Latin America - Strategikos

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Latin America

International Relations > Regions
Latin America is a vast macro-region, home of about 590 million people and experiencing a limited but sensible economic growth which is expected to reach an average of 2% in 2018. While the situation is improving in both economic and socio-political terms, the area still has to face numerous challenges.

During the Cold War, the US meddled in Latin American affairs to counter communist political forces that (often with Soviet help) wanted to take power and transform their countries into allies of the USSR. This was an application and reinterpretation of the long-standing Monroe Doctrine established in 1823, which considered the Western Hemisphere as an “American-only” zone to be protected from external influences: in practice, Washington supported (and event helped establishing) harsh military dictatorships in an anti-Soviet logic, that resulted in dramatic events like coups and repressions.

Alongside such political situation, the economic policies implemented by most South American states had poor results. The governments in the region traditionally applyed import substitution policies, whose objective was to favor the development of domestic industries by protecting them from foreign competition thanks to trade barriers and state subsidies. This favored the creation of large state-owned firms or subsidized private companies that enjoyed a (quasi) monopoly and were often directed by people belonging or close to the ruling elite; therefore, they were economically inefficient, unprepared to face foreign competition, and driven by corruption and political favors. At first, this system of rent-seeking companies worked, because they could benefit from large domestic markets that were protected from international competitors.

The initial effect of these policies was somehow positive (an average GDP growth by 2.5% between 1950 and 1973) but they ultimately resulted into a sensible economic slowdown.
As a matter of fact, the situation changed in the early 70s, due to a combination of factors.  First, states applied a financial repression system by which they extracted savings from the agricultural sector to support the rapid industrialization one; and so farmers remained in povery. Moreover, governments faced high expenditures (subsidies to industries and social care programs); but had little tax income since the population was still too poor and industries paid less than they received as state aid. Additionally, corruption and political favors further contributed in putting the budget under strain. As a result, countries started accumulating debts. To counter this, they printed more and more money; but the increase, combined with the limited production of goods, resulted in soaring inflation. With the oil shock in 1973, international petroleum prices dramatically rose; and expenditures further increased for most Latin American countries who depended on energy imports (still, some oil exporters benefitted from it). At that point, the economic situation degenerated, and Latin America entered in the “lost decade” (1973-1987). The situation was made even worse by the fact that the US, to curb inflation, decided to raise its interest rate. This damaged the highly-indebted South American states, many of which had to bankrupt. The only solution would have been to open markets and export more; but due to decades of protectionist policies, firms were unable to sustain international competition. As a result, the average GDP growth dropped to 0.8%.

During the late 80s and early 90s, the situation started changing. With the end of the Cold War, South America experienced a gradual democratization process. In the context of the “Washington consensus”, the governments in the region implemented important market-oriented reforms to limit inflation, reduce the debt, attract foreign investments and technologies. Still, changing decades-long economic structures (and social problems) was difficult, and the results were not fully satisfactory; with peaks and falls. In 2007, Latin America sustained quite well the global financial crisis; whose effects were felt only later, resulting in a slowdown (even though the growth rate has remained generally positive).

Now, it appears the trend is moving again towards a new phase of development. However, the continent has many problems to solve, besides the need to continue its economic reforms. In particular, the social situation is troublesome. Considerable swathes of the population remain poor, and large favelas exist in the periphery of Latin America’s largest cities. Strictly linked to this problem, there is the issue of high criminality rates, notably among young people. As they are born in poor families that cannot afford sending them to school, they have no choice but to either work since childhood or become involved in crime. As a result, they do not receive adequate education and remain trapped in unemployment and poverty, originating a negative feedback cycle.
Criminality is therefore another major problem for the continent, which affects the cities but also assumes transnational dimensions; notably in the case of narco-traffic, with socio-economic consequences on Europe, North America and other rich countries. Latin America also has long-standing problems with guerrilla movements, even though the phenomenon appears to be diminishing. Other issues include the delicate matter of ethnic minorities (notably native pre-Colombian peoples) and environmental protection. These are often linked, as economic exploitation is damaging areas where native peoples live.

In this context, the international asset of the region is changing. Inter-state wars appear remote, but several territorial disputes remain unsettled. The main regional power is with no doubt Brazil. With a large, young population and a growing economy of considerable dimensions, it is playing an increasingly important role in South America and worldwide: it is part of the BRICS grouping, it attempts to become an economic and naval power, and has ambitious projects to extend its influence over the continent so to connect the Atlantic and the Pacific. However, social and political turmoil, economic troubles, corruption and other problems risk to compromise its plans. Venezuela is another important country, notably due to its rich oil reserves and its staunch anti-American position. Still, it is facing a severe economic, social and political crisis that is having deleterious effects. Because of its deep roots (excessive dependence on oil exports and unwise economic policies combined with a fall in petroleum prices), it is unlikely to be solved anytime soon. Cuba, another country traditionally opposed to the US, appears about to enter a period of gradual reform in both political and economic terms; but its relations with America remain complicated.

As far as foreign powers are concerned, the US remain an important actor. However, in parallel with the “Pivot to Asia” policy, in 2013 the Obama administration announced the end of the Monroe Doctrine and de-prioritized Washington’s interests in Latin America. This left more space for other powers. China is becoming an important player: it wants to access the continent’s energetic and mineral resources as well as to open new markets; so it has been greatly expanding its economic and political activity and is also planning to build several infrastructure projects. This includes the Nicaragua Canal, poised to rival the Panama one (however, the PRC as a state is not directly involved, as the project is sponsored by a Chinese billionaire; even though he is likely linked with Beijing’s authorities). For similar reasons, India is also present in Latin America, albeit to a far lesser degree than China. Russia’s engagement is more ancient and political, and it mainly tries to find partners in the region (like Cuba and Venezuela) to counter the US; as Iran isdoing. Finally, the EU maintains cultural ties with the area, it supports democratization and is an important investor; even though the trade relations are still relatively limited.

As such, Latin America is in a transition phase concerning its economic structure, its social and political organization and its relations with the rest of the world; and local governments will need to carefully manage this transformation.

I am not an expert of Latin American affairs, and the countries I know the most are Brazil and Venezuela. Nevertheless, I may still write reports on the region, especially concerning the presence of external powers. Such papers will be posted here below.
Argentina’s Finances Are Hamstringing Its International Role (Again)

While the world's mediatic attention was all focused on Iran and North Korea, the recent financial troubles in Argentina went almost unnoticed. Still, the country had to raise its interest rates three times in a week to a 40% rate in an attempt to counter the rapid depreciation of the peso, and asked the IMF for assistance.
Is another financial crisis looming in Argentina? Difficult to say, but one thing is sure: its macroeconomic instability risks once more to undermine its international role. Yet, its natural resources (natably vast shale oil & gas deposits) may allow Argentina to boost its economy and with its its geopolitical influence in South America.

Full article here (only for Geopolitical Monitor subscribers).
Venezuela: Country Risk Assessment

This report evaluates the economic and political situation in Venezuela so to provide a country risk assessment. I had to write it in mid-August 2017, so please note that it is not updated to the most recent developments. Still, it offers a valid overview of the country's problems and correlated risks.
At first, the report outlines the general characteristics of Venezuela. Then it moves to the socio-political outlook, showing how the economic policies resulted in the current social turmoil. Then, the paper examines Venezuela's economic situation, providing some relevant data that are useful to understand the situation and its likely evolution. The report concludes by highlighting that the country's problems, due to their long-standing nature, are unlikely to be solved soon; thus representing a risk to be taken into consideration.
Click here to read the report
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