Here is a piece I authored with my colleagues at the Council on Foreign Relations on the effects of the world financial crisis in Latin America. It originally appeared here.

Latin America: Not So Insulated After All

Latin America Studies Program, Council on Foreign Relations

Tuesday, November 18, 2008; 9:24 AM

In recent years, commentators and policymakers alike have praised Latin America for its growing financial independence and maturity. Fiscal discipline, high commodity prices, and sustained economic growth brought down external debt levels, built international reserves, and strengthened government and corporate balance sheets, placing the region on firmer economic footing. When crisis hit U.S. financial markets, many at first assumed that Latin America’s increasing openness and growing trade with China and India would cushion the impact of a U.S. slowdown. In September 2008, President Luiz Inácio Lula da Silva of Brazil boasted, “People ask me about the crisis, and I answer, go ask Bush. It is his crisis, not mine.”

Yet the widely touted financial “decoupling” between the United States and Latin America (and emerging economies in general) was a myth. Contrary to initial expectations, the spiraling worldwide credit crisis is hitting Latin American nations hard. The region may be free of subprime mortgages, but plummeting access to cross-border financing is stifling lending and investment. In Brazil, the state-owned oil company Petrobras has announced delays in the exploration of its new deepwater oil finds. In Peru, funding for two iron-ore projects has also been delayed. As in the United States, once-boisterous consumer demand across the region is waning. After several quarters of robust private consumption growth, demand has weakened in Brazil, Mexico, and other countries, and overall consumer spending may stall in the coming quarters. With both firms and families holding back, future economic growth remains uncertain.

Capital Flight Takes Off

Rather ironically, money is flowing out of the region and seeking the safe haven of U.S. treasuries. This outflow is pressuring national currency reserves and precipitating steep declines against the U.S. dollar. The Brazilian real is down 27 percent against the dollar since July and the Mexican peso has plummeted 23 percent against the dollar since August. The trend also hammered stock markets across the region, with the Brazilian Bovespa and the Mexican Bolsa both falling 50 percent between August and November. Poor currency bets have brought to their knees economic stalwarts such as Comercial Mexicana in Mexico and Grupo Votorantim in Brazil that are nearly a century old. Concerns about bad future loans encouraged the marriage of two of Brazil’s largest banks–Banco Itau and Unibanco–forming the largest bank in Latin America.

Much of the pain is still to come. With credit scarce, investment down, and the United States and other parts of the world edging toward recession, demand for basic economic goods–commodities–is already declining. Prices for Latin American staples like wheat and corn fell over 35 percent and 30 percent respectively between August and November, while sugar slumped 20 percent until a recent uptick.

Petro-Economies Hit Twice

Oil–the most watched of Latin America’s commodity exports–has plummeted from its $147-a-barrel high three months ago. It has now fallen to below $60 a barrel. Given this volatility, the region’s endemic vulnerability to commodity price swings bodes ill for the future. Oil economies across the ideological spectrum will struggle to keep their economies afloat. The Mexican and Venezuelan governments, in particular, will suffer, as oil profits comprise 40 percent and 50 percent respectively of their public budgets. Oil at its current price level will curtail ambitious plans to cushion the impact of a U.S. recession through public infrastructure investment in Mexico, as it will hamper Venezuela’s wide-ranging petro-diplomacy. Venezuela’s capacity to borrow abroad to finance ambitious social programs may well atrophy, reinforcing the decline in President Hugo Chavez’s standing at home on the eve of local elections, scheduled for November 23.

Countries less dependent on oil income also will suffer from a global downturn. The price of soy already has fallen 40 percent since its recent peak in September and analysts anticipate further declines. As a result, economists have substantially lowered 2009 economic growth projections for Argentina, the world’s third-largest soy supplier, from 6.2 percent in January to 2.2 percent today. Chile’s dependence on copper prompts concern, too, since world prices have halved since April. Peru, second only to Chile in terms of copper production in the world, will also feel these declines. The Economist Intelligence Unit predicts Chilean economic growth will fall below 3 percent in 2008, and shaved off 1.5 percent from its estimates for Peru’s gross domestic product (GDP) growth to 5.5 percent. Even more diversified economies, such as Brazil’s, will see their first downturn in export earnings in a decade. Brazil’s growth projection for 2008 has almost halved from 4.3 percent in January to 2.4 percent in November.

