impact on politics could, under con- is well known, has been the most unequal part ditions of economic reversal, be that much more of the world when it comes to income distribu- destabilizing. Nonetheless, we need public poli- tion. The gap between elites and poor people has cies that encourage the growth of this segment of fed polarized politics and instability ever since the population. independence in the early 19th century. At one time this manifested itself as a fight that pitted The Global Middle Class Marxist and other extreme-left groups against Substantial writing in the past decade has exam- anti-communist conservatives. Today, it is a strug- ined the arrival and prospects of a new global gle between populist politicians pursuing unsus- middle class that will shape the world economy tainable redistributive policies and mainstream and politics over the next two . A democratic parties, many of which fail to connect Goldman Sachs report projects that spending by with the poor. the world’s middle three income quintiles will rise The rise of a strong middle class in Latin from the current 31 percent of total income to America points to a way out of this polarization. 57 percent in 2050.1 Research by the European If the median voter is no longer a poor person but Union Institute for Security Studies estimates an individual with assets and education, rather that the middle class population will grow from than upending the system he or she will, presum- 1.8 billion in 2009 to 3.2 billion by 2020 and ably, have a greater stake in sound public policies to 4.9 billion in 2030 (out of a projected global to preserve the value of those assets and protect his or her social position. This promises the emer- gence of a political atmosphere more typical of the developed world, with contestation between cen- 1 ter-left and center-right political parties that differ Dominic Wilson and Raluca Dragusanu, The Expanding Middle: The Exploding World Middle Class and Falling on the degree and forms of redistribution but are Global Inequality (Goldman Sachs Global Economics Paper No. 170, 2008), p. 4.

26 The Americas in Motion: Looking Ahead || If the median voter is no longer a poor population of 8.3 billion).2 The person but an the term. The former tend to bulk of the growth is slated define middle class in simple individual with assets to occur in Asia, particularly income terms. A typical way China and India, but all regions and education, she will is to choose some band of income distribution, such as of the world—including Latin have a greater stake America—will participate in the middle one to three quin- this trend. in sound policies to tiles, or alternatively 0.5 to 1.5 Many countries in Latin preserve the value times the median income. This America reached middle- or makes the definition of middle even upper-middle-income of those assets. class dependent on a society’s status well before their Asian || wealth and, thus, incomparable counterparts. Nonetheless, they cross-nationally; being middle have registered additional gains. In 2002, 44 per- class in Brazil means a much lower consumption cent of the region’s population was classified as level than in the United States. poor; by 2010, this figure had fallen to 32 per- To get past this problem, some economists cent, according to the United Nation’s Economic choose an absolute level of consumption, ranging Commission for Latin America and the Caribbean from a low of US$5 a day, or $1,800 in annual (ECLAC).3 This shift is particularly notable in purchasing power parity (PPP), up to an income Brazil, where many observers have pointed to the range of US$6,000 to US$30,000 per year. This emergence of a new middle class with significantly fixes one problem but creates another since an higher levels of personal consumption. (The per- individual’s perception of class status is often rel- formance of individual Latin American countries ative rather than absolute. As Adam Smith noted varies widely in this regard, however.) Nora Lustig in the Wealth of Nations, a pauper in 18th century and her colleagues have documented an impres- might live like a king in Africa. sive fall in income inequality, as measured by Gini Using income definitions produces different coefficients, across much of Latin America in the estimates for the size of the Latin American mid- last decade—following a prolonged period when dle class. If using an absolute measure of US$2 inequality was on the rise.4 to US$20 per day PPP for a selected group of countries, the results range from 55 percent Who Is Middle Class? (Argentina) to 77 percent (Peru) of the total pop- Before we accept these findings as gospel, how- ulation being middle class, according to estimates ever, we need to define what is meant by “mid- by the Organisation for Economic Co-operation dle class.” There is a sharp distinction in the way and Development (OECD). Using a median that economists and sociologists think about income definition produces lower numbers, from 36 percent (Bolivia) to 50 percent (Mexico).5 Another OECD estimate places Latin America’s 2 European Union Institute for Security Studies, Global middle class at 181 million, or 10 percent of the Trends 2030: Citizens in an Interconnected and Polycentric 6 World (, 2012), p. 28. global middle class population. 3 This figure is quoted in Francesca Castellani and Gwenn Parent, Being “Middle Class” in Latin America (OECD Development Centre, Working Paper No. 305, October 2011), p. 9. 5 OECD (2011), p. 11. 4 Nora Lustig and Luis Felipe Lopez-Calva, Declining In- 6 Homi Kharas, The Emerging Middle Class in Developing equality in Latin America: A Decade of Progress? (Washing- Countries (Paris: OECD Development Centre, Working ton, DC: Brookings Institution Press, 2010). Paper 285, Jan. 2010), p. 16.

30th Anniversary Sol M. Linowitz Forum Commemorative Volume 27 Sociologists, in a tradition beginning with Karl Table 1 shows educational attainment levels of the Marx, tend not to look at statistical measures of “middle class” measured by income in Argentina, income but, rather, at how one’s income is earned, Brazil, and Chile. In Argentina, less than 18 per- occupational status, level of education, and assets. cent of the middle class has a high school edu- Marx’s original definition of bourgeoisie referred cation; in Brazil, less than 2 percent are college to ownership of the means of production. One of educated. the characteristics of the modern world is that the Table 1: Middle Class Education Levels* ownership of capital has become vastly democ- ratized through pension plans. Even if one does Argentina Brazil Chile not own large amounts of capital, employment Primary completed 34.7 52.1 17.4 in a managerial capacity or in a profession often Secondary completed 17.9 23.2 24.5 grants a different social status and outlook than a Tertiary completed 6.6 1.9 5.4 wage earner or low-skill worker might hold. * OECD (2011), p. 22. My preferred definition is the sociological one since I am interested here primarily in the Table 2 shows the occupational structure of political implications of a growing middle class. those designated “middle class” by income char- Simple measures of income or consumption, acteristics. Together, these tables suggest that the whether relative or absolute, tell you relatively middle class revolution in Latin America is per- little about the political inclinations of the per- haps a bit less impressive than at first glance. One son in question. One of the longstanding theo- large occupational group, from 30-50 percent ries of political science, stated most forcefully by depending on country, are what in Europe would Samuel Huntington in his book Political Order in be designated as “working class” in manufactur- Changing Societies, is that instability is driven by a ing, construction, or transport. Reflecting the gap between expectations and reality with regard region’s poor performance in education, no more to both political participation and job opportuni- than 20 percent in any country could be consid- ties.7 By this theory, a poor person of low social ered professionals (many probably being teach- status and education who rises out of poverty and ers). Many of the rest are former poor—owners of then sinks back is less politically destabilizing small shops or restaurants—and workers in the that a middle class person—someone, say, with informal sector who have increased their incomes a university education—who cannot find a job due to general economic growth. and “sinks” into a level of consumption, even if that level is significantly higher than that of a for- The Middle Class and Politics mer poor person who is supposedly middle class. There has been a great deal of theorizing as to From a political standpoint, the most revealing why the existence of a middle class is import- marker of middle class status would then be own- ant, both economically and politically. William ership of assets (a house or apartment and con- Easterly has linked what he labels a “Middle Class sumer durables), which could be taken away by Consensus” to higher economic growth, edu- the government, and education level. cation, health, stability, and other positive out- If one uses education as an indicator, the size comes.8 Economically, the middle class is theorized of the middle class shrinks in a dramatic fashion. to have “bourgeois” values of self-discipline, hard

7 Samuel P. Huntington, Political Order in Changing Societ- ies, with a New Forward by Francis Fukuyama (New Haven, 8 William Easterly, The Middle Class Consensus (World Bank, CT: Yale University Press, 2006). July 2001).

28 The Americas in Motion: Looking Ahead Table 2: Middle Class Occupations*

Argentina Uruguay Brazil Chile Costa Rica Mexico Peru

Agriculture 4.0 1.1 19.5 16.5 18.4 12.7 32.6 Mining Water Elec 11.5 4.8 NA 2.6 1.7 1.0 1.5 Manufacturing 26.6 16.8 16.3 15.0 14.2 17.4 9.9 Construction, Transp 5.8 17.0 18.0 22.8 18.1 20.9 16.4 Wholesale hotels rest 16.7 21.8 21.0 16.2 22.5 22.6 23.8 Public Edu Health 18.5 20.5 9.2 11.2 9.3 9.3 8.7 Other services 16.9 17.9 16.1 15.7 15.8 16.1 7.1

* OECD (2011), p. 23.

work, and a longer-term perspective that encour- the 2000s, this has not produced classic bourgeois ages savings and investment.9 Many analysts trace values but, rather, the opposite: a decrease in the this view to Max Weber, whose famous work The propensity to save and a sense of entitlement to Protestant Ethic and the Spirit of Capitalism inserted a ever-increasing levels of consumer spending. The values-based variable into the explanation for eco- resilience of such people to economic shocks nomic growth. would presumably be different than for an abste- Unfortunately, many of these observers misun- mious Weberian-style bourgeois.11 derstand Weber. Bourgeois values by his account My main concern here, however, is the impact are not endogenous to growth; rather, they are of a growing middle class on politics. There are due to totally exogenous factors like the rise of several channels by which a middle class theoret- Puritanism in Europe.10 A poor per- ically can impact the performance of political sys- son may hit a certain income level due to thrift and tems. As noted earlier, a strong middle class with hard work, but she may also hit it due to a rising some property and some education is more likely tide that is lifting all . Social habits may not to believe in the need for both property rights and change just because one has become richer. There democratic accountability. This is not a cultural is considerable evidence that the increase in con- issue but a matter of self-interest: One wants to sumption by the former poor in Brazil has been protect the value of one’s assets from rapacious or fueled by an unsustainable increase in available incompetent governments and is more likely to credit. As in the United States during the boom of have time to participate in politics (or to demand the right to participate) because higher income 9 See Luis F. Lopez-Calva, Jamele Rigolini, and Florencia provides a better margin for family survival. Torche, Is There Such a Thing as Middle-Class Values? Class Differences, Values, and Political Orientations in Latin This view is a bit more than a theory. A num- America (Washington, DC: Center for Global Development, ber of cross-national studies, including a series of Working Paper 286, Jan. 2012.) recent Pew surveys, have shown that middle class 10 There has in fact been an exogenous religious movement in Latin America with the conversion of Catholics to evan- people have different political values than the poor. gelical , with a number of scholars noting that They value democracy more, want more individual this process has indeed yielded the kind of improved social indicators that Weber’s theory predicts. The degree to which this constitutes a durable phenomenon requires further study. See David Martin, Tongues of Fire. The Explosion of Protestantism in Latin America (Oxford: Basil Blackwell, 1990); David Stoll, Is Latin America Turning Protestant? The Politics of Evangelical Growth (Berkeley, CA: University of 11 Patricia Mota Guedes and Nilson Vieira Oliveira, Democ- California Press, 1990). ratization of Consumption (Brauder Papers 02, 2006).

