Economic and Political Issues

For decades, the region of Middle and South America has been one of the poorer world regions—not as poor, on average, as sub-Saharan Africa, South Asia, or Southeast Asia—and has had serious economic challenges. The unique colonial and postcolonial history of this region has resulted in wide economic inequality and income disparity, as well as persistent political disempowerment of poor people. Because these issues are so connected, overall discussions of economic and political issues are combined in this chapter. As the discussions will show, however, in recent years the region has emerged from a long series of efforts to change its economic trajectory and includes several countries that are now being mentioned as the economic powerhouses of the future, perhaps even positioned to help Europeans resolve their issues with economic security.

Economic Inequality and Income Disparity

With the exception of a few small countries, the income disparity—the gap between rich and poor—in Middle America is one of the biggest in the world. According to the most recent United Nations (UN) figures, the richest 10 percent of the population was between 19 and 94 times richer than the poorest 10 percent, depending on which country was being analyzed (Table 3.2). In recent years, disparities have been shrinking in Brazil, Chile, Mexico, and Venezuela, primarily because of new government economic and social policies aimed at reducing wide disparities. However, in Bolivia, Guatemala, Colombia, and Peru, disparities have recently increased. The poverty rate for the region as a whole is around 33 percent, but in the poorer countries (Haiti, Guatemala, Honduras, Nicaragua, Peru, Bolivia, and Paraguay), more than half the population now lives in poverty.

Phases of Economic Development

The current economic and political situation in Middle and South America derives from the region’s history, which can be divided into three major phases: the early extractive phase, the import substitution industrialization (ISI) phase, and the current structural adjustment and marketization phase, which includes sharply rising investment from abroad. All three phases have helped entrench wide income disparities despite a consensus that more egalitarian development is desirable.

Early Extractive Phase

From the time European conquerors first arrived, economic development was guided by a policy of mercantilism in which Europeans extracted resources and controlled much of the economic activity in the American colonies in order to increase the power and wealth of their “mother” country. Even after independence was granted, many extractive enterprises were owned by foreign investors who had few incentives to build stable local economies.

A small flow of foreign investment and manufactured goods entered the region, while a vast flow of raw materials left for Europe and beyond. The money to fund the farms, plantations, mines, and transportation systems that enabled the extraction of resources for export came from abroad, first from Europeans and later from North Americans and other international sources. One example is the still highly lucrative Panama Canal. The French first attempted to build the canal in 1880. It was later completed and run by the United States, and finally turned over to Panamanian control in 1999. The profits from these ventures were usually banked abroad, depriving the region of investment funds and tax revenues that could have made it more economically independent. Industries were slow to develop in the region, so even essential items, such as farm tools and household utensils, had to be purchased from Europe and North America at relatively high prices. Many people simply did without.

A number of economic institutions arose in Middle and South America to supply food and raw materials to Europe and North America. Large rural estates called haciendas were granted to colonists as a reward for conquering territory and people for Spain. For generations these essentially feudal estates were then passed down through the families of those colonists. Over time, the owners, who often lived in a distant city or in Europe, lost interest in the day-to-day operations of the haciendas. Productivity on these lands was generally low and hacienda laborers remained extremely poor. Nevertheless, haciendas produced a diverse array of products (cattle, cotton, rum, sugar) for local consumption and export.

Plantations were large factory farms, meaning that in addition to growing crops such as sugar, coffee, cotton, or (more recently) bananas, some processing for shipment was done on site. Plantation owners made larger investments in equipment, and these farms were more efficient and profitable than haciendas. However, plantations had relatively little local economic impact. Instead of employing local populations, plantation owners imported slave labor from Africa. The equipment that the plantations used was usually imported from Europe, which was also where plantation owners preferred to invest their profits. As a result, little money was available to support the development of local industries that could have grown up around the plantations.

First developed by the European colonizers of the Caribbean and northeastern Brazil in the 1600s, plantations became more common throughout Middle and South America by the late nineteenth century. Unlike haciendas, which were often established in the continental interior in a variety of climates, plantations were for the most part situated in tropical coastal areas with year-round growing seasons. Their coastal and island locations gave them easier access to global markets via ocean transport.

As markets for meat, hides, and wool grew in Europe and North America, the livestock ranch emerged, specializing in raising cattle and sheep. Today, commercial ranches serving such global markets as the fast-food industry are found in the drier grasslands and savannas of South America, Central America, northern Mexico, and even in the wet tropics on freshly cleared rain forest lands.

