The Crux of Rural Development

The last two days, I’ve seen two really interesting sets of maps that really highlight the importance of geography and population density when it comes to development in Latin America.

The first is two maps of Brazil that the Wilson Center’s Brazil Institute retweeted comparing Brazil’s Human Development Index scores by what appears to be municipality in 1991 and 2010.

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The most striking thing is the huge leap forward Brazil has made in terms of quality of life in two decades. Nearly everywhere there has been a substantial improvement in their HDI scores, with much of the country (especially when accounting for population) now living in areas with “high” HDI scores. The second thing that jumps out is the tremendous regional differences that still exist. Some of this is explainable by geography; many of the lowest scoring regions are in Brazil’s Amazon Rainforest, where transport is difficult and therefore access to many important services. Much of this can be explained by population density. Comparing these maps with a map of Brazil’s population density shows that the green areas are almost all in the most densely populated parts of the country, which also happen to be its most economically dynamic. The exception to this is the Northeast, which has been persistently poorer and less developed than Brazil’s south, even in its large cities.

The other piece is an extended article from Venezuelan news website Prodavinci (in Spanish) examining the demographics of illiteracy across the country. Essentially, Venezuela has a literacy rate of roughly 95 percent, yet only five states and the Federal District of Caracas have a literacy rate at or above that level. The author breaks down the 2011 Census data at various levels down to parroquia (roughly akin to a county) to show how the inequality is geographically distributed. At that level, one can see clearly that cities and towns have much higher literacy rates while rural areas have lower ones, with the most geographically isolated being the most illiterate.

The upshot of these is that it illustrates the big quandary of rural development: it’s really hard. Because populations are more spread out in rural areas it is harder and more expensive to provide educational and health services. Similarly, cities are almost by definition more economically dynamic and richer than rural areas thanks to the benefits denser population allows in terms of specialization and economies of scale. Combine this with brain drain from rural to urban area and policy makers are left trying to provide expensive services to areas that are economically static where many of those who become educated leave for the cities, exacerbating the problem. None of this is unique to these countries or even Latin America as a whole—though the physical vastness of Latin America relative to its population doesn’t help—a few weeks ago there was some furor in the United States over a study that showed that many rural counties in the US have life expectancies lower than in many third world countries.

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Leave the IMF alone!

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I’m currently reading Globalization and Austerity Politics in Latin America by Stephen Kaplan, which deals with the way globalized and decentralized financial markets have affected economic policy in Latin America. I will do a full review of it later this week or next when I finish it, but in the meantime wanted to touch on the role of the International Monetary Fund (IMF) in the debt crises of the 1980s.

The conventional story is that, when the debt crises started following Mexico’s 90 day moratorium on debt repayment in 1982, the IMF came into the region, and in exchange for emergency loans to the affected countries, forced them to adopt harsh and unpopular cuts as conditionality. To a large degree this I true; the IMF did require countries to sign agreements to implement certain reforms in exchange for releasing funds. The problem with the traditional narrative is that the countries rarely actually implemented the reforms. As Kaplan documents in various case studies, a diverse array of Latin American countries would promise reforms, half implement them for a couple of years and then renege on them when it came time to get reelected.

Kaplan argues persuasively that governments could behave this way because most of the debt Latin American countries had accumulated was in the form of bank loans from just a handful of financial institutions. This dynamic meant that the banks had a strong incentive to ensure that the debtor countries remained solvent so that they could eventually be paid back. As a result, Latin American governments could count on receiving more loans even if they failed to implement reforms because the lenders did not want to write down the losses on the huge exposures they had to Latin America since doing so would have cost them billions of dollars in losses. Throughout the 1980s Latin American governments were therefore able to continually secure new loans even as they failed to live up to the conditionality of the previous ones.