30th Anniversary Sol M. Linowitz Forum Commemorative Volume 29 || No group is more dangerous politically freedom, are more tolerant of when its expectations States beginning in the as alternative lifestyles, etc.12 the franchise was broadened.14 are disappointed than By contrast, countries with The United States ended the large numbers of poor or mar- the middle class. patronage system during the ginalized voters and small elites Progressive Era at both national || have tended to produce popu- and municipal levels due to list politics. The rise of Hugo the rise of middle class groups Chávez, Evo Morales, and Rafael Correa in the whose interests were hurt by this kind of politics. countries in ALBA (the Bolivarian Alliance for Today, newly empowered middle-class entrepre- the Peoples of Our America) is less the cause of neurs, professionals, and social reformers fre- instability than a symptom of deep inequalities in quently spearhead anti-corruption efforts. those societies and the failure of their erstwhile democratic parties to develop programs with A Double-edged Sword relevance for the poor. Between 1996 and 2003, While the rise of a middle class is generally good Argentina’s middle class shrank by about 20 per- for liberal democracy, the link is by no means cent. While I cannot prove causality, this surely automatic, and in some cases middle class citi- must have had some effect on the Peronist Party’s zens may collaborate in the weakening or under- shift from neo-liberal policies in the early 1990s mining of healthy political institutions. This was 13 to populist ones in the late 2000s. true in Latin America when the middle classes A new factor in the last decade has been the rise supported military takeovers during the 1960s of the Internet and social media, which have been and ’70s.15 Many observers have pointed to the taken up much more readily by the middle class fragility of Latin America’s recent economic gains. than by the poor. Improved communications Growth has been heavily driven by commodity technology does not necessarily imply a partic- exports to Asia, rather than indigenous industrial- ular form of politics and it can be controlled or ization. If the Chinese growth engine slows down, used by authoritarian governments. Still, access as it inevitably will, the Western Hemisphere to information has been greatly democratized will suffer as well. A global recession could have over the past , and the overall impact disastrous consequences for the former poor, par- (as in the case of the Arab Spring) has been bene- ticularly if their recent consumption levels were ficial for democratic values. financed by debt rather than rising productivity. Apart from abstract support for democracy, No group is more dangerous politically when the rise of a middle class should also provide its expectations are disappointed than the middle social support for an end to clientelistic politics class. Huntington pointed out that revolutions are and anti-corruption. Clientelism can be seen almost never organized by the poor; rather they as an efficient form of political mobilization in are instigated by middle class individuals who countries with relatively poor and less educated can’t fit into the system. Even the most economi- populations. It became widespread in the United cally successful countries in the region like Chile or Brazil do not have a clear path to becoming

12 Ronald Inglehart and Christian Welzel, Modernization, Cultural Change, and Democracy: The Human Development 14 This is a topic that I will discuss further in the second Sequence (New York: Cambridge University Press, 2005); volume of my book, The Origins of Political Order. The Global Middle Class (Washington, DC: Pew Global 15 See Guillermo O’Donnell, Modernization and Bureaucratic Attitudes Project, 2009). Authoritarianism: Studies in South American Politics (Berke- 13 OECD (2011), p. 29. ley, CA: University of California Press, 1973).

30 The Americas in Motion: Looking Ahead || In countries where the middle classes high income ones. Their exist- expanded and poverty sided with the military against ing employment bases are con- former Prime Minister Thaksin declined, democracy stantly threatened by new rising Shinawatra in the 2000s powers in Asia. A prolonged has been the winner. because they feared his brand period of stagnation or eco- of redistributionist populism || nomic decline may set off a new would kill the Thai economic form of politics, perhaps unlike miracle. This has led to a sharp what we have seen. Greece today is a living labo- polarization of the country and a prolonged polit- ratory for the political consequences of a country ical crisis that is still unresolved. Something sim- whose citizens are losing their middle class status. ilar exists in China. The Chinese middle class is There are other ways in which the middle estimated at 300 million to 400 million people, or class can become a liability rather than a benefit a quarter of the country’s population. While it is to a democratic political system. One’s occupa- hard to know their ultimate political preferences tional status matters a great deal. In past gener- given the authoritarian political system, there is ations, a significant portion of the middle class evidence that they, too, fear a rapid transition to in Latin America achieved that status through democracy that would open up strong demands public employment, either in the public sector for redistribution on the part of China’s rural or in parastatals linked to the government. This poor. For a true middle class democratic consen- type of middle class offers negative implications sus to emerge, this group needs to constitute a for democracy: employment is often clientelistic, clear majority of the population so that redistri- public employees have a stake in a large state sec- butionist schemes do not threaten to derail all tor, the government—rather than private entre- economic growth. preneurship—is seen as a road to wealth and status. Francisco Ferreira finds that some of the Conclusion decline in Brazil’s levels of inequality is due to the At this point in Latin America’s history, it is diffi- shift in middle-class employment away from the cult to conceive of the middle classes openly turn- 16 state sector. If governments seek to make up for ing against democracy as they did in the 1960s falling private sector employment through public and ’70s. The post-dictatorship democratic con- sector expansion, we will be back to the old Latin sensus has held fairly strongly throughout the America of the mid-20th century. region, and middle class groups have shown little Moreover, the size of the middle class relative willingness to, for example, turn to the military to the rest of the society matters. When the mid- to prevent the rise of populist politicians. So, in dle class constitutes a minority of the population, countries where the middle classes expanded and it oftentimes sides with elites against democracy poverty declined, democracy has been the winner. because it fears that its wealth and status will be The bigger immediate challenge is whether threatened if the poor have access to the polit- middle class voters coalesce behind modern, ical system. This happened in Thailand. While programmatic political parties or are co-opted middle class Thais led the pro-democracy move- by clientelistic or personalistic parties that lever- ment against the military in the early 1990s, they age their ability to distribute public resources and jobs to followers. The Partido Justicialista in 16 Francisco H. G. Ferreira and Phillippe G. Leite, “Trade Argentina or the PMDB in Brazil are examples. In Liberalization, Employment Flows and Wage Inequality in the United States, economic modernization and Brazil,” Journal of Economic Literature, 2006.

30th Anniversary Sol M. Linowitz Forum Commemorative Volume 31 || Democracy will not be of high quality until the rise of a new middle class it begins to revolve policies rather than personali- signaled the end of clientelism ties, jobs, and individual perks. around issues and and related forms of corrup- The rise of a broad middle class tion. But in Greece and Italy, policies rather than does not guarantee either of clientelism has survived despite these outcomes. But it is hard to personalities, jobs, high levels of economic devel- envision a stable democracy or opment. Part of the reason that and individual perks. a non-clientelistic state emerg- they, and the European Union || ing in the absence of this kind as a whole, are in trouble today of a social base. In Chile and is because of the continuing Brazil, the dominant center-left role of clientelistic politics in their public sectors. parties have eschewed populism and tried to for- There is no automatic mechanism that links a mulate European-style social democratic agendas. growing middle class to good government. Social In Colombia, middle class voters have brought groups have to be organized. And until political to power new reformist mayors in Bogotá and parties represent middle-class interests, they will Medellín and have supported the strengthening of have little effect on the political system. the state required to resolve the country’s inter- Democracy in the region will not become fully nal conflicts. In Mexico, a rapidly growing middle institutionalized and stable until countries are gov- class has blocked a turn to populism and may yet erned by competitive center-left and center-right be mobilized to move past the country’s clientelis- parties that offer different policies and programs tic traditions. With continued economic growth, but share a common commitment to liberal dem- these positive trends should continue and Latin ocratic values. And democracy will not be of high America’s deep tradition of democracy will be quality until it begins to revolve around issues and more fully consolidated.

32 The Americas in Motion: Looking Ahead Comment by any of the numbers Michael Reid housing programs. This rep- tracking the rise of resent the beginnings of a Ma new middle class “property-owning democracy” refer purely to disposable income. That is import- to borrow a phrase used both by British conser- ant. The numbers give the lie to the notion that vative leaders of the past century and by philoso- everything is a disaster in Latin America. They are pher John Rawls. important for providing data for businesses about Educational coverage is expanding very rapidly. the growth of consumer markets. But they tell us In Brazil today, a 6-year-old can be expected to little or nothing about political attitudes. achieve twice as many years of education as his or I agree that a sociological approach is much her parents. Go to any self-built barriada in coun- more useful, and it is a reality check, showing tries like Peru and Mexico and you will find the that the middle class is probably no more than same story. The generation that migrated in the a third of the population in the region. (That 1960s and 1970s had only a few years of primary was the conclusion reached by the World Bank schooling; their children or grandchildren, in their in a rigorous study, published after the Linowitz twenties today, will in most cases have completed Forum, that defined the middle class in terms of secondary schooling and, in many cases, will have economic security.17) some technical or higher education. While, as Fukuyama says, a strong middle class Two caveats are in order. The quality of edu- with some education and some property is more cation in the region is improving, but from an likely to believe in the need for both property abysmally low base. If you have been taught by a rights and democratic accountability, he is surely deeply ignorant criollo Maoist, as may well be the also right to add that there is nothing automatic case in Peru, you won’t automatically turn into about the link between the growth of the middle John Stuart Mill. Second, and this is perhaps most class and the strength and quality of democracy. doubtful, will Latin America’s economies be able Argentina over the past fifty years provides a cau- to provide jobs appropriate to the educational tionary tale. It had become a predominantly mid- levels these young people are achieving? In other dle-class society, but that middle class declined words, will there be enough middle class jobs? amid a vicious circle of erratic economic growth, Latin America has far too many graduates work- fierce distributional conflicts, and mistaken policies. ing as taxi-drivers. So what are the prospects for a rapid expansion of Latin America’s middle class in a sociological The New Middle Class sense? We know something about the political atti- Take two of the attributes of the middle class: tudes of the new middle class—and we can make assets and education. After disappearing for a gen- guesses at others. The traditional middle class, eration because of financial instability, mortgages still a presence in Argentina and Uruguay, worked are once again available in many Latin American in the public sector and had many statist atti- countries. And there are low-cost government tudes. The new middle class is much more likely to be employed by the private sector. Many of its 17 “Economic Mobility and the Rise of the Latin American Middle Class,” World Bank, November 2012. members are in the informal sector. The OECD The World Bank has the citation as: Francisco H.G. Ferreira, found that in the typical Latin American country, Julian Messina, Jamele Rigolini, Luis-Felipe López-Calva, Maria Ana Lugo, and Renos Vakis, “Economic Mobility and around half the middle class does not contribute the Rise of the Latin American Middle Class,” (Washington, to a pension. DC: World Bank, 2013).