Finally, countries receiving substantial remittances from their nationals abroad, such as Mexico and Central American countries, may feel pinched. Already Mexico, El Salvador, and Guatemala report significant decreases in returning funds, which support the poorer segments of their populations. Further declines could lead to worrisome increases in national poverty levels.

Reasons for Guarded Optimism

Given the region’s volatile economic history, these developments may seem nothing more than the recurrence of crises past: 1982, 1995, and 2001. But this time key differences provide some room for optimism. Latin American countries hold some of the lowest debt to GDP ratios in the world today, a sharp contrast with previous crises. Chile and Brazil, for instance, have become net creditors. Latin America’s governments now run more balanced budgets and pursue healthier fiscal policies. In April, both Peru and Brazil received investment-grade sovereign-debt ratings for the first time, joining Mexico and Chile. Lastly, Latin America now boasts a number of large “multilatinas”–multinational Latin American companies–with presences from Hudson Bay to Patagonia and beyond. Among these are Televisa, Gerdau Ameristeel, Cemex, Embraer, and Grupo Bimbo.

Still, a number of questions remain. As China, and soon the United States and perhaps other major economies, introduce massive economic stimulus packages, what might their effect be on Latin America? Could the region lose more capital absent similar domestic stimulus efforts?

The Geopolitical Dimension

Also unclear is the impact of the financial crisis on politics and political thought in the region. Despite obvious differences among Latin American governments’ approaches to the market, social policy, globalization, and the role of the state, most now believe that Washington failed to heed its own prescriptions for fiscal discipline. In the last few years, as Latin America’s left has gained in popularity and political power throughout the hemisphere, commentators have tended to group the region into “good” left governments (Brazil, Chile) and “bad” left governments (Venezuela, Bolivia). Following this superficial conceit, it may be tempting to conclude that the current financial crisis will reinforce the positions of those on the “bad” left, who will trumpet the end of market dominance. Yet after the dust settles, Latin America may also realize that weathering a global financial crisis will take more then ideology. Today, every goverment in the Western Hemisphere, including the United States, faces the same challenge: how to finance domestic programs that advance the common good, enhance global competitiveness, and ultimately deliver votes. Starting with the United States, a Western Hemisphere focused on solving problems rather than on market or political orthodoxy would be the best–if improbable–outcome, not only for the poor, but for working class sectors, middle class professionals, and economic elites as well.

While there is little in Latin America’s history to suggest that an end to political polarization is near, the region’s leaders do generally recognize what is at stake, and a political center with a global consciousness seems to be emerging, as Brazil’s leadership of the G-20 industrial and developing economies attests. The downturn also provides Latin American nations with an unexpected opportunity to demonstrate the region’s newfound fiscal prudence, creditworthiness, and accountability. If governments are able to ride out the crisis while providing for the most vulnerable populations in the region, Latin America should remain an increasingly attractive destination for investment once international funds begin to flow again. These trends would augur well for the emergence of a new financial architecture that reinforces Latin America’s path toward socially inclusive economic prosperity.

CFR Fellow Shannon O’Neil, Senior Fellow Julia Sweig, and research associates Sebastian Chaskel and Michael Bustamante all contributed to this article.

Nearly 10 million Latinos voted last Tuesday, setting a new record. They made up between 8% and 9% of the total vote, slightly more than in 2004. Hispanic votes shares did jump significantly in a few swing states – up 9% in New Mexico, and 5% in both Colorado and Nevada.

