Latin America thrives during US 'lost decade'

Then Brazilian President Ignacio Lula da Silva and Venezuelan President Hugo Chavez Lula and Chavez have steered Latin America in a different direction during the last decade

As the United States geared up to respond to the 9/11 attacks, its geopolitical priorities focused on the Middle East and Central Asia during the last 10 years in what some observers call "the lost decade".

In addition to other changing factors on the international stage, Latin America took full advantage of the distractions of its giant neighbour and traditional partner to spread its wings in search of different political, diplomatic and, above all, economic directions.

As a result, several countries in the region elected governments that were less docile to Washington's tastes, established relations with other nations that, in the past, would have been considered a bit too exotic and prioritised the trade with them, especially China.

Experts continue to debate the cause and long term effects of this shift, but it is certain that the region reaffirmed its sense of identity and independence.

Many countries revitalised their economies and came out relatively unscathed from the financial crisis of 2008, which still affects the US and Europe.

"September 11, 2001, does, more or less, mark the time when Latin America came to birth as a truly independent entity," says Larry Birns, director of the Council on Hemispheric Affairs, COHA, a Washington-based left-leaning think tank.

'Producer of events'

The harbingers of this new stance were the administrations of Lula da Silva in Brazil and Hugo Chavez in Venezuela. The first, highlighted by his dramatic campaign in search of a permanent seat at the UN Security Council, the second by his defiant radical populism.

Start Quote

Economic activity in these countries is starting to dance more to the tune of China than to that of the US”

End Quote Augusto de la Torre World Bank chief economist for Latin America and the Caribbean

All things relative, this tune was followed by governments such as that of Nestor Kirchner in Argentina, Rafael Correa in Ecuador and Evo Morales in Bolivia, among others in South America. In Central America, Daniel Ortega and Mauricio Funes lead the way in Nicaragua and El Salvador.

This tendency to the so-called left in Latin American was probably already in the making, Mr Birns acknowledges, but it was definitely accelerated in the aftermath of 9/11.

This change can be seen consolidated in multilateral organisms such as UNASUR, the Union of South American Nations, which excludes the US and Canada from its diplomatic endeavours in the region.

"The region is emerging as an important epicentre of foreign policy," Mr Birns reasons. "Latin America is no longer just a consumer of events, it is also the producer of events."

New engine of growth

The loss of US dominance is most strongly felt in the economy, with the region establishing ever-increasing and strong commercial ties to other emerging powers and economic blocs.

Trader despairs in 2008 in the US The financial crisis changed the US focus for years

But although Washington's lack of interest in its traditional backyard has cost it the automatic privilege of being customer number one in Latin America, there have been other factors at play.

To begin with, the free trade agreements wrangled in the 1990s such as Nafta (between the US, Mexico and Canada) and Cafta (in Central America) were only partially successful, so the region started to turn its eyes toward Europe at end of that decade and the beginning of the 2000s.

Then the initiative to create one great free trade zone from Alaska to Patagonia, known as FTAA, never materialised. This was followed by other bilateral agreements between the US and several countries which stalled or are still to get off the ground.

Most significantly and coincidentally, however, was when China strutted into the room as the new engine of growth.

"The entrance of China into the global economy is possibly the single most important event in this economic period we are now living in," remarks Augusto de la Torre, World Bank chief economist for Latin America and the Caribbean.

China's tune

At the beginning, China's emergence adversely affected the economies of Mexico and Central America because it started to displace them in US markets, and it was believed that this would be the tendency for the entire region, explains Mr de la Torre.

Start Quote

Many countries learned the lessons from their political and economic dependence on the United States and they want to diversify their relations ”

End Quote Geoff Thale Washington's Office on Latin America

But China's present phase of development - moving up from a low-per-capita-income country to one of middle income and beyond - means it is going through a very intensive process of commodities consumption.