30th Anniversary Sol M. Linowitz Forum Commemorative Volume 33 || The expansion of the new middle class The new middle class is also offers hope of political study found hostility to welfare likely to seek private education programs among the new mid- progress, but it is still and health services, both for dle class in Peru. aspirational reasons and as a fragile and reversible. Unlike the traditional mid- silent rebellion against the poor dle class, many members of the || quality of public provisions. new middle class are Private schools are mushroom- or . To the extent that ing in former barriadas. Most of the threefold they face discrimination from the traditional increase in the numbers of Brazilians in higher middle class, they may be open to the appeal of education between 2000 and 2010 is explained populist leaders. by the expansion of private institutions. Much the The expanding middle class has been a huge same is true in Chile. The student movement in beneficiary of economic stability, so it would be Chile is a demand for greater state provision, or logical to think it will be intolerant of higher facilitation, of education for all. It is likely to be inflation. But against that, middle class Latin matched elsewhere. Americans are debtors, rather than savers. They On the other hand, an expanding middle class have benefited, too, from open economies and reliance on private education and health care may foreign investment. make its members resistant to higher taxes. That The traditional middle class in Latin America could be a problem in Mexico or the Andean has been, by turns, complicit in or intolerant of countries, but it could be an important check on corruption. One would hope that an expanding statism in Brazil. (For those in the informal sector middle class would spawn a kind of Progressive this may be a non-issue to the extent that they Movement favoring clean government, as in the don’t perceive the impact of the indirect taxes United States a century ago. It doesn’t help that they pay.) the middle class in Latin America is expanding at These issues serve as an example of how the a time when political parties and traditional forms new middle class is starting to put much more of representation are in crisis worldwide. The new sophisticated demands on the state. It is no lon- middle class is not organised, but it is as techno- ger enough for political leaders to merely offer logically connected as never before. una obra por ahí or to control a price. In the 20th There are some signs of that in the formation century, in different ways, countries such as of NGOs or online watchdogs monitoring public Brazil, Mexico, Argentina, and Venezuela were spending or in the popular mobilization behind state-dominated societies. In this century, thanks the Ficha Limpa law (that bars congressional candi- in large part to the expanding middle class, these dates with criminal records) or in the new student societies are becoming much more dynamic, and movement in Mexico. But this year, middle class that requires a rethink about the role of the state. votes may be decisive in giving power to the PRI. The political attitudes of many in the new In many ways, this is a subject with more ques- middle class were formed when they were poor. tions than answers. Some seem to favor redistribution. For example, It is appropriate to conclude by citing Fernando the new middle class in Brazil has been until now Henrique Cardoso who, in the A Soma e Resto broadly Lulista. But others are what in Britain used reflections published on his eightieth birthday last to be known as working-class Tories. A Brookings year, said: “The data show an increase in income,

34 The Americas in Motion: Looking Ahead the formation of new middle classes, but nobody Will the new middle class act as a political really knows what is the political and social signif- constituency for reform? Or, as the commodity icance of this phenomenon.” That may be a frus- super-cycle draws to a close and growth slows, trating conclusion, but it is an honest and accurate will middle class resentment provide further fuel one, and it shows that the new middle class calls for populism? That is perhaps the biggest polit- for a vital field of study. ical question in the region—and one for which After a decade of commodity-fueled growth, Latin it is hard to give a clear answer at the moment. America is entering a new period in which raising My prediction would be that the expansion of the productivity and encouraging innovation and com- new middle class offers hope of political progress, petitiveness will be key to sustaining growth. but it is still fragile and reversible.

30th Anniversary Sol M. Linowitz Forum Commemorative Volume 35 Social Trends in Latin America: Time to Move Beyond Growth?

By George Gray Molina1

atin America is into its tenth year of sus- transfers, including conditional cash transfers tained economic growth. Since 2002, pov- (CCTs) or non-contributive pensions, and pri- Lerty in Latin America and the Caribbean vate transfers such as remittances.4 The rapid rise has dropped by about 58 million people, with in labor incomes tends to support the view that 167 million remaining under the poverty line most achievements are growth-led. However, too (equivalent to 29 percent of the population using little is known about how labor markets translate national poverty lines, or 28 percent using the firm-level growth into broad-based income gen- $US4/day international poverty line).2 Inequality eration. Rather than trickle-down via good jobs has also fallen in fourteen of seventeen countries, in high-productivity sectors, recent growth is led by improvements in labor income and better occurring in service sectors fueled by consumer educational returns at of the income demand. Does what is happening in the labor distribution.3 However, structural challenges hin- markets explain everything? Or are the long-run der further progress. This is a good time to take effects of educational and health policies or policy stock of the growth-poverty linkages and ask interventions in the labor market, such as formal- what lessons can be learned. ization or minimum wage floors, also factors?5 An important question is whether further social gains can be expected from more economic The High-hanging Fruit of Latin growth. Most poverty and inequality reduction American Progress can be explained by rapid and sizeable increases Recent labor income gains in Latin America in labor income, followed by the effect of public concentrate in the service sectors, favoring male

1 George Gray Molina, United Nations Development workers and largely bypassing youth employ- Programme (UNDP), Regional Bureau for Latin American ment. Labor income was also tempered cycli- and the Caribbean. Email: [email protected]. All opinions are personal, and do not reflect the institu- cally, as labor shares improved during crises, and tional position of UNDP. Many thanks to Susana Martinez public transfers weighed most at the peak of the for permission to use research from Martinez, Susana and George Gray Molina, 2013, “The High Hanging Fruit of Latin economic crisis in 2009. This pattern reveals America Progress,” Human Development Research Brief interesting facts that run counter to the conven- 01/2013, New York, UNDP. tional wisdom. 2 World Bank, On the Edge of Uncertainty: Poverty Reduc- tion in Latin America and the Caribbean during the Great First, rises in labor income account for an esti- Recession and Beyond, (Washington DC: World Bank, 2011); mated 45 percent of the total poverty reduction Panorama Social de America Latina, : CEPAL (2012). 3 Luis Felipe Lopez-Calva and Nora Lustig (editors), 2010, Declining Inequality in Latin America: A Decade of Prog- 4 World Bank, 2011, op. cit. ress? (Washington, DC: Brookings Institution, 2010, and 5 Saúl N. Keifman and Roxana Maurizio, Changes in Labour UNDP, 2009); Leonardo Gasparini and Nora Lustig, “The Market Conditions and Policies: Their Impact on Wage Rise and Fall of Income Inequality in Latin America,” (La Inequality during the Last Decade, (Helsinki: UNU-Wider, Plata: CEDLAS, 2011). 2012).

36 The Americas in Motion: Looking Ahead || Rises in labor income account for 45 percent effect, followed by social trans- of poverty reduction, With 167 million people still fers (16 percent), pensions (10 under the poverty line in Latin followed by social percent), and an increase in the America and the Caribbean and number of working-age individ- transfers, pensions, 66 million under the indigence uals (9 percent).6 Proportions line,7 there are still gains to be and an increase in the vary. Brazil and Chile see more made from further growth in impact from transfers and number of working- labor income and by expanding pensions, and Mexico is more age individuals. existing fiscal and social pro- affected by labor income. Still, tection programs. Much of the the overall figures are signif- || remaining poverty, however, icant because they show that is concentrated in sectors and wages are rising in Latin America like they haven’t geographic areas that have either hit declining for close to two decades. returns or are excluded from the dynamic sectors Second, the growth patterns diverge from of the economy and/or existing social safety nets. Chinese and Asian patterns. LAC economies are Two general trends are salient. First, labor par- not expanding through improvements in manu- ticipation and wages have increased since 1995, facturing or upgrades in technology. In contrast with males benefitting to a greater extent. Second, to economies driven by strong manufacturing/ the share of labor participation in the service sec- export sectors that create jobs in non-tradeable tor accounts for more than 60 percent of total sectors (transportation, logistics, processing, and employment and—with the exception of Peru— export-oriented services), LAC jobs and wages it has increased since 1995. The manufacturing seem to be growing on the basis of domestic con- sector and primary sectors have also shrunk since sumption driven by commodity exports. Easy and 1995. Manufacturing in Brazil and primary activ- available credit fueled consumer growth that made ities in Peru are the exceptions. its way to construction and low-skilled services. Third, if labor markets are tightening for Microtrends that Point to New low-skilled service-sector jobs, mostly aimed Challenges at males from 25 to 49 years old, future policy Microtrends, group-specific trends that deviate may need to focus on those excluded: youth, from country averages, help describe the speed females, non-agricultural rural markets, and and direction of social and economic change. For manufacturing and knowledge-intensive sectors. example, increased access to education will, in the In the region’s ongoing economic transformation, absence of technological upgrading, erode returns employees are leaving low-skilled, low produc- to education. Urbanization, which improved tivity, and poorly paid jobs in agriculture or the access to services in large cities in the past, will manufacturing sector and moving to low-skill tend toward scale diseconomies. And the demo- employment in trade and personal services, graphic dividend, which delivered a decline in mostly in the informal sector (such as domestic labor dependency ratios, will eventually stretch service, street vendors, or beauty parlor owners). labor markets and start to age.8

6 Joao Pedro Azevedo, Gabriela Inchauste, and Vivian 7 CEPAL, op cit., 2012. Sanfelice, “Decomposing the Decline in Income Inequality 8 The term “microtrend” comes from Mark Penn, Micro- in Latin America,” paper presented at the Network for In- trends: The Small Forces Behind Tomorrow’s Big Changes equality and Poverty (NIP) Conference, April 2012, Columbia (New York: Twelve, 2007), who constructs an insightful map University, New York, NY. and toolkit for grassroots political organizing.