Mining was another early extractive industry (Figure 3.14). Important mines (primarily gold and silver at first) were located on the island of Hispaniola and in north-central Mexico, the Andes, the Brazilian Highlands, and many other locations. Extremely inhumane labor practices were common in all of these mines. Today, oil and gas have been added to the mineral extraction industry, but rich mines throughout the region continue to produce gold, silver, copper, tin, precious gems, titanium, bauxite, and tungsten.

FIGURE 3.14 A copper mine in northern Chile, where some of the largest copper mines in the world are found. Copper accounts for 13 percent of Chile’s GDP, and Chile produces one-third of the world’s copper, more than any other country. Chile’s copper mines are highly dependent on imported machinery, such as large dump trucks that are made in the United States. Courtesy Wysocki Pawel/Getty Images

Profits from the region’s mines, ranches, plantations, and haciendas continued to leave the region, even after the countries gained independence in the nineteenth century. One of the main reasons for this was that wealthy foreign investors retained control of many of the extractive enterprises.

Import Substitution Industrialization Phase

In the 1950s, there were waves of protests against the continuing domination of the economy and society by local elites and a few foreign investors. Many governments—Mexico and Argentina most prominent among them—proclaimed themselves socialist democracies. To boost their economic independence, these governments tried to keep money and resources within the region through policies of import substitution industrialization (ISI). Subsidies, among other measures, encouraged the local production of machinery and other commonly imported items.

To encourage local people to buy manufactured goods from local suppliers, governments placed high tariffs on imported, usually higher-quality manufactured goods. The money and resources kept within each country were expected to provide the basis for further industrial development. These policies were intended to create well-paying jobs, raise living standards for the majority of people, and ultimately replace the extractive industries as the backbone of country economies.

The state-owned manufacturing sectors on which the success of ISI depended were never able to produce goods of a high-enough quality to compete with those produced in Asia, Europe, and North America. This was largely because the design, as well as the technological and managerial skills needed to run globally competitive factories, were lacking. Moreover, local consumers were not numerous or prosperous enough to support these industries. With demand for ISI products weak among domestic and foreign consumers alike, employment in these industries stagnated, tax revenues remained low, and social programs could not be adequately funded.

Not all state-owned corporations were losing propositions. ISI still survives in some countries, and periodically ISI schemes are considered for reimplementation in such places as Bolivia and Venezuela. Brazil—with its aircraft, armament, oil exports, and auto industries—and Mexico—with its oil and gas industries—both had success with some ISI programs. Interest in state-supported manufacturing industries continues as a way to keep profits in-country; however, the general trend is now toward more market-oriented management and global competitiveness. Most countries still depend on the export of raw materials.

Beginning in the early 1970s, sharp increases in oil prices and decreases in global prices of raw materials ended a period of relative prosperity that had begun in the early 1950s. Reluctant to let go of the dream of rapid development, governments and private interests across the region continued to pursue ambitious plans to modernize and industrialize their national economies. They did this even as prices for raw material exports—their main source of income—fell. With false optimism, they paid for dam, road, and factory projects by borrowing millions of dollars from major international banks, most of which were in North America or Europe. When, in 1980, a global economic recession hit, not only were development plans halted, but a number of governments in the region also found that they were unable to repay their loans (Figure 3.15).

FIGURE 3.15 Origins of Foreign Direct investment in Latin America and the Caribbean, 2006–2011. FDI flows into the region reached U.S.$153.448 billion in 2011, the highest total ever—and only a few years after a global financial crisis hit in 2008. The Netherlands was the leading investor in 2011, in large part because it is a conduit for investments from third-party countries. The United States was the second-leading investor, with 18% of the total; Spain was third; and Latin American countries were fourth in investing in other countries within the region. Brazil was the largest recipient of FDI in 2011, getting nearly half of the total, followed by Mexico and Chile.

Structural Adjustment and the Marketization Phase

Alarmed over the mounting debt of their clients, foreign banks that had made loans to governments in the region took action. The International Monetary Fund (IMF) developed and enforced policies that mandated profound changes in the organization of national economies. To ensure that sufficient money would be available to repay loans taken out from foreign banks to finance the now-discredited ISI phase, the IMF required structural adjustment policies (SAPs)—belt-tightening measures. These SAPs were based on concepts of privatization (the selling of formerly government-owned industries and firms to private investors), marketization (the development of a free market economy in support of free trade), and globalization (the opening of national economies to global investors; see Chapter 1, pages 30–33). At the time, these concepts were considered the soundest ways for countries to achieve economic expansion and thus to repay the debts to banks in North America, Europe, and Asia.

