LATIN AMERICA ADVISOR a DAILY PUBLICATION of the DIALOGUE Wednesday, February 17, 2021

LATIN AMERICA ADVISOR A DAILY PUBLICATION OF THE DIALOGUE www.thedialogue.org Wednesday, February 17, 2021

BOARD OF ADVISORS FEATURED Q&A TODAY’S NEWS Diego Arria Director, Columbus Group ECONOMIC Devry Boughner Vorwerk Will Peru’s Pension Rolling Blackouts Chief Corporate Affairs Officer, Grubhub Hit Mexico, Plants Joyce Chang Global Head of Research, System Undergo Forced to Close JPMorgan Chase & Co. Rolling blackouts hit several Paula Cifuentes Mexican states as much of the Director of Economic & Fiscal Affairs, a Major Reform? country grapples with an electrici- Latin America & Canada, Philip Morris International ty shortage. Severe winter storms Marlene Fernández in Texas have restricted Mexico’s Corporate Vice President for supply of natural gas, from which Government Relations, it derives most of its power. Arcos Dorados (McDonald’s) Page 2 Peter Hakim President Emeritus, Inter-American Dialogue BUSINESS Donna Hrinak Senior VP, Corporate Affairs, IDB, Businesses Royal Caribbean Group in Partnership for Jon E. Huenemann Council Member, Region’s Recovery GLG Inc. The Inter-American Development James R. Jones Peruvian lawmakers are considering an overhaul of the country’s pension system. An office of Bank and a coalition of 40 global Chairman, Peruvian pension fund manager AFP Integra is pictured before the Covid-19 pandemic. // File Monarch Global Strategies Photo: Asociación de AFP. corporate executives launched a new partnership for the economic Craig A. Kelly A congressional committee in Peru last month approved Senior Director, Americas recovery of Latin America and the Int’l Gov’t Relations, Exxon Mobil legislation that would replace the country’s private and Caribbean. John Maisto public pension plans with a government-run system, sending Page 3 Director, U.S. Education Finance Group Q it to the floor of the unicameral Congress. What are the most Nicolás Mariscal important elements of the proposed legislation? What are its major POLITICAL Chairman, Grupo Marhnos benefits and drawbacks? Is Congress likely to speedily approve it ahead Mexico to Raise Thomas F. McLarty III of April’s presidential election, and to what extent is the electoral race Concerns About Chairman, playing a role in its passage? McLarty Associates Vaccine Access at Beatrice Rangel Director, United Nations AMLA Consulting LLC Luis Miguel Castilla, former Peruvian finance minister: “This Mexico will raise concerns about Jaana Remes ‘reform’ does little to improve the main challenges confront- unequal access around the world Partner, to Covid-19 vaccines, said Foreign McKinsey Global Institute ing Peru’s pension system: its low coverage (one in three Pe- Minister Marcelo Ebrard. ruvians contribute to a pension fund) and insufficient pension Ernesto Revilla Page 2 Head of Latin American A payments. This bill creates a new public entity to consolidate both public Economics, Citi Gustavo Roosen and private schemes and relegates the private pension system to an Chairman of the Board, asset management role. Moreover, it mandates that an undefined portion Envases Venezolanos Andrés Rozental of all individual funds be set aside to finance a minimum pension for the President, Rozental & poor, invoking the need for more solidarity. These are not sound ideas giv- Asociados en the government’s poor track record in managing long-term savings and Shelly Shetty Managing Director, Sovereigns the lack of a guarantee that fiscal voracity may divert pension receipts Fitch Ratings to other uses in the future. Furthermore, creating a compulsory contribution will further increase labor informality (the main reason behind the low density of contributions). General taxation revenues should finance minimum pensions. Although the interim head of Congress intends to first submit the proposal to the specialized congressional commissions for further debate (supposedly seeking inputs from all technical bodies), the Ebrard // File Photo: U.S. State Department. Continued on page 3

POLITICAL NEWS the government said it would distribute them NEWS BRIEFS across the country, including in rural areas. “We Mexico to Raise made the decision to start in the municipalities Former Ecuadorean that are the farthest away, the most marginal- President Noboa Dies at 83 Concerns at U.N. ized, with the poorest population in the country,” López Obrador told reporters on Sunday. Former Ecuadorean President Gustavo Noboa, About Vaccine Access [Editor’s note: See the Advisor’s video interview who helped to restore a measure of stability to on vaccine nationalism with Arachu Castro of the country after a severe economic crisis at Mexico will raise concerns this week at the Tulane University on vaccine nationalism.] the beginning of the century, died Tuesday at United Nations Security Council about