A region believed to never be able to succeed, Latin America was once called the “development of underdevelopment” by controversial economist Andre Gunder Frank.
For years, Latin America was considered the “America’s backyard,” as author Grace Livingstone named her 2009 book, in which she explains the economic dependency with the United States, and the U.S. government’s intervention in sinister episodes of Latin American history including the War on Terror during the presidency of George W. Bush.
However, a remarkable transformation in the last decade has the potential to change the course of the region’s history and possibly that of the world. Between 2003 and 2008, Latin American economies experienced an average of 5.5 percent growth with single digits inflation. Despite the world’s financial crisis of 2008-2009, countries in the region continued to experience sustainable growth, which has created considerable employment and, therefore, lifestyle improvement of the middle class while narrowing steep economic and social inequality.
The region not only has created inward wealth but has also expanded into the international markets by means of the emerging “multilatinas”—multinational Latin American corporations—generating conditions to create integrated regional markets that give country members a new presence in the world.
Five important events took place in Latin America just this year, creating new “poles of power” and allowing the region to position itself among the main contenders in the international arena while looking to expand its area of action.
Latin America: Brazil manages its economic slowdown
At a staggering speed of over 5 percent annual GDP growth rate, Brazil has positioned itself as the sixth largest economy in the world, and the largest in Latin America.
But this year, Brazil’s President Dilma Rousseff announced a wide array of new protectionist policies and use of stimulus packages “without restriction” to protect the country’s economy from the European crisis and the slowing of its internal consumer markets.
Through imports tariffs on industrial products and auto parts, limiting car imports from Mexico and an array of cheap products from China, Brazil is trying to protect its internal economy by a stimulus of domestic formal and informal manufacturing industries.
The measures have created turbulence in its relationship with other countries, especially the United States, a country that needs free markets to boost its own economic recovery. Brazil is also looking inwards into the Latin American region to create better economic trade with its partners in Mercosur.
Argentina Repsol’s takeover results in Chevron gain
Back in April of this year, Argentine President Cristina Fernandez took over 51 percent of the shares of YPF—the Argentine oil company—that was controlled by Spain’s Repsol, in an attempt to recover national sovereignty over its own hydrocarbon resources under allegations of a $3 billion deficit in gas and petroleum imports.
The decision came after Repsol YPF had estimated an equivalent of nearly 23 billion barrels of potentially recoverable oil and gas in Patagonia’s shale basin, a big enough deposit to enable Argentina to compete with the United States in non-conventional petroleum production.
The good news came with a caveat, though. The exploration and exploitation of the new deposits required a substantial amount of funding, infrastructure and human capital, which Fernandez is looking to obtain from a recent December agreement with California based Chevron Corp. for a “massive development” of the non-conventional oil and gas resources in Vaca Muerta, Neuquén, believed to be the third-largest shale resource in the world.
Chevron had developed business in Argentina since 1999 and is the partner of preference of Mercosur’s new member, Venezuela.
Venezuela strengthens Mercosur while the Pacific Alliance is looking at Asia
After years of opposition from Mercosur founding member Paraguay, finally in 2012 Venezuela was able to join the South American regional trade organization. The annexation of Venezuela into the pact has consequences beyond the mere trading activity.
Immediately after Venezuela’s incorporation, Hugo Chávez and Cristina Fernandez signed a joint agreement which incorporates the nationalized YPF to the Orinoco Oil Belt and Petroleos de Venezuela to the oil and shale gas exploitation projects in Southern Argentina. As anticipated, the agreement includes petrochemical projects and technology transference.
Argentina’s Cristina Fernandez, Venezuela’s Hugo Chávez, Uruguay’s Jose Mujica and the host Dilma Rousseff from Brazil officially met during a special summit held in Brasilia in October of last year.
The group brings a great deal of power to the table. Venezuela’s largest petroleum reserves in the world, Brazil as one of largest producers of food and the largest oil company in Latin America, and Argentina’s agricultural exports in addition to its confirmed shale deposits makes the group a valid international player.
In addition, the region’s geographical advantages include the Amazon basin and the Guarani Aquifer, possibly the world’s largest in ground fresh water deposit located beneath the surface of Argentina, Brazil, Paraguay and Uruguay.
America’s historic strategy has been to incorporate the weakest economies into the U.S. area of influence but Mercosur has broken free into assuring that none of its member presidents would be removed by a coup d’état or any other foreign manipulation of local political opposition.
Mercosur has also attracted associated countries, making the bloc a more interesting “partner” for global economies looking to suck up commodities and dump large amounts of cheap manufactured products such as China. Hence, China’s insistence on creating a free trade zone within Latin America.
On the other hand, back in April, Peru, Chile, Colombia and Mexico agreed to advance efforts for “deep integration” through the Alianza del Pacífico, or Pacific Alliance. The agreement comes as a revitalization of the region’s economies looking to the exchange of labor, products, services and capital among the four nations. Frustrated by the languishing United States’ economy, Colombia, Mexico, Chile, Peru and possibly Panama are looking to extend their trading options to expanding Asia-Pacific countries.
President Peña Nieto says ‘Mexico is open for business’
Recently elected President Enrique Peña Nieto of the Partido Revolucionario Institucional (PRI) made a public statement that government-owned concessions including the energy sector might be available to foreign investors under his administration.
Traditionally owned by the state and the world’s second largest non-publicly traded company, the oil giant Petroleos Mexicanos (PEMEX) is a $415.75 billion company that pays over 60 percent of its revenue in royalties and taxes to support 40 percent of the Mexican federal budget. Lack of reinvestment in infrastructure and innovation, terminal decline of some of its oil fields and vast stolen amounts of oil by the drug cartels have placed the company in disarray.
Opening the door to oil foreign investors might be a challenge, as the national oil company is protected by the Constitution and requires two-thirds of the Congress votes to be changed. But it may also be a solution to the declining productivity of the company and the cash-strapped federal government.
Under the promise of economic growth, Peña Nieto also faces new challenges in economic policies, having pledged to balance the federal budget for the first time in four years. He has also committed to strengthen the North American Free Trade Agreement (NAFTA), a policy that has decimated the agricultural industry in Mexico unable to compete with U.S. subsidized imports, and impedes measures to basic protectionism of national industries or vulnerable sectors.
Originally published by VOXXI as Five Latin America key events that will impact the world’s economy