Certainly, many agreed upon reforms were implemented, but often only partially. This was in many ways far worse than the reforms themselves. For instance, a state owned enterprise (SOE) might be privatized, but without an accompanying regulatory framework, resulting in continued poor quality yet higher prices. Or price hikes and wage freezes would not be accompanied by measures to improve productivity, making the reform just a sudden reduction in living standards. However, it is unfair to blame this on the IMF the way that many do since it really lacked significant leverage over these countries. While there are certainly reasons to criticize the IMF for how it’s handled developing world crises (i.e. the Asian Financial Crisis), this is not one of those instances. Even when Latin America did begin to embrace orthodox policies more seriously, it was driven by factors related more to the shifting nature of the international financial system than by the IMF, though the IMF was supportive of many of those policies

Evo, Rafa and the SIDH

An interesting piece from Ecuador about joint declarations from Evo Morales and Rafael Correa about attempts to reform the Inter-American Human Rights System. A couple of quick thoughts:

  1. Anytime leaders who count among the dozen who back Bashar Assad in Syria talk about the need to reform the SIDH (Sistema Interamericana de Derechos Humanos), I get suspicious. That said, they do make a very good point about the hypocrisy of Inter-America Commission on Human Rights being based out of Washington, DC when the United States hasn’t ratified the treaty.
  2. Until a Latin American leader explains how forcing Kelpers (people who live in the Falklands) to become part of Argentina against their will isn’t tantamount to colonizing the islands, I will remain firmly on the side of the Kelpers’ right to self-determination over Argentina’s territorial claims.
  3. In the piece, Correa and Morales are reported as mentioning three separate regional organizations through which they want to advance their reforms. I think this is symptomatic of a disease that runs throughout the region’s governments of creating lots of different organizations (or ministries or commissions) that all do roughly the same thing. I have difficulty imagining how spreading out the functions of human rights protection across the OAS, Unasur, ALBA and CECLAC (Comunidad de Estados Latinoamericanos y Caribeños) will be more effective than centralizing them into one or two of those organizations… unless the whole point is to dilute the power of human rights enforcement in the region.

Merco-sucks, continued

Today I attended an event put on by the Americas Program at CSIS that was very provocatively called “Paraguay- Leaving Mercosur?” where the Paraguayan ambassador the United States Fernando Pfannl Caballero spoke. The short answer, is that, no Paraguay is not going to abandon Mercosur. However, the underlying subtext of his comments is that while Paraguay isn’t eager to leave, it also isn’t all that committed to the project and is deeply frustrated with its co-member states.

Paraguayan ambiguity regarding its membership is threefold. Legally, Paraguay feels—justifiably—that it never should have been suspended in the first place. Ambassador Pfannl complained that, notwithstanding the fact that Fernando Lugo’s impeachment was carried out within the constitutional framework and therefore not a constitutional breach, Paraguay was not given a chance to defend itself in the process whereby it was suspended from Mercosur. Moreover, while Paraguay was suspended for violating the democratic clause, a far more egregiously undemocratic regime in Venezuela was allowed in as a result of removing Paraguay and thereby negating its two-year refusal to ratify Venezuela’s entrance. The Paraguayan government feels that the whole process was illegal under international law, and feels that, as a small country in a club of big countries, it needs assurance that there are legal processes that will protect it in the future before it rejoins.

Economically, Paraguay perceives Mercosur as not providing enough economic benefit to justify the restrictions it puts on its ability to conduct bilateral and multilateral economic policy outside of the organization. Since Mercosur’s bylaws technically restrict member states from negotiating trade agreements outside of Mercosur, Paraguay is hamstrung in its ability to expand its trading options. In theory, this shouldn’t matter, as Mercosur would be actively perusing these types of agreements as a unit. However, in practice, Brazil and Argentina have been intransigent in these processes, particularly as protectionist impulses have gained prominence within each government. In this light, Paraguay sees its suspension as a way to explore other avenues economically and perhaps gain leverage to carve out exceptions for itself upon returning, in a similar way to Uruguay being allowed to negotiate a free trade agreement with Mexico. So far, this has manifested in trade talks with Mexico and observer status in the Pacific Alliance.

Finally, there is a large degree of nationalism at play in Paraguay’s behavior. Though largely unknown outside Latin America, the War of the Triple Alliance, which devastated Paraguay, remains salient to this day and Paraguayans are extremely sensitive to any perception that Brazil, Argentina and Uruguay might be ganging up on them. On top of that, Paraguayan relations with Venezuela are extremely tense. Paraguay has accused Venezuela of supporting terrorist groups in Paraguay’s northern departments through its connections with the FARC and Nicolás Maduro was declared persona non grata by both houses of the Paraguayan Congress following the Lugo impeachment, when he was filmed speaking with Paraguayan generals and accused of encouraging the military to step in on Lugo’s behalf. In effect, Paraguay feels deeply wronged by Brazil, Uruguay and Argentina, in a way that evoked painful memories of the War of the Triple Alliance and also allowed a country that Paraguay has accused on meddling in its internal affairs into the group.