unequal age 83, the Associated Press reported. Noboa access around the world to the Covid-19 died in Miami following surgery for a brain vaccines, Foreign Minister Marcelo Ebrard said ECONOMIC NEWS tumor. He was Ecuador’s president from 2000- Tuesday, Reuters reported. “The countries that 2003, following Jamil Mahaud, who was ousted produce [vaccines] have very high vaccination in a military coup. rates, and Latin America and the Caribbean Rolling Blackouts Hit much less,” Ebrard told reporters. He added Mexico, Factories that access to the vaccines was “not fair.” At Colombian Attorney the same event, Mexican President Andrés Forced to Close Manuel López Obrador said his government General’s Ecuador wanted to see the United Nations address Rolling blackouts hit several Mexican states Visit Draws Criticism the issue of vaccine hoarding and equitable on Tuesday as officials struggled to adapt to a The recent visit of Colombia’s attorney general access to the shots so that “all countries have shortage of electricity caused by severe winter to Ecuador amid the latter’s electoral recount the possibility of vaccinating their inhabi- storms in Texas, the Associated Press report- has sparked criticism in both countries, Agence tants.” Mexico’s government has struck deals ed. Bitterly cold winter weather north of the France-Presse reported Monday. Colombia’s with international drug makers for millions U.S.-Mexico border cut supplies of natural gas Francisco Barbosa met with his counterpart to of doses of Covid-19 vaccines. In a Q&A that much of northern Mexico relies upon to discuss information that allegedly links Ecua- published in the Advisor last June, Andrew generate electricity, leading numerous factories dorean left-wing presidential candidate Andrés Rudman, a then-managing director of Monarch in Mexico to shut down. The National Council Arauz with the ELN, an armed Colombian guer- Global Strategies, said it would be “tragically of the Maquiladora Industry said as many as rilla group considered a terrorist organization. short-sighted” for any country to exercise “vac- 1,600 plants were forced to halt operations Arauz, who will face a yet undetermined candi- cine nationalism,” or restrictions on the expor- because of a lack of power, putting hundreds date in Ecuador’s runoff in April, has denied the tation of Covid-19 vaccines. “Seeking to control of thousands of people out of work, the wire accusation, calling it a “coarse lie.” access through some sort of export control or service reported. Authorities were announcing expropriation of a commercially developed vac- rolling blackouts via Twitter without coordinat- cine would expose the implementing country ing with the factories, said the organization’s to the risk of retaliation in the future and likely president, Luis Hernández. Rosalina Torres, the Church Leaders Urge provoke similar behavior by other nations,” he leader of the maquiladora council in Matam- Biden to End Trump Suit said. On Tuesday, Mexican health authorities oros, said all the factories in the border city Blocking Puerto Rico Aid said the country will likely save more lives were closed. “The losses are going to run into Catholic Archbishop Roberto González of San with its limited supply of Covid-19 vaccines by the millions,” she told the AP. Much of northern Juan and leaders from other churches in the diverting some of them into poor rural com- Mexico was without reliable power on Tuesday, United States on Tuesday called on President munities, Bloomberg News reported. Remote and blackouts stretched into central Mexico, as Joe Biden to immediately withdraw a lawsuit areas are at a greater risk from the virus than far south as Guerrero state. Beginning late Sun- filed by the Trump administration to block $2.3 are cities, said Hugo López-Gatell, the country’s day, unexpectedly low temperatures in Texas billion in additional income payments to around coronavirus czar. Social inequality “has led us froze natural gas pipelines, cutting off private 300,000 elderly, blind and disabled Puerto Ri- to believe that our vaccination efforts should plants that supply some 80 percent of northern cans, Reuters reported. They also urged Biden be directed to the places where there’s the Mexico’s electricity. Mexico uses natural gas to to support bringing more pharmaceutical and greatest need, because that’s where there’s generate approximately 60 percent of its power manufacturing jobs to the U.S. territory. “Nearly the greatest risk of complications,” he told nationwide. The winter storm has caused at 60 percent of Puerto Rico’s children, U.S. reporters. This week, Mexico received 870,000 least 23 deaths in Texas, The New York Times citizens, live in poverty and would benefit from doses of the AstraZeneca/Oxford vaccine, and reported. The storm led the state’s power grid these measures,” they wrote in a letter.