30th Anniversary Sol M. Linowitz Forum Commemorative Volume 37 || Future policy may need to focus

Disaggregating demographic, on the excluded: Idle youth, as labor social, and labor data by age, youth, females, markets are booming geographic location, sex, eth- One of the paradoxes of eco- nic group, and so on pro- non-agricultural nomic growth in Latin America vides insight into existing and rural markets, and is that, despite greater educa- tional and labor opportunities, enduring disparities. And by manufacturing pinpointing microtrends for large numbers of young indi- certain groups, such as women and knowledge- viduals neither study nor work. in the formal labor market or intensive sectors. This is a phenomenon known youth entering the labor force as “idle youth”9 or NINIs, refer- for the first time, we are able || ring to those that “ni estudian, to focus more tightly on hypotheses and mecha- ni trabajan.” Currently, 18.5 nisms that might have a large impact over future percent of Latin Americans between the ages of trends (including human capital, skills premium, 15 and 18—some 9.4 million people—neither labor productivity, and wage shares). Microtrends work nor study. Interestingly, the highest rates also point toward future policy opportunities and in 2009 were in countries with very different challenges. If the past three decades were marked economic and cultural trajectories: 28 percent by urbanization, drops in the fertility rate, and in , 25.3 percent in Guatemala, 26.1 increased access to education for females, the percent in Peru, 20.5 percent in Chile, and 20.4 next decade is likely to be marked by now-in- percent in Colombia.10 Figure 1 reveals that, cipient processes, among them increased global

migration, climate change patterns, demographic 9 World Bank, op. cit., 2011. shifts in household composition, adoption of 10 M. Cardenas, R. de Hoyos, and M. Szekely, “Idle Youth in Latin America: A Persistent Problem in a Decade of Prosper- communication technologies, crime and violence. ity,” in Latin America Initiative at Brookings (2011).

Figure 1. Idle Youth by Income Quintiles LAC12 (Age Group 15 to 18)

100%

Quintile 5 80% (Highest) Quintile 4 60% Quintile 3

40% Quintile 2

20% Quintile 1 (Lowest)

0%

Brazil Chile Peru Bolivia Mexico Panama Uruguay Colombia Honduras Argentina Guatemala

Dominican Rep.

Note: Author’s elaboration based on calculations using micro data from 214 household surveys (for the years 2007 and 2008) by Cardenas et al (2011).

38 The Americas in Motion: Looking Ahead || Despite greater educational and labor except for Peru, Bolivia, and the opportunities, large violence, the number of siblings Dominican Republic, 50 to 60 in the household, and house- numbers (18.5 percent) percent of idle youth are con- hold structure.11 centrated in the lowest income of LA youth neither quintiles. Millions of Women study nor work. Missing from Formal Figure 2 provides a snap- Labor Markets shot of Brazil, where there is || A microtrend that has become increasing secondary school a macrotrend in recent years enrollment and decreasing is the share of women in the formal labor force. youth employment. This suggests that greater Over thirty years, participation rates moved by educational opportunities are driving the young 10 to 15 percentage points in most countries. population out of the labor market. However, that However, if LAC female participation converged unemployment has increased by 5 percent since with the female participation rates in OECD 1995 suggests that although a lower percentage of countries, 19 million more women would be young individuals are working, many are looking formally employed. And if participation rates of for jobs and not finding them. men and women converged in Latin America, Young individuals are not benefiting from 50 million more women would be in the formal increasing economic growth and labor opportu- workforce. Given the current structure of income nities to the same extent as adults. Indeed, recent studies suggest that idleness is associated with 11 For evidence about Brazil’s idle youth see: Susana Martinez-Restrepo, “The Economics of Adolescents’ Time factors such as extreme poverty and youth long- Allocation: Evidence from the Young Agent Project in Brazil” term unemployment. More research is needed on (PhD diss., , 2012). For evidence about Mexico See: Arceo-Gómez, Eva; Campos Vasquez-Ray- the role of other determinants, including drugs, mundo, ¿Quienes son los NiNis en México? RePEc:emx:- alcohol, distance to school, teen pregnancy, ceedoc:2011-08, El Colegio de México, Centro de Estudios Económicos (2011).

Figure 2. Jobs, Schooling, and Idle from 1995 to 2009

90.0%

82.0% 80.0% School Enrollment, Secondary (% Net) 70.0% 65.8% 60.0% 58.0% Enrollment Ages 15–24, Total 52.5% 50.0%

40.0%

30.0%

20.7% Idle Youth (15–24) 18.6% 20.0% 11.4% Unemployment (%15–24) 17.8% 10.0% 1995 2000 2005 2009

Note: Author’s own elaboration using the Socio-Economic Database for the Latin America and Caribbean (SEDLAC)—World Bank Data and the World Development Indicators.

30th Anniversary Sol M. Linowitz Forum Commemorative Volume 39 || Despite the overall educational upgrade, generation and poverty reduc- the labor market Another interesting micro- tion, a massive shift of women trend surfaces in the Dominican seems to be benefiting into formal labor markets is a Republic. Despite the overall must for future gains. low-skilled males in educational upgrade, the labor The literature on female labor market seems to be benefiting the informal sector. participation points to eco- low-skilled males in the infor- nomic, cultural, and techno- || mal sector. Figure 4 shows a logical obstacles (Goldin, 1997; change in the education attain- Gutierrez, 2009; and Katz and ment of unemployed individu- Goldin, 2008). Beyond averages, however, there als. In 2005, most unemployed males and females are particular stories that merit closer scrutiny. were those with no more than primary education. The key question is whether and how policy Today, employment among individuals with ter- interventions can change incentives for increased tiary (higher) education has increased 3 percent; participation, opening the way for millions more for those with secondary education, it has grown to move out of poverty. 7 percent since 2005. That means the gender gap Two microtrends stand side by side in Figure 3. closed for the unemployed with secondary educa- First, the richest 20 percent of the female popula- tion but increased for those with primary educa- tion in Brazil is moving in the direction of greater tion, affecting more females than males. female labor participation and higher incomes. Recent evidence suggests that the fall in the Secondly, the poorest 20 percent of the female skill premia affects both employment and wag- population is moving toward declining labor par- es.12 In a 2006 study, Levy and Murnane argue ticipation. Within age groups, labor participation rates have flattened for 15- to 24-year-olds since 12 Gasparini, et al., Educational Upgrading and Return to Skills in Latin America Evidence from a Supply-Demand the 1990s. Framework, 1990–2010. Policy Research Working Paper 5921, (Washington, DC: World Bank, 2012).

Figure 3. Labor Force, Female (% of Total Labor Force)

71.0%

66.0% LAC Brazil all >15 61.0% Brazil (15–24) Brazil (25–64) 56.0% Brazil Lowest Income Quintile Brazil Highest Income Quintile 51.0%

46.0%

41.0%

36.0%

31.0%

26.0% 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Note: Author’s own elaboration based on the Socio-Economic Database for Latin America and the Caribbean (CEDLAC and the World Bank)

40 The Americas in Motion: Looking Ahead Figure 4. Share of unemployment by education level and gender

47.0% 43.7% With Secondary Education, Female 42.4% 42.0% 41.1% With Secondary Education, Male 42.0%

37.4% 37.0% With Primary Education, Male 36.1% 35.6% With Primary Education, Female 32.0% 29.4% 27.0%

22.0% 20.6% With Tertiary Education, Female 17.0% 18.0% 17.0% 15.6% With Tertiary Education, Male

12.0% 2005 2006 2007 2008 2009 2010 Source: Authors’ elaboration based on data from the World Development Indicators.

that middle-skilled jobs are most vulnerable to Lopsided service sectors an increasingly global labor market, suggesting Recent growth has brought increased service sec- that while low-skilled service workers must be tor employment and a decreased share in man- on-site, (e.g. janitors, security guards, restaurant ufacturing and primary activities. Commerce, helpers, nursing home workers, construction construction, and educational and health services workers, cleaning personnel), middle-skilled jobs have been particularly important employers. The such as those in call centers and offices can be out- current composition of service sectors tends to sourced offshore. These studies should be viewed weigh heavily in favor of low-skilled, low-pay with caution since they used evidence from the labor markets. United States and OECD countries.13 Still, the Peru, however, suggests a different story. finding seems to apply to certain sectors in the Although the service sector accounts for 56 percent Dominican Republic. Its tourist industry produces of total jobs, Peru is the only country among those many direct and indirect jobs, most of which are studied in this brief where the service sector share low skilled and low paid. Recent evidence reveals has decreased and primary activities has increased. a drop in male and female participation in man- Figures 6 and 7 show that most job creation since ufacturing industries that employ middle-skilled 1995 has occurred in the agricultural and mining workers. Males present minor but increasing labor sectors (particularly primary mining activities). participation in transportation and commerce. Job Despite a general decrease in the service sector’s informality remains very high and constant since share of the overall economy, industries such as 2000 in the Dominican Republic among both commerce, transportation and communications, males (48 percent) and females (47 percent). and health and social services have increased their share since 1995. Peru’s strong economic growth 13 Frank Levy and Richard J. Murnane, For now, mid- since 2003 mainly stems from a booming tour- dle-skilled jobs are the most vulnerable, CESifo Forum, Ifo Institute for Economic Research at the University of Munich, ism sector and the development of agriculture vol. 7(2), pages 38-38, 07. http://www.cesifo-group.de/ portal/pls/portal/docs/1/1191752.PDF

30th Anniversary Sol M. Linowitz Forum Commemorative Volume 41 Figure 5. Service sector as % of occupied labor force

80.0% Argentina, 76.1% 75.0%

70.0% Uruguay, 70.5% Dominic Rep., 68.2% 65.0% Panama, 62.7% Brazil, 61.3% 60.0%

55.0% Paraguay, 53.6% 50.0%

45.0% Bolivia, 43.5% Honduras, 42.9% 40.0%

35.0% Peru, 34.1% 30.0% 2005 2007 2008 2009 Note: Author’s own elaboration based on the Socio-Economic Database for Latin America and the Caribbean (CEDLAC and the World Bank)