Tuesday’s results show that Latinos were crucial in many states that switched from red to blue. In 2004 56% of Florida’s Latinos (639,225) voted for George Bush, propelling him to a 5% (380,978 vote) victory. This time around, 634,500 Latinos—57%—voted for Obama, propelling him to victory with a 2.5% (204,577 votes) margin. Despite the still solid Republican vote of Florida’s Cuban-Americans, the growing non-Cuban Latinos pushed Obama over the top. Latino votes for Obama also exceeded his margin of victory in Colorado and New Mexico. In Nevada and Virginia, Latino votes also played an important, if not decisive, role in moving Nevada and Virginia into the Obama camp. All told, without the Latino vote, Obama would have won 41 fewer electoral college votes. Not a deal breaker, but this demographic helped orchestrate his electoral college landslide last Tuesday.

Nearly one out of every two new Americans is Latino, meaning this demographic could increasingly dominate the future electorate. But to do so, they have to get out the vote. While 10 million voters is a record, it means that nearly 7 million eligible Latino voters didn’t make it to the polls. That places Latino turnout at 58% - below the country’s 62%, and particularly lower than white voters’ 67% . To strengthen their political heft, and shape the issues that matter to them such as education, the cost of living, jobs, health care, and immigration, turnout will have to increase. As Latinos expand to become 30% of our population (expected by 2042) the question will be whether this population resides in the heart, rather than the margins, of American democracy.

How will U.S.-Latin America relations change under an Obama administration? This is what I had to say for PBS’s WorldFocus last night.

While the world was glued to televisions waiting for the result of the U.S. elections last night, Mexico lost one of its most important leaders in its struggle against organized crime and drug trafficking. Juan Camilo Mouriño, Mexico’s Interior Minister, died along with seven others when a government plane that was carrying them to Mexico City crashed into the city’s busy Reforma Avenue in what appears to have been an accident. Among those killed was also José Luis Santiago Vasconcelos, an important presidential adviser on security and judicial reform matters, who had headed Mexico’s elite force to combat organized crime (SIEDO) and had been in charge of extraditing numerous narcotraffickers. The Interior Minister is the second most important position in Mexico’s government, comparable to the vicepresidential position in the United States, and is usually responsible for negotiating with the legislative branch. President Calderon had assigned Mouriño to spearhead the government’s efforts against organized crime and to reform Mexico’s security institutions. In an administration that has rested heavily on President Calderon’s closest confidants in its decision-making process Mouriño was probably the closest to Calderon. It is unclear who could fill Mouriño’s shoes. His death is indeed a blow to Calderon and to Mexico’s efforts against organized crime, drug trafficking, and corruption.

The Mexican Congress approved a long-overdue energy reform on Tuesday October 28 following 6 months of debates, referendums in 8 Mexican states and Mexico City, and numerous public demonstrations from both sides. While some newspapers tout the government got 80% of the reforms it asked for, Calderon started with an already limited proposal, rejecting any foreign investment in production, which would have required substantial changes to the 1938 constitutional amendment governing Mexican oil. The shared risk/shared reward bargain present around the world, and with other state-owned oil companies such as PETROBRAS in Brazil and PDVSA in Venezuela, was never on the table in Mexico. Even so, the “20 percent” that the President conceded to the PRI and PRD in Congress was an important part. The final bill , and soon law, prohibits private companies from operating refineries and transporting oil within Mexico. It allows Pemex, Mexico’s state-owned oil company, to contract with other companies for some (but not all) types of desperately needed investment in exploration and production, leaving out in particular difficult deep water explorations. The approved reform also sets up disincentives to contracting with Pemex at a time when capital and credit are limited. It mandates that contracted companies must be paid in cash and forbids paying them based on the amount of oil found, produced, or sold by Pemex, although it does offer bonuses for early completion of projects and transferring technology to the Mexican oil company. While the reform does give Pemex more financial autonomy and greater flexibility - allowing it to keep more of its profits so that it can use them for investment in technology and exploration - the company’s employees currently lack many of the necessary skills to realize these new opportunities. So, in the end, production will continue to decline.