COPYRIGHT © 2021, INTER-AMERICAN DIALOGUE PAGE 2 LATIN AMERICA ADVISOR Wednesday, February 17, 2021 to become overwhelmed amid soaring demand FEATURED Q&A / Continued from page 1 for electric heat. “No one’s model of the power system envisioned that all 254 Texas counties prevailing populist stance may well prevail. and without technical advice. The finance would come under a winter storm warning at Some parties have threatened a no-confi- minister and central bank do not favor this the same time,” Joshua Rhodes, an expert on dence vote on congressional leadership to proposal. It is not realistic to have a sober Texas’ electrical grid at the University of Texas force a particular course of action. Given the dialogue about a long-term reform during the at Austin, told the newspaper. recent Constitutional Tribunal’s ruling that heat of an election campaign.” renders unconstitutional the law that en- abled the devolution of public pension funds Mercedes Aráoz, former second BUSINESS NEWS to its affiliates, Congress may well decide vice president of Peru and to show its political strength and proceed professor of economics at Uni- IDB, Executives with a vote. Upcoming elections are a crucial A versidad del Pacífico in Lima: motivation underlying most congressional “Peru’s entire pension fund system must Launch Partnership decisions, and the government’s weakness be reformed as part of a well-thought-out is unable to mitigate this situation.” overhaul in which labor market and social for Region’s Recovery security system (both health and pension) Cristian Rodriguez, chairman reforms are seen as an integral part of the The Inter-American Development Bank and a and former CEO of AFP Habitat: process. Seventy percent of Peru’s labor coalition of 40 global corporate executives “Probably the most critical force is informal and doesn’t have cover- on Tuesday launched a partnership aimed A factor that explains levels of age. The public-sector manager (ONP), a at driving Latin America and the Caribbean’s pensions in Latin America besides income solidarity program, is broken and fueled economic recovery, the IDB said in a statement. is the lack of contributions. Informal jobs by fiscal resources. Four and a half million The plan will focus on empowering women, represent a large section of the labor force. people are in the private system, but some accelerating digitalization and strengthen- As long as that level of informality persists, of them will not receive a minimum pension ing regional value chains. Business leaders, it will be very difficult to have a sustainable because of their intermittent participation in including from Amazon, AT&T, Citibank, Copa, pension system. The proposed legislation the formal market. The bill proposes a public Google, Itaú Latam, MetLife, Telefónica, Visa, does not deal with this issue, so it is very entity that would collect funds from salaries Walmart and several others, signed a “part- unlikely to be sustainable in the long run. and the private sector in a two-tiered system, nership declaration” and pledged to work with The big challenge is how to increase the one based on individual accounts and the the development bank to mobilize resources in number of contributors and the amounts other on a solidarity system. This becomes a these three areas, the IDB said. “Today’s gath- of contributions that each Peruvian makes, tax on payroll, pushing more people into the ering with leaders from 40 of the world’s most not how to redistribute the payments of the informal sector. Nothing is said about how innovative global and regional companies, few who contribute to the system. The most funds will be distributed between these two and the signing of this historic Partnership important elements are those not being ad- tiers. The idea of having a solidarity tier is Declaration, enshrined our shared vision and dressed: the universality of the contributions not bad, but it should be funded by the Trea- an action plan for future investment, growth and the retirement age. Benefits include sury, not by taxing payrolls and promoting in- and prosperity in our countries,” said IDB unifying old-age aid programs and setting formality. It also seems unconstitutional for President Mauricio Claver-Carone. Earlier this up a first pillar financed with general taxes. people in the private system to be forced to month, Claver-Carone said the development Drawbacks include using labor taxes to transfer to the new one. Moreover, the public bank would have to cut lending by at least 25 finance current pensions, which disincentiv- entity will select, without any given rules, percent this year, as compared to the previous izes formal jobs, and concentrating pension who will invest the money. The proposed year, unless members approve a proposed savings under a government administration legislation, without consulting authorities $80 billion capital increase, Bloomberg News and related activities into a state-owned mo- and stakeholders, appeared during a presi- reported. The IDB loaned a record $21.6 billion nopoly is a big step back from consolidating dential campaign, and from a delegitimized last year as countries struggled to manage the an efficient and transparent system. For a Congress following political turmoil. Some Covid-19 pandemic and its economic fallout. viable pension system, incentives must be candidates such as César Acuña, leader Claver-Carone said lending would need to created to encourage the informal economy of APP, the same party of Carmen Omonte, return to between $12 billion to $16 billion to become formal, but this proposal may do the president of the committee and his starting this year, unless additional resources the opposite. Such an important reform for vice-presidential candidate, have said that are approved. the long run should not be done in a rush the debate should be postponed to the new Continued on page 4