Figure 6. Share of employment within activities in the service sector went from US$3,638 primary activities in 1995 to US$4,973 in 2009. In the manufactur- ing sector they rose from US$962 to US$1,402. 45.0% 5.8 They also increased in the primary sector but at a 40.0% 0.9 lower rate, going from US$231 to US$353. This 0.6 35.0% 1.1 0.7 0.6 data suggests that workers in the service sector 0.7 30.0% 0.6 are benefiting most from Peru’s recent economic 25.0% growth. 20.0% 36.2 34.5 Informal jobs accounted in 2009 for 63 percent 15.0% 31.0 31.6 of total workers in the labor market and, despite 10.0% a recent reduction, claim the highest share among 5.0% selected countries. 0.0% The aggregate figures do not account for the Circa Circa Circa Circa 1995 2000 2005 2009 fact that within each sector, there are different Mining & Quarrying types of jobs. The mining sector, for example, Agriculture, Fishing Argiculture, & Forestry employs both highly qualified and highly paid individuals such as mining managers as well as Note: Author’s own elaboration using aggregates of national low paid and low qualified individuals such as household surveys calculated by SEDLAC—World Bank. miners. Workers in low-productivity jobs are the high-hanging fruit of current economic growth. and agro-business, the extractive industry sector What policies are needed to address economic (mining), and infrastructure. growth that also maintains existing structural eco- Despite a greater share of the primary sector nomic inequalities? in overall employment, the service and manu- facturing sectors have seen a stronger increase in monthly wages since 1995. Wages in main

42 The Americas in Motion: Looking Ahead Figure 7. Share of employment within the service sector 60.0%

50.0% Domestic Servants Other Services 40.0% Health & Social Services Teaching 30.0% Public Administration Business Services Finance 20.0% Transportation & Communications Restaurants & Hotels 10.0% Commerce Construction

0.0% Circa Circa Circa Circa 1995 2000 2005 2009 Note: Author’s own elaboration using aggregates of national household surveys calculated by SEDLAC—World Bank.

Figure 8. Distribution of Services, Manufacturing and Primary Activity wages (US$) $5,000 $4,973 $4,500

$4,000 $3,638 Services Monthly Income $3,500

$3,000

$2,500

$2,000

$1,500 $1,402 $1,000 $962 Manufacture Monthly Income $500 Primary Activities Monthly Income $353 $231 0 Circa 1995 Circa 2000 Circa 2005 Circa 2009

Note: Author’s own elaboration using aggregates of national household surveys calculated by SEDLAC—World Bank. Informality refers to salaried workers in a small firm, the non-professional self-employed, or a zero-income.

Will Social Gains Slow Down? spending priorities. Most new spending beyond inertial public sector allocations has focused on Fiscal constraints slow parts of the expanding social transfers or broadening public expansion sector employment. With close to 113 million Despite the fiscal space gained since the 2008–2009 social transfer recipients (25 percent of the pop- crisis, there remain serious obstacles to raising tax ulation), it is worth considering whether transfers revenue levels in most economies, excluding Brazil, will expand or target increasingly excluded groups. Uruguay, and Argentina.14 Current revenues, at There are at least three aspects to the fiscal con- about half the OECD rates, seriously constrain straint question. The first concerns the sources of fiscal expansion. The region currently raises rev- enues from value-added taxes and social security 14 IMF, World Economic Outlook, Washington, DC: IMF, April 2012). contributions, followed by specific consumption

30th Anniversary Sol M. Linowitz Forum Commemorative Volume 43 || The double burden faced by millions taxes. Corporate and income of women acts as a A bridge from CCTs to taxes still lag.15 In federal coun- a universal safety net is hidden subsidy on tries like Brazil, Argentina, and needed Mexico, a large share of reve- society, markets, and The move from targeted trans- nue mobilization occurs at the fers to a universal basic income the state, undergirds subnational level and/or is ear- or service safety net is rid- marked to subnational spending the welfare regime, dled with challenges, the most important of which are around or investment priorities. There and is blatantly unfair. are few additional revenue female labor participation and sources beyond income taxes, || youth employment. A welfare which already grate against regime perspective is useful middle-class preferences. A to gauge the magnitude of this new fiscal pact will need to focus on the structural shift.18 While most OECD economies are under- demands of a growing population. written by market-led or state-provided safety A second concern is that the pro-poor impact nets, pensions or insurance from risk, most Latin of fiscal transfers is still low or moderate. Barring American households are “familistic” in their labor Chile, Brazil and, perhaps, Argentina, CCTs and and income strategies. The double burden faced other non-conditional transfers are not making by millions of women acts as a hidden subsidy on much of a dent on poverty or income inequality.16 society, markets, and the state. It undergirds the Transfers are typically too small to make up for current welfare regime and, among other things, large poverty gaps at the bottom of the distribu- is blatantly unfair. tion, and transfers typically show a lot of leak- Transitioning millions of women or youth into age from poor to non-poor households. Besides, the labor force will require a new type of social most CCTs are not meant to bring households compact that transcends fiscal revenue pressure. out of poverty. Rather, they are designed to pro- This issue is likely to dominate future discus- vide demand incentives for human capital accu- sions of social policy because it intersects with mulation, to allow children to go to school, and job creation and other economic policymaking. for use of public health services.17 The supply Santiago Levy has looked at one important aspect, side is frequently missing in social services, and the behavioral impact of social protection policies this deficit, which is both material and human over labor markets.19 An additional examination resource-based, will take decades to fulfill. This has been provided by a burgeoning literature on is particularly important for countries with large the economics of care.20 Both strands of research rural populations and for rapidly growing urban focus on the balance between labor markets and centers that haven’t caught up with demand in household decision-making. the 2000s.

15 OECD, ECLAC and CIAT, Revenue Statistics in Latin Amer- 18 Juliana Martinez, “Welfare Regimes in Latin America: ica, (Santiago: CEPAL, 2012). Capturing Constellations of Markets, Families and Policies” 16 Nora Lustig et al, “Fiscal Policy and Income Redistribution (Latin American Politics and Society, vol. 50, 2: 67-100, 2008). in Latin America: Challenging the Conventional Wisdom,” 19 Santiago Levy, Good Intentions, Bad Outcomes: Social (New Orleans: Tulane University and Inter-American Dia- Policy, Informality, and Economic Growth in Mexico, (Brook- logue, 2011). ings Institution: Washington, DC, 2010). 17 Simone Cecchini and Aldo Madariaga, Programas de Trans- 20 Valeria Esquivel, “La economía del cuidado en América ferencias Condicionadas: Balance de la experiencia reciente Latina: poniendo a los cuidados en el centro de la agenda,” de América Latina y el Caribe, (Santiago: CEPAL, 2011). (Area de Practica Genero, PNUD: Panama, 2012).

44 The Americas in Motion: Looking Ahead A third strand of work pulls some of these cost of doing business in the region is often seen concerns together.21 Economic policymaking has as more expedient for competitiveness. focused on stabilizing welfare in turbulent times What to Expect in the Future? and promoting economic growth in the good Can we expect further poverty reduction from times; social policy tends to be compensatory and/ a longer growth spell in Latin America and the or aimed at long-run human capital accumulation. Caribbean? In this essay I have argued that much The key in the future will be focusing on job cre- of remaining poverty—the 167 million people ation with both market and state-led policy levers. under the poverty line last year—is concentrated Are good jobs out of reach? in hard-to-reach pockets, sectors, and geographic In many respects, these are the best of times for areas, either excluded from dynamic labor markets labor markets. Participation, as measured by hours or as yet untouched by social safety nets. More of worked, is expanding. Labor income, as mea- the same will not accelerate poverty reduction. sured by income per hour, is also on the rise. But Two factors are likely to slow down progress two forces move against “good job” creation in in the near future. First, an aging population in the region. The first is macro, linked to the pat- many countries will bring an end to the demo- tern of economic specialization, technology con- graphic dividend that led to a record expansion tent, and export diversification of Latin American in the number of people in the labor force this economies. Most growth is driven by a surge in decade. Second, fiscal constraints will not allow commodity demand. While this has not been det- a smooth transition from safety nets to univer- rimental to growth, it has structured incentives for sal social protection floors. Without an income labor market upgrading in the 2000s. The second floor for the poorest, the competiveness of Latin force is micro, linked to the pattern of female labor American economies will continue to be based on participation and youth employment. The sectors cheap labor and not on incentives for educational that create jobs are not likely to break through to and technological upgrading. Without social ben- non-participating females and youth. The incen- efits in the informal sectors, the risk premium will tives are not there. The welfare regime that might be too high for poor and vulnerable households employ more women in the labor force is largely to move into high-productivity, yet flexible, eco- absent in the region and shows little signs of mate- nomic activities. rializing. Together, macro and micro incentives cre- Latin America is approaching a crossroads. The ate a scissors for future poverty alleviation. best of times show us what happens when we get Time-use surveys show that the gap between our economic-growth wish. This might be the male and female labor participation will not opportunity to focus on our social wishes to spur close without behavioral changes in the house- future progress. hold and incentives from the state. What is stop- ping reforms? Part of the answer seems to be political. But part is managerial: Why engage in gender-equalizing, productivity-enhancing sus- tainable development reforms when cutting the

21 Juliana Martinez and Diego Sanchez Ancochea, “The Pro- ductive Bottlenecks of Progressive Social Policies: Lessons from Costa Rica and Beyond,” CROP Poverty Brief, (Bergen: CROP, 2011).