In the case of privatization, the investors to whom government firms were sold were multinational corporations located in North America, Europe, and Asia. Thus the SAP era resulted in industries across the region being returned to foreign ownership. The other main SAP policy, marketization, required that governments remove tariffs on imported goods of all types in order to obtain further loans. The removal of tariffs was meant to make the market more competitive, but many local industries failed as a result.

Crucially, SAPs also reversed the ISI-era trend of expanding government social programs and building infrastructure. To free up funds for debt repayment, governments were required to fire many civil servants and drastically reduce spending on public health, education, job training, day care, water systems, sanitation, and infrastructure building and maintenance. In other words, SAPs took government services away from the poor and middle-class workers. While severely cutting these badly needed government programs, SAPs encouraged the expansion of industries that were already earning profits by lowering taxes on their activities, thus further shrinking government revenues to pay for services. In the countries of Middle and South America, as in most developing countries, the most profitable industries remained those based on the extraction of raw materials for export. 61. PERUVIANS STRUGGLE TO GAIN HEALTH CARE ACCESS

Export Processing Zones

A major component of SAPs was the expansion of manufacturing industries in Export Processing Zones (EPZs), also known as free trade zones—specially created areas within a country where, in order to attract foreign-owned factories, taxes on imports and exports are not charged. The main benefit to the host country is the employment of local labor, which eases unemployment and brings money into the economy. Products are often assembled strictly for export to foreign markets.

There are EPZs in nearly all countries on the Middle and South American mainland and on some Caribbean islands (in many other world regions also). However, the largest of the EPZs is the conglomeration of assembly factories, called maquiladoras, that are located along the Mexican side of the U.S.–Mexico border. Although these factories do provide employment, living conditions are difficult and exactly the role they will ultimately play in Mexican economic development is unclear, as the following vignette illustrates.

Voter Backlash Against SAPs

The SAP era did not produce the sustained economic growth that was expected to relieve the debt crisis and create broader prosperity. SAPs failed to stimulate economic growth in large part because they encouraged greater dependence on exports of raw materials just when prices for these items were falling in the global market.

Beginning in the late 1990s, millions of voters within this region have registered their opposition to SAPs. Since 1999, presidents who explicitly opposed SAPs have been elected in eight countries in the region: Argentina, Bolivia, Brazil, Chile, Ecuador, Nicaragua, Uruguay, and Venezuela. Both Brazil and Argentina made considerable sacrifices to pay off their debts and liberate themselves from the restrictions of SAPs. Venezuela, under President Hugo Chávez, emerged as a leader of the SAP backlash. In 2005, the Chávez administration nationalized foreign oil companies operating in Venezuela. Since then it has also used its own considerable oil wealth to help other countries, such as Argentina, Bolivia, and Nicaragua, pay off their debts. Bolivia, led by Evo Morales (often an ally of Chávez), reversed the SAP policy of privatization by nationalizing that country’s natural gas industry. Loans taken from the IMF dropped from $48 billion in 2003 to just $1 billion in 2008. During this same period, IMF policy reversed itself from promoting SAPs to promoting Poverty Reduction Strategies (PRSs) that attempt to combine marketization with strong investment in social programs. This new IMF position has been maintained across the globe now for several years, suggesting that voters in Middle and South America have had an important impact on a major global financial institution (see page 32 in Chapter 1).

63. NEW BOLIVIAN ENERGY POLICY CAUSES CONCERN

67. U.S.–VENEZUELA ENERGY TIES ENDURE DESPITE DETERIORATING POLITICAL RELATIONS

The Present Era of Foreign Direct Investment

The most recent development in this region is the emergence of several countries—most notably Brazil, Mexico, and Chile—that are not only improving in economic health but are stepping into global economic leadership roles. These three have received notably increased flows of foreign direct investment (FDI). FDI is defined as investment funds coming in to enterprises from outside the country (Figure 3.15). In fact, FDI flows to Middle and South America in 2011 were larger than to any other world region; in Brazil, specifically, FDI increased by more than 80 percent in just 9 months of 2011, with the money flowing primarily into the telecommunications, food, metal works, and petroleum industries. Furthermore, Brazil is often mentioned as part of a global foursome known as the BRIC countries: Brazil, Russia, India, and China. These are emerging economic powers, rich in resources and poised for transformation into highly developed, highly productive powerhouses. One measure of the region’s rising reputation as financially stable is the fact that in 2012, Christine Lagarde, director of the IMF, asked for help from Brazil, Mexico, and Peru in designing and funding a bailout package for overly indebted countries in the European Union—the first time countries in Middle and South America have played such a role.

