Free Trade and Poverty
While Andean presidents met in Lima at the end of July to discuss regional integration, the real story took place in Miami. There, representatives for three of the Andean countries--Colombia, Ecuador and Peru--were busy negotiating a free trade agreement with the United States.
The Andean presidents agreed to study a proposal from Venezuela’s leader Hugo Chavez to create a regional oil company, PetroAndina, presumably to offset trading with the United States. “We hope the Andean countries don’t let other economic interests interfere in our business,“ Chavez said at the summit.
Yet, his host at the summit, Peruvian president Alejandro Toledo, and his Colombian colleague, Alvaro Uribe, were looking beyond a scheme that would make their countries more dependent on Venezuela rather than the world’s largest market.
The United States accounts for 42.7 percent of Colombia’s exports and 29.5 percent of Peru’s exports, according to data from United Nations and the US Census Bureau. The five Andean countries’ total exports to the United States reached $39.7 billion last year. By comparison, their exports within the Andean region reached $7.8 billion, according to data from the Andean Community.
Ironically, the United States also accounts for 63.5 percent of Venezuela’s exports. While Chavez lambastes its Northern neighbor, Venezuela actually managed to post one of the strongest Latin American export increases with the United States last year: 45.4 percent. Venezuela passed Brazil to become the second-largest Latin American exporter to the United States, largely thanks to the increased value of oil, its top export product. Crude oil and other petroleum products accounted for 86.8 percent of those exports, according to the US Census Bureau.
While Chavez can be easily dismissed in certain quarters, fact is that a growing number of Latin Americans are disillusioned with the market reforms of the 1990’s. Although these did produce macro-economic growth and stability, they failed to significantly boost wealth and reduce poverty for the majority. While the total GDP in Latin America and the Caribbean grew from $1.1 trillion in 1990 to $1.9 trillion in 2001, the number of Latin Americans living on less than two dollars a day increased from 124.6 million to 128.2 million in the same period, according to the World Bank.
By comparison, the number of people living on less than 2 dollars a day has fallen dramatically in China during the same period: From 72.6 percent in 1990 to 46.7 percent in 2001, according to World Bank data. That success can partly be explained by the strong increase in international trade. Exports grew from 22 percent of China’s GDP in 1999 to 34 percent of GDP in 2003. Imports grew even more--from 19 percent of GDP to 32 percent, according to the World Bank Development Indicators. And all this while GDP actually grew dramatically in the same period.
Although Latin America has made progress, too many local governments continue with import policies aimed at protecting domestic industries rather than promoting imports.
These policies are misguided since they only help to weaken, rather than strengthen, the economies. Cheaper imports benefit not only consumers, but also companies that are active exporters.
There is nothing wrong with Venezuela and its neighbors pursuing increased regional integration. But that should not come at the expense of trade with the United States.
As China’s example shows, only a combination of strong two-way trade growth, economic liberalization and increased foreign direct investment can result in sustained economic growth in Latin America, which in turn will create more and better-paying jobs and reduce poverty.