30th Anniversary Sol M. Linowitz Forum Commemorative Volume 45 Comment by eorge Gray Molina Augusto de la Torre way of looking at gender pol- offers an accom- icy. The focus should not be Gplished overview of on equalizing outcomes (such social trends in Latin America. After describing as labor force participation) across genders always the social gains (poverty reduction, rising labor and everywhere but, rather, on equalizing access to incomes), the paper focuses on key remaining fundamental human rights and basic services such challenges, including those posed by about 170 as health and education, strengthening cooperative million Latin Americans who still live in poverty, interactions within households, equalizing opportu- the nearly one-fifth of young people (in the 15–18 nities, and broadening freedom of choice. As dis- age range) who are out of school and out of work, cussed in a recent report produced in my office and the rising share of employment in service sec- (Work and Family: Latin American Women in Search tors of low skill intensity. These are, indeed, two of a New Balance, by Laura Chioda, 2011), this big challenges that need to be addressed by policy shift of emphasis is warranted by the evidence. with a sense of urgency. For starters, cross-country data show that the While I share most of the paper’s assessments, relationship between FLFP and economic devel- I think that it underplays the extent of the social opment is not linear but, rather, U-shaped. At progress achieved by the region in the past decade, low levels of per capita income, FLFP is very high notably the strong rise of the middle class, from because women have no choice but to work in about 20 percent of the population in the 1990s order to survive and help their families survive. to about 30 percent at present, a phenomenon As per capita income rises, FLFP declines for a extensively analyzed in our 2012 flagship report number of reasons, including constraints that Economic Mobility and the Rise of the Latin American women face in combining labor force participa- Middle Class. I also regret that the paper is silent tion with family formation. At the higher levels on what is now the most populous economic of per capita income, FLFP rises again, as women class in Latin America, the class sandwiched become more educated, freer from traditional between the poor and the middle class, a “vul- gender roles, and able to more flexibly combine nerable class” that accounts for a whopping 40 their career aspirations with their family-related percent of the region’s population. Both the new aspirations (not least due to improved labor “middle class” and the large “vulnerable class” call market legislation and such public services as for a second generation of reform in social policy, childcare and preschool education). Hence, two one that maintains but goes beyond (conditional countries at very different stages of development cash transfer-type) social assistance and puts a pre- can have the same FLFP rate, but with that rate mium on the social insurance component of the reflecting very different underlying conditions in social protection system (pensions, health ser- terms of, say, gender discrimination, fundamental vices, unemployment protections), a component human rights protection, and degree of equality that is in much need of repair. of access to education and health. This sort of I concentrate the rest of my comments on the U-shaped FLFP can help explain the fact (shown issue of female labor force participation (FLFP), in Figure 4) that FLFP for Latin American women where I find myself disagreeing with the paper. with less than secondary education has been on Gray Molina seems to suggest that achieving gen- the decline, even as their per person income has der parity in labor force participation should be been on the rise. a goal in and of itself. I think this is not the right

46 The Americas in Motion: Looking Ahead || The formal sector fails to offer married women Partly because of the U-shape the flexibility and other Latin America seems unique of FLFP, policies that help in that marriage, rather than characteristics they remove gender-based discrimi- having children, is the event nation or equalize access do not prefer and seek so as that causes women with less- necessarily lead to increases in than-tertiary education to leave to achieve a better FLFP. For example, the intro- the labor force in droves, and duction of publicly sponsored work-family balance. mainly by choice. This suggests childcare services in Argentina || that social norms matter. These and Brazil did not result in norms notwithstanding, there is a sharp increase in FLFP (as plenty of evidence in the region policymakers had expected) but allowed already and elsewhere, even in Scandinavian countries, that working mothers to labor more hours, move from working mothers are in search of flexibility. This is informal to formal jobs, and better manage fami- illustrated in Latin America, for example, by the fact ly-work balance. The point is that well-designed that while single women are over-represented (rel- gender policy should aim at improving the wel- ative to men) in the formal sector, married women fare of women, and such welfare does not map are over-represented in the informal sector. The one-to-one with FLFP rates. The non-mechanical likely reason is that the formal sector fails to offer link between equality of access/opportunity and married women the flexibility and other character- equality of outcomes obviously points towards a istics (part-time employment, flexible work hours, complex mediation mechanism involving human telecommuting arrangements, more cooperative capital, interactions within households, and social settings, etc.) they prefer and seek so as to achieve a norms and preferences. better work-family balance. It is a well-documented The evidence, in fact, suggests that the con- fact that women all over the world (in middle-in- straint is not so much on the decision to work come and rich countries) struggle emotionally more (i.e., Latin women who want to work do work, by than men with this balance. and large) but on the degree of formal labor mar- As the region moves toward a stronger, evi- ket friendliness that working women face. This is dence-based gender policy, a shift of emphasis will particularly important for married women. In fact, be needed from a gender-parity, outcome-driven FLFP for single women in Latin America is already agenda to one that is gender-sensitive and driven as high as that in the United States. Gender-based by equality of opportunity. wage gaps do seem to exist, but these may reflect choices geared at achieving a better work-family balance more than discrimination.

30th Anniversary Sol M. Linowitz Forum Commemorative Volume 47 Comment by atin America has appar- Diego Sanchez- Will the region meet these ently reversed course policy challenges in the future? L over the last ten years. Ancochea Gray Molina does not quite After seeing poverty increasing address this. To begin answer- by 40 percent in the period ing this question, we first must 1980–2002, the number of poor people went decide which part of the region we are talking down from 225 million to 167 million between about. Latin America is increasingly divided 2002 and 2012.1 Higher economic growth, between the winners and losers of the commod- greater formal employment, and a more effec- ity boom. In contrast to positive trends south of tive redistribution of income have contributed to Panama, Central America’s recent performance renewed optimism in Latin America. But will this has been unimpressive. In El Salvador, the per- trend continue? Has Latin America finally bro- centage of people living in poverty was practically ken with history, to paraphrase the famous 2002 the same in 2002 and 2010; in Honduras, 43 World Bank report on inequality? Will the region percent are still indigent.2 High oil and mineral continue its upward trend towards equity in the prices, decreasing opportunities for migration to next thirty years? Europe and the United States, growing competi- In his contribution to this volume, George Gray tion in labor-intensive manufactured goods arena, Molina offers a fascinating exploration of these and high levels of violence and drug trafficking questions. By going beyond the macro-num- have contributed to make Central America’s chal- bers and considering micro-trends, he identifies lenges particularly overwhelming. recent winners and losers and highlights future While acknowledging these differences is challenges. Latin America’s commodity-based extraordinarily important, Gray Molina prefers to economic model has failed to incorporate many emphasize common micro-trends. Women’s labor women and young people into the labor market participation rates are low across the region and and the welfare state. Latin America’s excessive good jobs and adequate social programs are in reliance on low productivity jobs may also con- short supply almost everywhere. What he does not strain future productivity and wage growth. Gray discuss is Latin America’s biggest common political Molina also proposes a rich and creative devel- problem: the concentration of income and political opment agenda for the future. We need sectoral power at the top. Income distribution may have policies that, on the one hand, create high pro- improved as the middle class grows, but the top 1 ductivity sectors and add value to commodity percent remains more powerful than anywhere else production and, on the other, expand capabilities in the world. Household surveys indicate that their and learning within low productivity activities. income power has contracted, but wages in the New social policies must simultaneously help financial sector point to a different story. In 2010, people to enter the labor market and to access free for example, CEOs and company directors earned services as rights. Confronting the lack of public more in São Paolo than in New York, London, or childcare and expanding the school day in pri- Hong Kong.3 A recent study of top incomes in mary education, for example, would be particu- Colombia using tax returns confirms the stability larly important. 2 See http://www.cepal.org/prensa/noticias/comunica- dos/9/48459/tabla-pobreza-indigencia-en.pdf (last accessed 1 See http://www.cepal.org/prensa/noticias/comunica- February 27, 2013). The data for Honduras is from 2010. dos/9/48459/grafico-evolucion-pobreza-indigencia-en.pdf 3 See http://www.economist.com/node/18010831 (last (last accessed February 27, 2013). accessed February 27, 2013).

48 The Americas in Motion: Looking Ahead || Income distribution may have improved as of inequality at the top. The the middle class grows, The reduction of the eco- richest 1 percent of the popu- nomic power and political influ- but the top 1 percent lation received 20.5 percent of ence of the top income groups total income in 1993 and 20.4 remains more powerful is by no means a sufficient percent in 2010—despite an condition to secure more pro- than anywhere else overall reduction in the Gini gressive development policies coefficient.4 The persistence of in the world. in the future, but it is probably income concentration among || a necessary one. Some govern- the rich has significant impli- ments, like the Venezuelan one, cations for the political pro- at least rhetorically placed this cess and Latin America’s future policy trajectory. objective at the forefront of their political agenda, First, the elite in most countries still has an over- yet their confrontational stand and lack of atten- whelming influence in politics through campaign tion to state reform may do more harm than good financing and other channels. Second, elite power in the long run. More effective and professional makes the expansion of income taxes—still a bureaucracies, more progressive technocrats, and major challenge in Latin America as pointed out more active social movements may be the ingre- by Gray Molina’s paper—extremely difficult. Even dients needed to gradually shift power in society, the most radical governments have failed to pass strengthen accountability, and slowly promote all major income tax reforms in recent years. Third, the policies that will marry our social and eco- the informal coalition between the elite and the nomic wishes for decades to come. upper middle class still skews the nature of social policies in many countries. In Brazil, for example, successive governments “have protected privileged interests: influential groups have maintained and, in some cases, even expanded their already sub- stantial benefits.”5

4 Facundo Alvarado and Juliana Londoño (2013) “High Incomes and Personal Taxation in a Developing Econo- my: Colombia, 1993-2010” (mimeo). The top 1 percent in Colombia received a higher income share than in any other country in the world with the exception of the United States in a few years. 5 Wendy Hunter and Natasha Sujiyama (2009) “Democracy and Social Policy in Brazil: Advancing Basic Needs, Pre- serving Priviledged Interests,” Latin American Politics and Society, 51(2): 29-58, page 29.

30th Anniversary Sol M. Linowitz Forum Commemorative Volume 49 Global Trends and How Latin America Should Think About the Future

By Sergio Bitar

erious exploration of the region’s future is Six Global Trends impossible without a global outlook. To govern better, it is therefore crucial that The Inter-American Dialogue has set up, and is S updating, a registry of more than 500 long-term, Latin American countries strengthen their capac- ity to engage in forward thinking and strategic global, and sector-specific studies published in reflection. This will help them to take advantage recent years. A review of the most relevant of of opportunities and to anticipate risks. Nations these helps us to identify six global trends the must become familiar with global scenarios and, region should watch: within them, the types and scale of challenges 1. “Disruptive” technologies bringing substantial they may confront. Latin American governments changes in production, employment, well-being, will need to learn how to act when conditions are governability, and human relations. uncertain and rapidly changing. 2. Natural-resource scarcity affecting water, food- The leading powers have been engaged in the stuffs, energy, and minerals in tandem with systematic examination of world trends, giving changes in demand and production. developed countries a competence for global fore- 3. Demographic changes resulting in new markets, sight that is generally unknown in Latin America. middle classes on the rise, migration, and the The greatest capacity comes in the United States, displacement of power. where the National Intelligence Council as recently 4. Urbanization and the growth of cities altering as December 2012 released Global Trends 2030: population concentrations, demands for infra- Alternative , which draws on extensive con- structure and basic services, quality of life, and sultations with experts from around the world. the competitiveness of cities. The European Union (EU), similarly, pub- 5. Climate change affecting agriculture, “ lished a 2012 report by the European Union growth” opportunities, behavioral change, and Institute for Security Studies titled Global Trends citizen action. 2030: Citizens in an Interconnected and Polycentric 6. Democratic governability influencing the inter- World. Individual countries such as Singapore and connection of global citizens, the impact of new Finland have also been at the forefront of such technologies on social relations, transparency, study, and some emerging countries, notably security, and violence and organized crime. China, South Korea, Russia, and Brazil, are head- ing in this direction.