Interest in investing in the region has risen significantly and shifted, as shown in Figure 3.15. The Netherlands now plays the biggest role, primarily because it acts on behalf of a consortium of investor countries. Spain has played a major FDI role for a number of years. The absolute amounts invested by the United States are rising, but because of the strong interest of others, the U.S. proportion has decreased. China quietly invested in the region in relatively small ways for several decades, but recently it has increased its investments and appears to be most interested in buying or leasing (for an extended period) large swatches of agricultural land in Brazil, Argentina, and Chile. In the Bahamas, China has a major upscale casino/resort tourism investment called Baha Mar. Six hotels with a total of 2250 rooms are planned, with construction to be done by the Chinese State Construction Engineering Corporation.

The Role of Remittances

Migration for the purpose of supporting family members back home with remittances is an extremely important economic activity throughout this region (see further discussion). Each year, remittances amount to roughly double the U.S. foreign aid to the region. Most such remittance migrations are within countries. While the amounts of cash sent home are small, these remittances are crucial for families that may not have much other income.

One report (by geographer Dennis Conway and anthropologist Jeffrey H. Cohen) suggests that couples that migrate to the United States from indigenous villages in Mexico typically work at menial jobs and live frugally in order to save a substantial nest egg. Then they may return home for several years to build a house (usually a family self-help project) and buy furnishings. When the money runs out, the couple, or just the husband or wife, may migrate again to save up another nest egg.

The Informal Economy

For centuries, low-profile businesspeople throughout Middle and South America have operated in the informal economy, meaning that they support their families through inventive entrepreneurship but are not officially recognized in the statistics and do not pay business, sales, or income taxes. Most are small-scale operators involved with street vending or recycling used items such as clothing, glass, or waste materials.

Regional Trade and Trade Agreements

The growth in international trade and foreign investment in the region, encouraged in part by SAPs, has been joined by growth in regional free trade agreements. Such agreements reduce tariffs and other barriers to trade among a group of neighboring countries. The two largest free trade agreements within the region are NAFTA and UNASUR.

The North American Free Trade Agreement (NAFTA) established a free trade bloc in 1994, consisting of the United States, Mexico, and Canada and containing more than 450 million people. The main goal of NAFTA is to reduce barriers to trade, thereby creating expanded markets for the goods and services produced in the three countries. Since 1994, the value of the economies of these three countries has grown steadily; by 2011, it was worth at least $18 trillion. A subsequent effort by the United States to create a NAFTA-like trade bloc for all of the Americas (FTAA) has stalled in recent years, largely because of dissatisfaction with the effects of globalization and fear of U.S. domination.

UNASUR, a union of South American nations, was organized in May of 2008; it supersedes Mercosur and the Andean Community of Nations, two previous customs unions. The 12 member countries (Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Guyana, Paraguay, Peru, Suriname, Uruguay, and Venezuela) contain nearly 400 million people, with a combined economy worth nearly $8 trillion per year. UNASUR appears to want to emulate the European Union in that it has adopted resolutions on a multitude of political, social, and trade issues, not the least of which is to reduce disparities of wealth and opportunity. 62. MANY VENEZUELANS UNCERTAIN ABOUT CHÁVEZ’S TWENTY-FIRST-CENTURY SOCIALISM

The overall record of regional free trade agreements so far is mixed. While they have increased trade, the benefits of that trade usually are not spread evenly among regions or among all sectors of society. In Mexico, for instance, the benefits of NAFTA have gone mainly to wealthy investors, concentrated in the northern states that border the United States. There, the agreement facilitated the growth of maquiladoras by easing cross-border finances and transit. But significantly, as many as one-third of small-scale farmers throughout Mexico have lost their jobs as a result of increased competition from U.S. corporate agriculture, which now, with NAFTA, has unrestricted access to Mexican markets. In particular, corn imports from the United States have driven down the price of corn in local markets, driving small farmers out of business.

The record of UNASUR is too short to be evaluated; but the shift in the global economy since UNASUR’s creation in 2008 may be creating conditions that will place this trade bloc in an advantageous position vis-à-vis markets far outside the region: China, India, Europe, and even North America.