FEATURED Q&A / Continued from page 3 LATIN AMERICA ADVISOR is published every business day by the Inter-American Dialogue, Copyright © 2021 Congress. But nobody can predict this Con- of last resort, and only under exceptional gress’ behavior, given legislators’ populism individual hardship circumstances.” Erik Brand and low commitment to their own parties.” Publisher [email protected] Pedro Francke, Peru-based Pablo Antolin, principal econ- economist, researcher and Gene Kuleta Editor omist and head of the private consultant on poverty, health [email protected] pensions unit at the Organiza- and social policies: “Peru’s A Anastasia Chacón González tion for Economic Cooperation pension system, which Alberto Fujimori A Reporter & Associate Editor and Development: “The main discussion in privatized after the 1992 self-coup, is quite [email protected] Latin America is whether to have pay-as- deficient: the AFPs charge commissions you-go (PAYG)-financed public pensions or that are among the highest in the world, and

funded private pensions as current arrange- most older adults do not have a pension. Michael Shifter, President ments fail to deliver adequate retirement The Peruvian system is so inequitable that Rebecca Bill Chavez, Nonresident Senior Fellow income. This discussion misses the point. the AFPs charge more in commissions Sergio Bitar, Nonresident Senior Fellow Current pension arrangements fail to deliver than the state dedicates to the payment of Joan Caivano, Senior Advisor adequate retirement income because contri- noncontributory pensions for the poorest. Michael Camilleri, Director, Rule of Law Program butions are low, by international standards, A special congressional commission has Kevin Casas-Zamora, Nonresident Senior Fellow to finance levels of retirement income above approved a reform proposal, establishing Héctor Castro Vizcarra, Nonresident Senior Fellow 50 percent of final salary. Moreover, the a multi-pillar system like the one the World Julia Dias Leite, Nonresident Senior Fellow number of periods that people actively save Bank recommends. However, Peruvian AFPs Ariel Fiszbein, Director, Education Program to finance retirement is quite short, by inter- have unleashed a fierce campaign against Peter Hakim, President Emeritus national standards. The OECD recommends it. The main charge is that there would be Nora Lustig, Nonresident Senior Fellow combining both PAYG and funded pensions, an autonomous public administration and Margaret Myers, Director, Asia and designing them so that they complement solidarity contributions, such as those in the Latin America Program Manuel Orozco, Senior Fellow each other. This means that all individuals U.S. pension systems, and in all developed Xiaoyu Pu, Nonresident Senior Fellow in active life contribute to both and, when in and most developing countries. The real rea- Jeffrey Puryear, Senior Fellow retirement, their overall retirement income son is that AFPs will only be able to charge Mateo Samper, Nonresident Senior Fellow comprises income from both. The OECD also commissions based on the profitability Tamar Solnik, Director, Finance & Administration argues that it is essential, for any pension achieved. However, the proposal leaves an Lisa Viscidi, Director, Energy Program system to work and have public trust, to essential issue undefined: how much should Denisse Yanovich, Director of Development, have a strong old-age safety so that all go toward a solidarity contribution and External Relations & Special Projects retirees enjoy a minimum retirement income, how much should go toward an individual financed from the budget. The solution to account. Likewise, although the proposal Latin America Advisor is published every business day, except for major U.S. holidays, the shortcomings of Latin American pension includes the increase and expansion of by the Inter-American Dialogue at systems is to save more and for longer. The noncontributory pension coverage, the pace 1155 15th Street NW, Suite 800 Washington, DC 20005 OECD presents in its pension reviews guide- of growth remains undefined. A reform under www.thedialogue.org lines to achieve this and recognizes the diffi- debate in a low-legitimacy Congress, which ISSN 2163-7962 culties that informality creates, arguing that a few months ago endorsed a coup in the Subscription inquiries are welcomed at informality needs to be addressed within the middle of an electoral campaign and without [email protected] labor market. Yet, it provides guidelines to support of the president, has little chance of The opinions expressed by the members of the Board of make sure that retirement savings arrange- being approved. The issue must be debated Advisors and by guest commentators do not necessarily ments do not compound the problem and after a new government takes over on July represent those of the publisher. The analysis is the sole improve the situation. Policymakers should 28.” view of each commentator and does not necessarily represent the views of their respective employers or firms. follow the guidelines in the OECD Roadmap The information in this report has been obtained from for the Good Design of DC Pension Plans The Advisor welcomes comments on its Q&A reliable sources, but neither its accuracy and completeness, nor the opinions based thereon, are guaranteed. If you have and Core Principles of Private Pension Regu- section. Readers can write editor Gene Kuleta any questions relating to the contents of this publication, lation to improve funded pensions. Allowing at [email protected]. contact the editorial offices of the Inter-American Dialogue. Contents of this report may not be reproduced, stored in early withdrawals should be a measure a retrieval system, or transmitted without prior written permission from the publisher.