50 The Americas in Motion: Looking Ahead || Latin America is lagging behind in Detecting the knowledge of forwarding-looking reports have been created in the region, Unexpected Events global trends and including Brasil 2022 (Brazil’s In addition to these overarch- their implications Secretariat of the Presidency); ing trends, we should be aware México, Visión Nacional 2030 for policymaking. of other events that may have and México 2042 (written in low probability but, should they || 2012 by the Centennial Group occur, carry sweeping impact. in Washington, D.C., in collab- They include: oration with Mexican organiza- ■■ Acceleration of climate change and possible tions); Visión Colombia 2019; Chile 2025 (Colegio rises in levels—with adverse effects on de Ingenieros de Chile, 2012) and Agenda Chile many coastal populations—as well as great- País Desarrollado: Más Oportunidades y Mejores er-than-expected temperature changes. The Empleos, 2010–2018; Plan Perú 2021; Ecuador, repercussions for agriculture, rainfall, and Estrategia Nacional 2010/2025; the Dominican health will be more profound than early stud- Republic’s Estrategia Nacional de Desarrollo 2030 ies anticipated. and Un viaje de Transformación hacia un País ■■ Cyberattacks on networks that control electric- Mejor, 2030; and Uruguay’s Estrategia Nacional de ity transmission, communications, financial sys- Desarrollo 2030.1 tems, logistics, food production, and other basic In addition, on a regional scale, CAF— services. Some experts maintain that cyber risks Development Bank of Latin America commis- pose more danger than nuclear threats. sioned the report América Latina 20402 and the ■■ Food insecurity brought about by increases in Millennium Project prepared Latinoamérica 2030.3 prices and the imbalance between production Recent studies about Asia are also relevant to and demand in dry zones or water-scarce areas. Latin America’s future. Notable among them are The negative effects will be felt most strongly China 2030 (prepared by the Chinese govern- by the world’s poorest. ment and the World Bank, 2012), India 2039 ■■ Aging populations and growing concerns (Centennial Group, 2011); and Asia 2050 (Asian around the financing of social security, as Development Bank, 2011). It is instructive to well as fiscal indebtedness and related effects contrast Latin America with Asia, where a lack on productivity and waning competitiveness, of natural resources has obliged countries to be especially in Europe. more creative, pushing them to specialize and to ■■ Geopolitical tensions in the south and east improve the capacity of their human resources, China and in the Indian . their educational systems, and their technology. Asian countries have shown the political resolve Challenges for Latin America in to put their sights on a distant horizon. the New Global System How could the development strategies of each Latin America is lagging behind in the knowledge Latin American country change if long-term of global trends and their implications for policy- 1 See Alicia Bárcena in Latinoamérica 2030, by José Luis making, but it could quickly catch up by using Cordeiro et al. (Washington, DC: The Millenium Project, studies from the developed countries, creating January 2013). 2 analytical groups in Latin America, and establish- Harinder S. Kohli, Claudio M. Loser, and Anil Sood, Latin America 2040; Breaking Away from Complacency: An Agenda ing networks among those groups. In recent years, for Resurgence (Thousand , CA: Sage Publications, 2010). 3 Latinoamérica 2030, op. cit.

30th Anniversary Sol M. Linowitz Forum Commemorative Volume 51 global trends are taken into account? Positive 2. Transformation of the productive structure in order developments of the past twenty years have nour- to gain greater competitiveness and special- ished confidence in the region’s own capacity. ization. Keeping sound macroeconomic man- The spread of democratic practices; more coher- agement, creation of decent jobs and worker ent macroeconomic management; an increase in training, enhancement of small and medium per-capita output driven by exports of minerals, enterprises (SMEs), adoption of technological fuels, and foodstuffs; and an emphasis on social innovation, and provision high-quality educa- welfare have inculcated a positive spirit, albeit tion for all. one that is also more complacent. 3. Social inclusion as a result of a reduction in Can Latin American countries escape from poverty and inequality, the elimination of dis- what has been called the “middle-income trap”) crimination, and the establishment of equal- and achieve at the same time a deepening of ity of opportunity. This goal will be reached democracy, social inclusion, and environmental by setting up a social welfare network and by sustainability? improving social well-being. Housing, health- Aware of these challenges, almost all Latin care, education, high-quality public spaces in American governments have asserted their will- the cities, public transportation, digital com- ingness to tackle at least four long-term goals: munications networks, and citizen security will 1. Consolidation of democracy through institution be its markers. building, citizen empowerment, stable local 4. Latin American cooperation and integration government, stronger civil society, greater stemming from new alliances that enlarge the transparency, and international agreements on regional market, including agreements on trade, global governance. investment, taxes, infrastructure projects, and

Escaping the Middle Income Trap?

21,000

18,000

Republic of Korea 15,000

12,000 Avoiding the middle income trap 9,000

Brazil GDP per capital ($) 6,000

3,000 South Africa Caught in the middle income trap 0 1975 1980 1985 1990 1995 2000 2005

Source: Asia 2050: Realizing the Asian Century. Executive Summary. Asian Development Bank, 2011.

52 The Americas in Motion: Looking Ahead || National governability in a multi-polar world energy. Political coordination increasingly will organizations and civil soci- and joint economic action ety will expand, but they may be conditioned by will reduce vulnerability and become a sword with a double help bring about changes in global governability. edge: helping and also challeng- international institutions. ing governability. Latin America || 5. Sustainable development in is a region of peace, without light of climate change. While interstate conflicts, and also a this may not appear now as a government pri- region where democracy may become stronger ority, there will be pressure, including from and more creative. These two realities represent civil society organizations, to adopt policies a big advantage that should be cultivated with affecting technologies, water and energy con- timely reforms. sumption, deforestation, and fishing. This will At the same time, national governability in a be required in order to ensure exports, process multi-polar world increasingly will be condi- natural resources, and guarantee quality of life. tioned by global governability. Regional agree- Attainment of these goals does not depend ments will, therefore, become more important in solely on national decision-making. Rather, they tackling global challenges in the areas of finance, must be viewed in the light of global scenarios trade, the environment, and security in the face of in order to determine which goals and policies organized crime. merit reconsideration. Globalization requires more State, not less. Latin America could step up its global role if the region Deepening Democracy strengthened its political and economic cohesion. Information and communications technologies Strengthening the Productive will have a growing impact on how democracy operates and how governments manage. The rise System in educational levels, as well as a standard of liv- In contrast to successful countries in Asia and ing that grants more autonomy to members of the , Latin American countries accord almost middle classes, will spur demands for new forms exclusive primacy to sound economic management of participation, transparency, and local power. and neglect long-term trends in the world economy. Youth will have more skills and will be better Improved competitiveness calls for a more complex equipped to communicate, coordinate and influ- productive base of goods and services. Complexity ence politics. But usually they are outsiders to is the variable that most closely correlates to produc- political organizations. Will existing institutions tivity and development.4 Achieving it requires simul- be able to channel what is coming? New threats— taneous efforts in the areas of quality education, among them a failure to renew the ranks of the scientific and technological research, and infrastruc- elites, opacity, corruption, and inequality—could ture (transport, energy, and telecommunications). It emerge to compromise democracy. Institutions also requires policy geared toward product differ- are not responding adequately to such dangers. entiation and specialization. Concentration of power, the lack of social mobil- ity, the weakness of political parties, or the loss of prestige of parliaments and politicians could 4 Dany Bahar, Ricardo Hausmann, and Cesar Hidalgo. International Knowledge Diffusion and the Comparative Ad- provoke a drop in political participation or lead vantage of Nations. Center for International Development to disruptive action outside institutions. Social Working Paper No. 235. (Cambridge: Harvard University, April 2012).

30th Anniversary Sol M. Linowitz Forum Commemorative Volume 53 || Latin America’s future competitiveness will Given technological trends, depend on energy, a ahead to global circumstances development will have to focus in 2030 and deduce the effects field in which global on countries acquiring compar- of those circumstances on each ative advantages in agriculture, conditions are quickly Latin American country. aquaculture, minerals, solar Transformation of the pro- recalibrating. energy, biofuels, biotechnol- ductive structure entails not ogy, communications, com- || neglecting but, rather, enhanc- puting, and nanotechnology. ing export of natural resources Manufacturing and services by means of innovative technol- will require more discerning actions for market ogies and by using surpluses to leverage specializa- identification, product design, and production tion. The experiences and strategies of countries in technologies, with attention to transformative Asia and in developed countries that have entered technologies such as 3D printing. Regrettably, the green-growth stage should be obligatory refer- what is known traditionally as industrial policy ence points. and, more recently, as specialization for com- Latin America’s future competitiveness will petitiveness is mostly absent from the menu of depend on energy, a field in which global con- options in Latin America.5 Progress will not be ditions are quickly recalibrating. A recent game- made unless the State plays a more active role changer is the increase in shale gas production in in coordinating public-private action through the United States, an expansion that has brought research centers and expert training, thereby rais- two great benefits for the country: greater sup- ing productivity. ply security and lower production costs. Many There is an urgent need to set up groups to Latin American countries are well endowed and monitor technological innovations, as well as the the future may show increasing oil production experiences of other successful countries with and possible exploitation of important shale gas industrial policy, technical training, scientific reserves in Mexico, Argentina, and Brazil, among development, and technological innovation. Latin others. If public oil companies improve perfor- American governments and international organi- mance, and investments and research increase, zations should foster and finance these groups. the region may become an important source of The main battle will be fought in the field secured supply. It may also reduce emissions and of education. The OECD’s Programme for costs for enhancing productivity. International Student Assessment (PISA) and the Energy developments could affect European Trends in International Mathematics and Science markets, pushing them toward lower-cost, coal- Study (TIMSS) reveal that the achievement based power generation. They could also lead to among students in the region is modest. There is a reduction in European energy purchases from little long-term planning and few targets for the Russia. At the same time, growing demand in numbers and competencies of educators, tech- Asia and the greater availability of energy from nical specialists, and people with postgraduate the Middle East could forge closer links between qualifications who will need to be trained. There Asia and the Arab countries. is an urgent need for educational studies that look Beyond traditional energy sources, photovol- taic solar technology is leading to a dramatic fall in prices, while nuclear energy will expand 5 Cambio Estructural para la Igualdad, (Santiago: ECLAC, 2012). in China, India, South Korea, and Finland, to