Despite these limitations, the reform process was positive for Mexico’s solidifying democracy at work. Once a political third rail, politicians, interest groups, and society at large discussed and approved an oil reform, through successful negotiation and compromise between the Executive and Legislature, and within Congress. The PRI and the PRD played an important role in toning down the reform, which was then passed by an overwhelming majority in both the Senate and the Chamber of Representatives. The reforms exposed the deepening division within the PRD. While many of their colleagues voted for the reform, other PRD representatives attempted to block debate , forcing the Senate vote to take place at an alternate venue and the Chamber vote to take place at a makeshift podium, away from the flag-waving and horn-blowing occurring in the usual space. Yet these anti-democratic tactics were unable to sway the workings of Congress — a good sign. Democracy worked.

Given the importance of oil revenues for the government — it funds nearly 40% of all public spending — further debates and reforms will happen again — perhaps sooner than later. What this round of reform shows is The that the “sacred cow”? of oil is no longer that. This itself is good for Mexico.

Mexico’s attorney general said yesterday that employees of his elite force to combat organized crime, SIEDO, passed confidential information to the Beltran-Leyva cartel in what has been described as the “worst case of infiltration of law enforcement by drug cartels in 10 years.” This is what I had to say about this for PBS’s new show WorldFocus last night.

In late September Venezuelan President Chavez traveled to China. This is what I had to say about this for PBS’s new show WorldFocus.

This opinion piece I wrote for the Washington Post lays out many of the findings and recommendations of the Council on Foreign Relations sponsored Independent Task Force on U.S.-Latin America Relations, for which I served as Director.

The report has gotten some great feedback so far, and I hope will help jumpstart a new conversation within the next Administration and Congress with regard to the region.

The Task Force report co-chairs, Charlene Barshefsky and General James T. Hill, published an editorial yesterday in the Miami Herald. It lays out the main themes of the report, in particular the call to recognize that U.S.-Latin American relations is increasingly about U.S. domestic policy.

After taking a 3 plus month maternity hiatus, I am back and will be posting regularly again.

To kick things off, here is a link to a new Independent Task Force report from the Council on Foreign Relations, titled U.S.-Latin America Relations: A New Direction for a New Reality. The Council brought together 19 individuals of various interest and expertise under the chairmanship of Charlene Barshefsky and General James T. Hill. As director of the project, I can attest to the long hours of intense and at times spirited discussion among its members.
The group decided that U.S. policy should focus on four critical areas: poverty and inequality, public security, migration, and energy integration. The main recommendations are the following:

Poverty and Inequality:

• U.S. should expand targeted assistance for poverty alleviation and institution building by fully funding the Millennium Challenge Account and developing new initiatives to reach the poor regions of the larger middle income countries. These programs should reflect the priorities of Latin American governments and also involve restructuring and integrating the programs of various U.S. government bureaucracies and multilateral institutions.
• Alongside aid, the United States should approve pending free trade agreements with Colombia and Panama and extend trade preferences to Bolivia and Ecuador to encourage productive relations with these complex countries.

Public Security:

• The United States should assist Latin American countries in strengthening their law enforcement and judicial systems. Only through strong institutions can criminal networks and drug traffickers be controlled in the long term. The United States should also focus more on the demand side of the drug equation, working closely with other large drug consuming nations, specifically those in the European Union.

Migration:

• Push through a comprehensive reform in 2009. This must deal with border security, employer responsibility, some sort of regularization of the 12 million unauthorized workers here today, and a flexible guest worker program to deal with future labor demands.

Energy Security:

• The United States should provide FDI incentives to help build energy infrastructure i the region. It should also sponsor regional and subregional working groups to forward best practices.

Finally, the task force touches briefly on 4 bilateral relations. It recommends deepening U.S. relations with Brazil to promote global trade negotiations and manage energy demands; strengthening cooperation with Mexico to stop narcotics trafficking, increase U.S. investment in energy production, and reform immigration policies; using multilateral institutions to address foreign and domestic policies of Venezuela; and opening informal and formal channels of communication with Cuba, with the eventual goal of lifting the embargo.