Foreign direct investment is still deterred by inadequate legal protection, corruption, poor education and over regulation.
BY DAVID TRIESMAN
During my time as Minister responsible for this region, I have been struck by how central Latin America is to British interests. I have seen how much it has changed over the last twenty years. (...)
Our approach to Latin America needed to change. In the 70s and 80s, we saw Latin America as a continent where democracy was endangered, human rights massively abused, and economies appeared in a state of terminal decline.
What a different reality today. Our relationship with Latin America has changed because Latin America has changed. All Latin American states, except Cuba, are democracies. This gives the UK new opportunities in the region. New opportunities to assist democratic reforms. New opportunities to create new partnerships on global issues.
Our work in Latin America does much to support these two areas. Our Embassies encourage and assist reform across the continent. Now I want us to develop stronger partnerships on global issues — climate change, poverty reduction, the fight against crime. (...)
FOUR FUTURE SCENARIOS
Since I became Minister, I realized that South America is at a crossroads. It has made remarkable progress over the last few years. Now it has a choice: either to capitalize on these achievements or to see its success outstripped by more successful global regions.
I believe there are four realistic scenarios for Latin America in 2020:
- First, a secure, prosperous continent working in partnership with the UK on global issues;
- Second, a continent where democratic progress stalls, replaced by a new form of caudillo;
- Third, a continent unable to compete with either Asia in the manufacturing sector or Europe and the US on services, leaving it dependent on its raw materials;
- Fourth, a continent with a dividing line between prosperous and economically under performing states - with all the political instability that entails.
Of the four, I believe the first scenario can be realized. I say this not because I am an optimist. But because I have confidence in the people of Latin America. I have confidence in the democratic system which allows them to chose, and hold to account, a new generation of leader. And I am certain of the commitment of the United Kingdom in support the process of reform. Our stance, then, over this strategic period is to place the UK in partnership for security and prosperity.
I hope that by 2020, we will not deal with problems within Latin America. Instead, we will work with Latin America on our shared global agenda. The first signs of this relationship are already visible. We work with Brazil on poverty and AIDs projects in Africa. Many Latin American states, particularly Uruguay, are our partners in UN peacekeeping missions across the globe.
Because of the democratic changes in Latin America in the last few years, we now have opportunities for joint work to fight poverty and social inequality, on judicial reform, and on the fight against corruption and crime. Quite frankly, a few years ago, it would have been a waste of time and money. We now have programs with the judicial authorities in Mexico, with prison authorities in Argentina, Brazil, Chile, Uruguay and Venezuela.
The continent is on track to meet the UN's Millennium Development targets for education, access to water and sanitation and reducing hunger. Chile's poverty rate halved between 1990 and 2004. I am heartened by similar trends in Mexico and Brazil.
But we are also aware of the shortfalls compared with much of the world. Educational attainment is low compared with Asia. The results are worrying. Economic activity based on high skills is not possible without an end-to-end education system culminating in higher education. That is what makes export composition more varied and an economy less dependant on primary commodities and fluctuating commodity prices.
Of course, good education has to lead to good jobs. Taken together that gives a major competitive edge to China, India, Asia. Their education drive is intense. It leads to jobs in higher technology as well as low cost manufacture in which there is high volume, contemporary investment. Their capital stock per worker is high and compared with Latin America, paying high dividends.
I set out this point about education because it informs my view. Structurally education improves only in economies capable of fiscal restructuring. Tax regimes have to be both efficient and non-regressive. A dependency culture in social security has to move to use of state revenues to generate opportunity and incentive. And this model is not neo-liberal. It is no more nor less than modern mixed economy theory. Keynes would recognize it far more rapidly than Milton Freedman.
I urge the governments of Latin America to remain dedicated to the cause of reform. Free and fair elections, current account surpluses are all to the good. But are they sufficient to lift South American countries out of the table of poor performers and propel them into competitive, dynamic global players? I would argue that more must be done. We cannot be complacent about where Latin America might be in 2020.
CHALLENGES FOR FDI
I have mentioned the economy. This, more than anything, will lift Latin America from developing to developed world. Yes, the investment environment has improved, but, is still outperformed by the emerging economies in Asia. (...)
Foreign Direct Investment is still deterred by inadequate legal protection, corruption, poor education and over regulation. In Brazil, a relatively strong economic performer, it takes one hundred and fifty two days to register a new company.
The financial crises of the 1980s are, I hope, firmly in the past. Inflation is broadly under control. Long term current account deficits have been replaced, in the last four years with a surplus. Growth, at 4 percent, is steady.
But it is still below average for the developing world and questions about the region's competitivity remain valid. This will remain the case until the continent overcomes its dependence on raw materials and looks hard at how it can develop a climate to encourage inwards investment and entrepreneurial activity.