All of this reinforces the points I already made about Mercosur last week. Namely, it is an organization with a clear goal—to establish a customs union on the path toward creating a common market—whose most important members are ambivalent or worse toward that idea. There are tremendous economic gains from liberalizing within the bloc—something that Paraguay in particular, and Uruguay to a lesser extent seem eager to pursue—yet the trend is away from liberalization, with an institutional framework that prevents member states from striking out on their own. The fact that the poorest member of the bloc—who presumably had a lot to gain from access to Brazil and Argentina’s giant markets—is dragging its feet on returning to Mercosur says a lot about how effective it has been.

A few good reads

Over the weekend, I read a few great pieces about Latin America; two on Cuba and one on US policy in the region. I don’t have much to add but I highly recommend all three.

The Blind Spot– David Rothkopf (Foreign Policy)
A harsh rebuke of American foreign policy in the region which he characterizes as outdated, negligent, and as a result, defined by its blunders and crises.

Cuba’s Economy: Money Starts to Talk (The Economist)
Reporting on some of the reforms on the island and their economic effects.

Cuba After Communism: The Economic Reforms That Are Transforming the Island– Julia E Sweig and Michael J Bustamante (Foreign Affairs)
A more in-depth look at the economic reforms in Cuba under Raúl and the political pressures both on and off the island that are driving the pace and shape of the reforms.

Merco-sucks

The recent rapprochement between Mercosur (Southern Common Market) and suspended member state Paraguay appear to have hit a roadblock that will delay Paraguay’s reentry into the organization until next year at the earliest. Following the controversial impeachment of former president Fernando Lugo, Brazil, Argentina and Uruguay suspended Paraguay from the organization for violating its democratic charter. The move allowed Venezuela to finally become a full member as Paraguay’s senate could no longer block its admittance into the group. Now, Paraguay is refusing to rejoin the group so long as Venezuelan president Nicolás Maduro holds the rotating presidency, arguing that since Paraguay hasn’t yet approved Venezuela’s membership, it could not hold the presidency. This latest spat helps to highlight the unfortunate missed potential of Mercosur, an economic bloc with so much potential that often behaves in direct opposition to its founding, and very ambitious goals.

Mercosur was established in 1991 with the intention of eventually evolving into a common market akin to the European Common Market that eventually became the European Union. In the 1990s, trade within the group grew quickly and it looked like Mercosur could soon become an important economic block. However, since then, Mercosur is defined more by its failure to reach its potential than by its achievements. While the customs union was successfully established, little significant progress has been made toward a deeper economic integration, let alone a full-fledged common market. Trade between the member countries has grown dramatically among the four original members—averaging more than 4 percent annual growth since 1994 by UN COMTRADE statistics. However, that also took place during a period where Latin America’s trade in general was growing rapidly as a result of neoliberal reforms and was starting from an exceptionally low point after decades of Import Substitution Industrialization had closed off their economies.

Most damagingly, the member states have been all too willing to renege on their Mercosur commitments when it benefits when it will provide short-term economic or political boosts at home. For instance, the Kirchner governments in Argentina allowed environmentalist groups opposed to two pulp mills in Uruguay to blockade one of the crossings between the two countries off and on for years until Argentina finally lost its case in the International Court of Justice in 2010. In a similar vein, following Brazil’s devaluation in 1999, Argentina placed a tariff on Brazilian steel to forestall the deleterious effects of a suddenly more competitive Brazilian car industry on Argentine markets. More broadly, Paraguay and Uruguay have often complained of asymmetrical access to the larger Brazilian and Argentine markets, particularly as both have reverted to increasingly protectionist policies over the past few years and retreated into bilateral economic agreements that exclude their smaller neighbors.