So much so that the countries in South America, whose productive structure is complementary to Chinese requirements, are starting to be pulled by the Asian giant. These include Brazil, Peru, Chile, Argentina, Venezuela, Colombia, Ecuador, Paraguay and Uruguay.

Also riding this wave are Panama, with its canal as the pathway to Chinese international trade, and Costa Rica, which is engaged in the production of microchip elements.

"One starts to see how the economic activity in these countries is starting to dance more to the tune of China than to that of the US," says Mr de la Torre, "to the point where China is now the principal trade partner to some of them, such as Peru."

But trade in commodities is a double-edged sword that, in the past, has been Latin America's "source of prosperity as well as anguish", he adds.

Natural resources

To avoid the swing of economic booms and busts typical of the banana republics in the region, it is necessary to implement a policy of diversification, competitiveness and connectivity that will promote a long-term growth in multi-layered fields.

According to the World Bank, Latin American societies - with a few exceptions - have managed to improve their institutions in a way that has given them better means to manage their natural resources.

Mr de la Torre sets Chile as an example. It has "wisely and prudently" administered its income from copper, saving in funds that were later drawn upon to keep its economy afloat during the worst of the global financial crisis, he says.

Similarly, Brazil, which is endowed with enormous mineral abundance, is projected to do well in the management of this wealth because of the maturity of its institutions.

Gaining knowledge

In spite of this, success is not altogether guaranteed. Analysts such as Mr Birns of COHA point to some serious problems of leadership, record crime levels and endemic government corruption that could scuttle progress achieved from these riches.

What would be more of a long-term benefit is, perhaps, how to transform all these riches derived from commodities into what Mr de la Torre calls "a wealth of knowledge".

It would mean copying post-WWII Japan and, now, China, which have been able to extract from their trade with developed countries the new technologies and scientific advancements inherent in what they buy and sell.

"When the iPod comes to China to be assembled," Mr de la Torre says, "there is a swarm of Chinese engineers trying to figure out how the devil they can make something similar or even better."

This mindset creates an ever-evolving cycle of acquired skills and competencies within the labour force and human capital which, in turn, generates more sophisticated products and thrusts the country into other levels of commerce.

This, lamentably, was a trade-relation mentality that Latin America did not take advantage of when its economic ties with the United States were strongest.

"We have still not developed the ability to absorb technology, innovation, knowledge and we don't gear our national policies in this direction with the same vigour as the Asians," says Mr de la Torre.

Diversified relationships

Naturally, whatever Latin America can glean from China is still limited by the level of development of the Asian country, which is not up to par with that of an industrialised power.

Nevertheless, the learning curve in China is very steep. As it continues to be so and its relationship with Latin America continues to intensify, the region could very soon take advantage of those new and varied levels of economic activity.

Where, then, is the relationship with the US left?

For the most part, analysts agree that there has been some distancing, but the general outlook is that the ties will continue to be strong, politically as well as economically, although with a different perspective.

"Latin America wants to spread its options," says Geoff Thale, programme director of Washington's Office on Latin America, WOLA, a non-governmental organisation that promotes balanced relations between the US and its neighbours.

"Many countries learned the lessons from their political and economic dependence on the United States and they want to diversify their relations."

The ties with the US continue to be key and mutually beneficial, however, Mr Thale believes.

"In 2003, during the worst times between Venezuela and the US, not one drop of oil was kept from being shipped, because both countries depend on that," he highlights.

Mr Thale is sure that, despite all the rhetoric, all governments in Latin America, left or right, want to have a very good relationship with their grand neighbour.

But he warns that with greater diversification of trade, those economic and political ties could be stretched to the detriment of the United States.

In order to hitch its wagon back on to the train, he says, Washington would have to engage again with the region and invest greater political capital there.

Some suggest the die is cast and that the present situation is irreversible.

Mr Birns of COHA believes the bonds are still there, but they are not as elastic.

"One thing is certain", he concludes. "The status quo ante, that which existed before 2001, that world does not exist any longer."

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