54 The Americas in Motion: Looking Ahead mention only a few countries. Similar progress Repositioning in Response to can be expected in the area of biofuels. Latin Global Trends American countries that are not endowed with fossil fuels should move earlier on green technol- Regional integration, political and economic, is a ogies, including solar, hydro, and biofuel. priority in better positioning Latin America in the To make the right decisions, countries will have to new world power structure. Four global trends monitor long-term energy scenarios. This is another will influence this and, therefore, have to be con- area of activity that Latin American governments sidered in policy design: 1) demographic change; and international organizations should support. 2) the displacement of economic and political power from the West to the East and South; 3) the Making Society More Cohesive influence of the middle classes worldwide; and 4) the speed of urbanization. If Latin American Unless countries make determined political countries consider the impact of these trends, efforts to provide more equality of opportu- they will be better positioned to leverage oppor- nity and social protection, global changes could tunities that arise and to avert being relegated heighten inequality—the cause and consequence behind the Asian countries. of the lag in education and healthcare. Inequality will spur new forms of con- sparks violence, endangers social peace, and sumption and change competitiveness. Countries holds back growth. In the future, social policies with young populations may enjoy a “demo- in Latin America will have to be reoriented away graphic dividend”—developing trained, low-cost from poverty reduction and toward efforts to nar- labor forces and seeing their “emerging middle row the gap between rich and poor. As transpar- sectors” increase. Incomes and consumption will ency and knowledge spread, abuses will be more also surge. evident. That will elevate the demands for the Population growth in Asia and Africa will spark protection of rights. Social pressure will increase greater demand for foodstuffs and other material for equal treatment at all levels. goods, in effect opening huge markets that could Social measures taken through pre-school edu- be supplied from Latin America. More detailed cation, housing, and healthcare, as well as the ris- studies on the composition of emerging consump- ing welfare costs attendant on aging populations tion would help guide the development of new will require increased government spending. products and services. Detailed studies would also Financial and tax planning call for these pro- help in the development of joint ventures among jections to be made over the next ten to twenty Latin American governments and companies in years under different scenarios. They should order to engage the huge Asian markets. be the subjects of futures studies in every Latin On the new map of global power, the Pacific American country. region holds a position of privilege—signaling To plot a course in the world now taking shape, even greater opportunity for Latin America. To political actors will have to draw up a new social take full advantage of this, Latin America’s foreign and political pact that promotes real equality of policy will have to advance a sound combination opportunities, social inclusion, public goods, tech- of initiatives with China, as well as with India, nology, and enterprise. Political actions will be more Indonesia, the , South Korea, Japan, forceful if the study of future scenarios raises aware- and the Association of Southeast Asian Nations ness as to the consequences of inaction, particularly in general. A strategy toward China could focus the effects on governability and productivity.

30th Anniversary Sol M. Linowitz Forum Commemorative Volume 55 || Global changes could heighten on foodstuffs, energy, miner- inequality—the cause 2035, some 315 million Latin als, and joint projects in man- Americans will live in 198 of and consequence of ufacturing and infrastructure. the biggest cities in the region. Latin America will also have to the lag in education It is estimated that those cit- deepen opportunities with the ies will account for 65 percent and healthcare. United States and the European of Latin American GDP. These Union. Initiatives with the || big metropolitan areas will United States and the European require significant investments Union could include agreements on education, to address their weaknesses and to attract inter- energy and the environment, trade and invest- national activities. Long-term urban planning ment, and closer collaboration in science and should be a priority. technology. Changing global forces will require the forma- Anticipating Actions to Tackle tion of new alliances and greater regional integra- Climate Change tion. The growth of Latin America’s middle classes Natural disasters will tend to be more frequent. will swell this internal market appreciably, making This tendency will carry with it migration to cit- regional integration more attractive. It could also ies and transfers of families to more secure areas, facilitate the expansion of Latin American busi- with high human costs. If no consideration is nesses to other countries. Governments and inter- given to preventive measures, such as relocating national organizations would do well to encourage housing and infrastructure, living conditions— thinking about such matters, creating permanent especially of the poor—will be gravely affected. venues for analysis that today barely exists. Climate change will also affect agriculture, energy, As regards the growth of the middle class, it and drinking water supplies. Countries need to is crucial to study the new demands that will set standards, measure environmental impacts, arise, how they will be channeled, what new assess the effectiveness of the measures taken, and products are to be offered and designed, and calculate the amount of investment needed in the the joint actions required by Latin American most sensitive areas, such as dams, water system countries. Because this middle class growth will infrastructure, and coastal protection. appear in both Latin America and in other emerg- Governments should also review food security ing regions, most importantly Asia, it is essential under scenarios involving a range of rainfall and to visualize future scenarios of development in temperature fluctuations, using that analysis to China, India and, more generally, Asia. The study determine what measures might be needed and of Latin American-Chinese relations through the what plans should be made. To effectively address year 2030 is a priority area. the most likely scenarios, countries will have Swift urbanization and the appearance of new to give priority to scientific and technological cities shape the fourth factor that will affect devel- research in areas related to green growth, espe- opment strategies. In response to the urbanization cially biotechnology, renewable energy, water- and trend, Latin American cities will have to improve energy-efficiency, biofuels, and . their efficiency and competitiveness and enhance quality-of-life offerings for their inhabitants. In

56 The Americas in Motion: Looking Ahead How to Prepare responsible for public policymaking; planning ministries should be reorganized. To get ready for what’s ahead, it is imperative that ■■ Foresight committees in parliaments to Latin America strengthens analytical teams within inform the long-term legislative agenda and each of its countries at the same time it sets up a disseminate future-focused analysis at the regional network for global analysis. The groups political level. and the network, working closely with govern- ■■ Publicly financed nongovernmental studies ments, should help design public policies. centers to analyze scenarios and train specialists. The Inter-American Dialogue’s project on Global ■■ National and region-wide coordination of Trends and the Future of Latin America, which is networks of institutions and individuals that supported by the Inter-American Development work on future studies; this includes the train- Bank, is cultivating familiarity with global studies ing of experts in pertinent methodologies and that may not be known in the region, with a view to the creation of research teams. developing national and regional foresight capacity. Long-term projections should become part of The Dialogue has drawn up a register of long-term the political discourse. This can happen if citi- global studies on issues of most importance to Latin zens are better informed about possible futures America. The project seeks to help create a regional and if the vision of the future is endowed with a network of research institutions and scholars that narrative that is more attractive to public policy- study global trends and to link the network to makers. Such a common perspective could be the global think tanks in developed countries. underpinning for long-term political pacts that For that purpose, the following would be useful: are conducive to better governance. ■■ Strategic planning units in each govern- ment, close to the presidency or to institutions

30th Anniversary Sol M. Linowitz Forum Commemorative Volume 57 Contributors

Genaro Arriagada, Chile’s former Minister of State and former Ambassador to the United States. He is a Senior Fellow of the Inter-American Dialogue and directs its Energy Policy Group.

Sergio Bitar, President of Fundación por la Democracia, former Minster of Public Works, Minister of Education, Minister of Mining, Senator, and President of the Party for Democracy (PPD) of Chile. He is a Senior Fellow and member of the Inter-American Dialogue and directs its Global Trends and Latin America’s Future project.

Augusto de la Torre, Chief Economist for Latin America, The World Bank.

Francis Fukuyama, Olivier Nomellini Senior Fellow at Stanford University’s Freeman Spogli Institute. He is a member of the Inter-American Dialogue’s Board of Directors.

George Gray Molina, Chief Economist, Regional Bureau for Latin America and the Caribbean, United Nations Development Programme (UNDP). He is a member of the Inter-American Dialogue.

Alejandro Izquierdo, Principal Economist, Research Department of the Inter-American Development Bank.

Barbara Kotschwar, Research Fellow, Peterson Institute for International Economics.

Ricardo Lagos, former President of Chile, and former Special Envoy on Climate Change for UN Secretary-General Ban Ki-. He is Chair Emeritus of the Inter-American Dialogue.

Abraham F. Lowenthal, Professor Emeritus at the University of Southern California and President Emeritus of the Pacific Council on International Policy. Together with Ambassador Sol Linowitz, he convened the first meeting of the Inter-American Dialogue in 1982 and served as the Dialogue’s founding director until 1992.

Margaret Myers, Director, China and Latin America Program at the Inter-American Dialogue.

Michael Reid, Americas Editor, The Economist.

Diego Sánchez-Ancochea, Economist, University of Oxford.

Patricia I. Vasquez, independent energy expert, former Jennings Randolph Senior Fellow at the US Institute of Peace. She is a member of the Inter-American Dialogue’s Energy Policy Group.

58 The Americas in Motion: Looking Ahead YEARS SHAPING POLICY DEBATE FOR ACTION

The Inter-American Dialogue is the leading US center for policy analysis, exchange, and communication on issues in Western Hemisphere affairs. The Dialogue brings together public and private leaders from across the Americas to address hemispheric problems and opportunities. Together they seek to build cooperation among Western Hemisphere nations and advance a regional agenda of democratic governance, social equity, and economic growth. The Dialogue’s select membership of 100 distinguished citizens from throughout the Americas includes political, business, academic, media, and other nongovernmental leaders. Sixteen Dialogue members served as presidents of their countries and more than three dozen have served at the cabinet level. Dialogue activities are directed to generating new policy ideas and practical propos- als for action, and getting these ideas and proposals to government and private deci- sion makers. The Dialogue also offers diverse Latin American and Caribbean voices access to U.S. policy discussions. Based in Washington, the Dialogue conducts its work throughout the hemisphere. A majority of our Board of Directors are from Latin American and Caribbean nations, as are more than half of the Dialogue’s members and participants in our other leadership networks and task forces. Since 1982—through successive Republican and Democratic administrations and many changes of leadership elsewhere in the hemisphere—the Dialogue has helped shape the agenda of issues and choices in inter-American relations.

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