Venezuela’s adhesion to the group was, in many ways, the culmination of Mercosur’s failure. Most conspicuously, Venezuela, first under Hugo Chávez, and now under Nicolás Maduro, has been Latin America’s leading voice in opposition to free trade. For an organization that purported to be working toward a common market (i.e. completely free trade within the member states), allowing the country that had spent a decade working to undermine free trade seemed incongruous at best. This played no small part in Paraguay’s resistance to ratifying Venezuela’s membership. How could a group attempting to increase free trade admit a member so diametrically opposed to the concept?

Moreover, that Fernando Lugo’s impeachment was sufficient to warrant a suspension from Mercosur for violating its democratic principles, but that Venezuela was allowed entrance in spite of its complete degradation of rule of law showed how hollow its commitment to democracy really is. The Ushuaia Protocol establishes Mercosur’s commitment to democracy and procedures for dealing with a “rupture in the democratic order.” As Javier El-Hage argued at the time, it is difficult to argue what happened to Lugo was a disruption in the democratic order considering the margins by which both houses voted to impeach him and the fact that it was conducted within the letter of Paraguayan law—if not its spirit. However, suspending Paraguay allowed Mercosur to backdoor Venezuela’s ascension into the organization; a cruel irony considering the Venezuelan government’s systematic disregard for its own constitution.

With Argentina continuing to close its economy in response to economic troubles, Venezuela still being run by chavistas and Brazil’s slowing growth and ambivalence toward the economic wellbeing of its co-members, it’s difficult to foresee a medium-term scenario where Mercosur returns to its roots and works to increase economic openness among its member states.

Another piece in the Rube Goldberg Machine

Professor_Lucifer_ButtsIn the last couple of weeks, both Venezuela and Argentina have implemented new programs that will function essentially as de facto mechanisms for loosening currency controls in each country to fight depreciation pressures.

In Venezuela, it takes the form of a program called SICAD (Sistema Complementario de Administración de Divisas), which will allow Venezuelans to buy an unlimited amount of foreign currency through all types of financial intermediaries provided it be for travel, health or education. While still a severe impediment to convertibility, it still represents a step forward from the current CADIVI system—which is now likely in its death throes—which made legal dollars almost impossible to obtain for many citizens and spurred a massive arbitrage scheme.

The Argentine novelty is CEDIN (certificado de depósito para inversión), which is attempting to simultaneously achieve three goals: encouraging people to declare heretofore illegal dollars to bring them into the official system, channeling investment into the moribund property market and closing the gap between the black market dollar (el dólar blue) and the official rate. Essentially, Argentines will be able to declare dollars without facing any penalty in exchange for CEDIN certificates which, depending on the type, can be used to purchase property or inputs for construction and some other goods. The CEDIN can then be exchanged back for dollars.

Neither SICAD nor CEDIN appears likely to do much to ease the currency pressures in either country and a formal devaluation is a near certitude in both countries within the next two years. Instead, these programs are emblematic of a commonality between both kirchnerismo and chavismo in economic matters; an overweening focus on the short-term that breeds a proclivity toward accumulating quick fixes rather than addressing underlying problems. The reasons for this are twofold: both governments have staked their economic legitimacy on a heterodox model and reform is painful, even in economies less distorted than those in Venezuela and Argentina.

I’ve written before about how Cristina Fernández de Kirchner’s devotion to el modelo has left her hamstrung in dealing with its failings, and, quite obviously, the chavista model of 21st Century Socialism is tightly wedded to a similar opposition to orthodox economic policy. This leaves little politically acceptable wiggle room for either government when the models lead to distortions in the economy, which incentivizes the governments toward adopting piecemeal solutions. These solutions can temporarily ameliorate whichever symptom they have been devised to combat, but often create further distortions or avenues for corruption necessitating further measures creating a vicious cycle of bad macroeconomic governance.

Reform is never an easy task; when times are good, politicians often lack the incentive and when they go bad, they’re often faced with a cure is worse than the disease scenario. SICAD and CEDIN won’t do anything to address the reasons why Argentines and Venezuelans are so desperate to have dollars instead of pesos and bolivares and in the meantime add one more layer of complexity to each economy. Looking forward, the question is, how much longer can these governments tinker while ignoring the real problems?