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Yale Global, August 3, 2005

Despite years of market reforms, many Latin American countries remain poor. Latin Business Chronicle editor Joachim Bamrud traces the region's poverty and sluggish growth to the continuing protectionism of many countries. President George W. Bush's signing of CAFTA provides Latin America with a new opportunity to abandon import tariffs, which actually hinder domestic growth and the development of export industries by restricting cheap inputs from abroad. Rather than a regionally-insular bloc, as advocated by Venezuela's Hugo Chavez, Bamrud suggests a more global trade outlook: Trade liberalization, a driving force behind China's economic miracle, may prove a valuable weapon in eliminating poverty and spurring growth in Latin America. – YaleGlobal

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 lambasts 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.

Despite the increase, Chavez is actively pursuing an alternative for his own country and the rest of Latin America: Bolivarian Alternative for the Americas (ALBA), meant to compete with the US-initiated Free Trade Area of the Americas (FTAA). So far only Cuba has signed up, but that hasn't stopped Chavez from using oil money to create PetroSur (with Argentina and Brazil), PetroCaribe (with 13 Caribbean countries) and now PetroAndina if it comes to fruition.

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. (2001 is the latest year available). The good news is that as a percent of Latin America's population, there has been a slight decline: From 28.4 percent to 24.5 percent.

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.

By comparison, exports in Latin America and the Caribbean as a percent of GDP grew from 20 to 24 percent in the 1999-2003 period, while imports as a percent of GDP didn't change at all, but remained at 21 percent.

The lack of import/GDP growth is due to a combination of GDP declines and still-high import tariffs, combined with non-tariff barriers, in many countries in the region.

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. One example: Dominican flower grower Flordom exports its flowers, but needs to import the paper pipes and supplies for packages it uses to send the flowers in. Thanks to CAFTA, those imports will be cheaper, which means Flordom will bost its export potential.

A more open trade environment has made Chile, a relatively small country, into a regional economic powerhouse. And Mexico managed to pass Brazil as Latin America's largest economy thanks to its strong export and import growth (largely due to NAFTA).

Free trade agreements such as NAFTA - and soon CAFTA - don't only spur trade growth, but also bring increased foreign investment. Many companies are more willing to invest millions and billions of dollars if dispute resolutions are provided, intellectual property is protected and increased transparency takes place in government procurement and key public entities like Customs.

Although FTAA may be dead for now, that doesn't mean Latin America should discard globalization-friendly policies such as unilateral tariff reductions and bilateral or regional free trade agreements with key markets like the United States, the European Union and Asia. In fact, without an FTAA such agreements become even more important.

There is nothing wrong with Venezuela and its neighbors pursuing incresed 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.

Latin Business Chronicle

Copyright Latin Business Chronicle. Published in the August 2005 issue.

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