I think there are lessons to be learnt from Mexico. Since the tequila crisis of 1994 it has worked hard to bring it's public finances under control. As a result, inflation in 2005 was lower than that of the US and it has now begun issuing 30-year fixed rate bonds. Mexico is proof that, to be globally competitive, good results are not enough. They have to be excellent.
REDUCE CRIME & CORRUPTION
UK businesses and investors believe that there are opportunities in Latin America. But too often, returns are higher and risk is lower in Asia. I urge the governments of Latin America to take urgent steps to improve their judiciaries, to reduce crime, corruption and violence and develop a more highly skilled workforce. This would attract not just foreign business but also domestic votes.
And it would help address a fundamental problem - that Latin America still has the highest level of social inequality in the world. This, more than any other factor, threatens Latin America's new found democracy.
The emerging democracy across Latin America offers the possibility of a successful regional partnership. The failure of the Free Trade Agreement of the Americas was a missed opportunity to share prosperity across the continent.
I am not going to preach to Latin Americans that they should follow this or that route to regional integration. But I find it extraordinary that trade within South America is less significant than its external trade. Today over half of British trade is within the EU. In the 10 years between 1992 and 2002, the Single Market generated nearly nine hundred billion euro in extra prosperity for Europe - a continent about the size of Latin America.
Better regional co-ordination would help face the global challenge from climate change. The world needs Latin America to contain the risks presented by climate change. The Amazon region, spreading across four Latin American countries, is the world's largest carbon sink.
Some countries, like Brazil, acknowledge they face problems as large emitters of greenhouse gases, particularly through deforestation and forest fires. But Brazil is also a world leader in clean biofuel technology - so could offer a fine way out of carbon dependence.
We believe there is no trade off between economic growth and tackling climate change. Latin American states, like all nations, feel the effects of climate change. Indeed, global warming will hit the poorest states first and hardest.
We do not expect the countries of Latin America to shoulder an unfair burden while the developed world does nothing. We have a shared responsibility on climate change. For this reason, we are developing a separate strategy and will keep up the high level contacts on this subject. It will be on the agenda throughout this strategic period.
Latin America is equally important to the global fight against the drugs trade. British law enforcement cannot stop the volume of drugs coming into the UK simply through erecting barriers at our borders. We must develop still more effective partnerships with Latin American authorities to disrupt the flow at its source. Our primary concern is to reduce the amount of drugs on British streets. To this end, we have provided computer profiling equipment to the Colombian customs service.
But we also see the harm that this trade inflicts on local communities in Latin America. It inhibits social development, political stability and leads to corruption and abuse of human rights. So, also in Colombia, we have funded a project to protect people displaced by drugs related violence.
STRONG BILATERAL RELATIONS
International and regional organizations increasingly form the fabric of our foreign policy. They provide an important venue to tackle issues which cannot be dealt with unilaterally - issues like climate change, poverty or establishing norms for human rights.
We also need strong bilateral relationships. Friends who share our own democratic values, who can help us win the arguments in the wider international community. In the United Nations, we support a permanent seat for Brazil on the Security Council. I do not forget that all the countries of Latin America have a long tradition of engagement with international organizations. Uruguay, for example, may be one of the smallest countries in Latin America, but it contributes more personnel to UN peace keeping missions than any other country in the region.
A strong dialogue between Europe and Latin America can only benefit us both. Our two continents share so much. Latin America has an incredibly strong cultural brand across Europe - art, music, dance, football. This is a great asset for both continents.
We are careful to recognize the diversity within this wonderful continent. I understand that our relationship with a country like Mexico will be different to, say, Chile, with its remarkable political and economic performance, hundreds of miles south. But, I also believe that, increasingly, the countries of Latin America have a joint responsibility to improve their continent for all the nationalities it contains. (...)
KEY TO SUCCESS
Current and future opportunities are simply opportunities. They will be grasped or missed.
We in Britain believe these opportunities can be grasped. And we stand ready to help. But it is the governments of Latin America which hold the key to their own success or failure.
Latin America is not Africa. It does not command a huge slice of our development budget - nor should it. Our network of diplomatic missions assists democratization by exchanging knowledge and best practice. We send some of our best diplomats to provide advice and support to Latin American reform projects.
My aim is to see less of this work. I would like to see changes in Latin America continue, so that our diplomatic posts devote less time to support for establishing democracy and more time talking to Latin American ministers, officials and civil society on international agendas - like climate change and counter terrorism.
This, more than anything, would be a sign that Latin America has taken the right path, away from the crossroads where it now stands, to prosperity, security and influence within the international community.
The UK and Latin America have great historic bonds. Still more, we have a great future. We have set out the strategic direction and we have renewed our energy. We will be candid with one another. We can afford to be straightforward because we have one huge advantage. We are old friends.
David Triesman, Lord Triesman of Tottenham, is the UK Parliamentary Under-Secretary of State with responsibility for relations with Latin America. This column is based on an excerpt of a speech at the House of Commons, London, March 28, 2007 in connection with the presentation of the FCO strategic paper on Latin America.