Saturday, June 30, 2012

Mercosur suspends Paraguay and includes Venezuela, 29 June 2012

During their biannual summit meeting on 29 June, the leaders of Brazil, Argentina and Uruguay decided to suspend Paraguay till elections are held in April 2013 to elect a new president in Paraguay. This is a punishment to the Paraguayan Congress which removed 
President Lugo from power on 22 June through a constituitional coup.
The three leaders also decided to admit Venezuela as a new member of Mercosur from 31 July. The proposal for Venezuelan membership had been pending for ratification by the Paraguayan senate for the last six years. While the other three countries had ratified Venezuelan admission, it was the Paraguayan right-wing dominated senate which refused to ratify. Now they have been taught a lesson.
Parguay has also been suspended from the 12-member South American Union called as UNASUR
The ideal solution would have been to restore Lugo to the Presidency. But since this is difficult, given the current circumstances, Mercosur has taken recourse to the second best option. I wholeheartedly support and applaud this.
However, Mercosur has rightly decided not impose economic sanctions against Paraguay.This means that trade will continue. Paraguay has no other option but to accept and suffer this isolation.
The entry of venezuela, the Saudi Arabia of Latin America, adds weight to Mercosur and increases its importance. However, the leftist radical Chavez might give more political headache to Mercosur than the rightist Paraguayan Congress.
Mercosur agreed to allow individual members to raise tariffs on imports from outside the bloc to up to 35 percent on 200 products to protect local industry.  Brazil and Argentina are likely to make use of this agreement.

Friday, June 15, 2012

ECLAC mid year report on Latin America –14 june 2012

In the " Macroeconomic Report on Latin America and the Caribbean" issued on 14 June, ECLAC ( Economic Commission for Latin America and the Caribbean) maintains its 3.7% growth forecast for the region, following a growth rate of 4.3% in 2011. While making this projection, the report has taken into account the euro zone risk factors, a slowing Chinese economy, precarious growth in the United States and the potential for oil price increase due to geopolitical conflict.  

Other highlights of the report:
The main driver of growth was domestic demand, not external demand. Private consumption remained buoyant on the strength of rising employment and real wages, continuing expansion of lending to the private sector 
In 2012, the fastest growing economies will be Panama (8.0%) and Haiti (6.0%), followed by Peru (5,7%), Bolivia (5.2%) and Costa Rica (5.0%), Venezuela (5.0%), Chile 4.9%, Mexico 4.0%, Argentina 3.5% and Brazil 2.7%   
With domestic growth outpacing external growth and a general worsening of the terms of trade, imports of Latin America are expected to climb by 10.2% during the year, outstripping a 6.3% rise in exports. As a result, the trade surplus would go from 1.3% of GDP in 2011 to just 0.7% of GDP in 2012. The current-account deficit will be 1.7% of GDP as against 1.2% in 2011.  
Unemployment in the region will touch a record low of 6.5% in 2012. Employment continued to rise in 2012, the quality of employment improved, real wages grew and, as a result, consumption and domestic demand jumped. In sum, the positive labour trends of 2010 and 2011 remained in place.
Inflation maintained its downward trend and in April 2012 stood at an annual rate of 5.5%, compared with 6.7% in March and 7% in December 2011. Venezuela and Argentina are the only exeptions with double digit inflation of over 20%
In case the global economic scenario worsens beyond the current expectations, the Latin American countries have an array of policy instruments at their disposal to address such a scenario and the fiscal room for manoeuvre to implement a countercyclical policy that would contain the immediate effects of the crisis on their economies.

This report reconfirms my optimism and confidence about the resilience and strength of the New Latin America 

Tuesday, June 12, 2012

Pacific Alliance - yet another Latin American bloc

12 JUNE 2012
Gateway House
The Pacific Alliance, yet another bloc in Latin America
The newly-formed Pacific Alliance bloc seems more like a political club to counterbalance the Atlantic-facing, Brazil-led Mercosur group. However, the bloc accounts for 30% of India’s trade with Latin America. Can India engage the group so it is not left out from their Asia focus?
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The Presidents of Chile, Colombia, Peru and Mexico signed an agreement establishing a regional group called as “Pacific Alliance” in their summit meeting on 6 May at the Paranal observatory in the Atacama desert of Chile. The Presidents of Costa Rica and Panama, who attended the summit as observers, have expressed interest in joining this new bloc. The Pacific Alliance idea was initiated by Alan Garcia, the then President of Peru in April 2011 in the first summit he had convened. It took two more summits to give shape and finalize this new regional integration.
Chile’s President Sebastián Piñera, in his speech at the signing ceremony said, “[the] Pacific Alliance is much more than a Free Trade Agreement. It is an Agreement of deep and broad integration that involves the exchange of goods, services, investment, people, and at the same time is committed towards physical, infrastructure and energy integration.” Colombian President Juan Manuel Santos described the new bloc as “one of the most significant processes towards integrations that have taken place in Latin America.” The Alliance is starting with free movement of goods and people by the end of 2012. The bourses from Lima, Bogota and Santiago joined together and formed in 2011 an integrated exchange known as Mila, which will soon have Mexico’s main stock exchange too. 
The new economic bloc has a combined population of 204 million (36% of Latin American population), GDP of $1.7 trillion (35% of region’s GDP) and global trade of $1045 billion which is half of the region’s global trade.
Chile, Colombia and Peru are already part of the Andean Community, which is one of the oldest and best institutionalized among the five Latino regional blocs, namely, Mercosur, UNASUR, SICA and NAFTA. The Andean Community , which has its own secretariat and development bank, was wrecked by Venezuelan President Chavez who pulled Venezuela out of this group in 2006 as part of his personal fight against the then Colombian President Alvaro Uribe. The exit of Venezuela was followed by the entry of Chile in the group. However, the Andean Community’s future remains uncertain because of the political incompatibility between the leftist-led Bolivia and Ecuador on the one hand and the right of centre-led Colombia and Chile on the other side. Mexico is part of NAFTA and eighty percent of its trade is with U.S. and Canada.
The four member countries of the Alliance have some common features: All four of them have investment grade markets. They are more open economies, outward looking and are keen to diversify their trade and economic partnerships. Chile and Mexico have signed the maximum number of FTAs (Free Trade Agreements) with other countries around the world. Peru and Colombia are following their examples. All four of them have FTA partnerships with U.S. 
There is also political convergence between the four members of the Pacific Alliance. Chile, Colombia and Mexico have centre-right governments. The Peruvian President Ollanta Humala, although a leftist, has emerged as a pragmatist, following the example of Brazil’s Lula.
But there is no great complementarity in trade. The intra-alliance trade is insignificant and less than three percent of their combined global trade. Most of their trade is with external partners. In contrast, Mercosur countries do significant trade (20% of their trade) with each other. Another obstacle for integration is the fact that geographically they are not contiguous.
The Pacific Alliance has not spelt out if they plan to set up institutions such as secretariat and common parliament. Nor have they set any time table for a customs union or common external tariff. 
It seems that the Pacific Alliance bloc is more of a political club. It is perceived as a new force to counterbalance the Atlantic-facing and Brazil-led Mercosur group ruled by leftist Presidents. Besides forming Mercosur, Brazil had taken the initiative to form the Unasur group in 2008, bringing together all the twelve countries of South America. They went further and created CELAC ( Community of Latin American and Caribbean States) in 2010, in a clear challenge to the Washington-based and U.S.-led Organisation of American States (OAS ). Apart from asserting their autonomy through these integrations, the South American leftist Presidents managed to defeat the U.S. proposal to form FTAA (Free Trade Area of the Americas) under which the whole hemisphere was to be made as a common market in which sub-regional groups such as Mercosur were to be dissolved.  The climax of this Latin American assertion of independence and refusal to be the U.S. backyard was demonstrated dramatically at the Mar del Plata Summit of the Americas in 2005 when the U.S. stood completely isolated in the hemisphere and found its FTAA proposal shred to pieces. With this background, the U.S. is seen as the hidden hand behind the formation of the Pacific Alliance to divide the region, hobble the growing Latin American autonomy and counter the rising leadership profile of Brazil. 
The rivalry of the new alliance with Mercosur was let out by President Calderon of Mexico, who mentioned in his speech, “Even when we are less in population and in the size of our economies compared to our brothers from Mercosur, we export double in volume and value than Mercosur. We have an extraordinary potential.” The Peruvian and Colombian Presidents downplayed the Mercosur rivalry saying that Pacific Alliance was not directed against any other group.
One of the stated objectives of the Pacific Alliance is to increase trade with Asia. The Alliance is planning a FTA with ASEAN. Chile and Peru have signed FTAs with China, Japan and Korea, while Colombia and Mexico are in the process of negotiating FTAs with China, Korea and Japan.  
India does not have FTA with any member of the Pacific Alliance except for a PTA with Chile. Indian exports therefore, face disadvantage in the markets of the Pacific Alliance vis-à-vis those who have FTAs. It is, therefore, imperative that India should take the initiative to sign PTAs or FTAs with members of the new Alliance. India’s trade with the Pacific Alliance in 2011 was $7.7 billion of which exports were $3.1 billion and imports $4.6 billion.  The trade with Pacific Alliance countries is 30% of the total trade with Latin America. There is potential to double India’s exports to the growing markets of the new Alliance in the next three years. Chile and Peru are important sources of copper and other minerals while Mexico and Colombia are sources of crude oil for India. Although Brazil is the most important strategic partner in Latin America, India should consider engaging the Pacific Alliance (keeping in mind Brazilian sensitivity) so that it is not left out from their Asia focus.
R. Viswanathan, who has just retired as Ambassador to Argentina, is an expert on Latin America. His email:
This article is part of the Ambassadors views’ section, a collection of articles featuring eminent Indian diplomats.