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Higlights from Latin America in 2008

By Thiago de Aragao.

Economic and political highlights from Latin America in 2008, including obervations on the impact of the global economic crisis for regional economics, politics and geopolitics from FPC Senior Research Associate Thiago de Aragao.

Economic Highlights

The region's growth streak has come to a halt. Latin American countries experienced solid growth between 2003 and 2008. The economic crisis that broke out in the U.S. did not have a devastating impact (so far, at least) over the region, but it has nevertheless signaled the end of a "Golden Age" in which almost every Latin American country experienced an economic boom.

In numbers, the most successful Latin American economies in 2008 were those of Uruguay and Peru. The growth experienced by Uruguay's economy last year reached 11.5%, mirroring the strength of Tabaré Vazquez. Mr Vazquez's administration enjoys the best rapport with the opposition among other administrations in the continent. Building upon a strong coalition and the outstanding ability to negotiate with the opposition, Mr Vazquez leaves office in 2009 with a feeling of "mission accomplished". The milestone of Uruguay's economic boom was the modernization of the country's traditional industries. Arguably, foreign investments channeled to the country's cellulose factories (the biggest ever seen in Uruguay's history) were key for the double-digit growth. Beef exports also reported solid figures in 2008 thanks to a retention policy put in place by neighbor Cristina Kirchner, a move that turned out to make more room for Uruguayan beef in the international market.

Another winner in the region's economic arena of 2008 was Peru.

Boasting a growth of 9.4%, the country hit the jackpot when it saw its Free Trade Agreement with the U.S. enacted before the change in the U.S. administration. By way of comparison, Colombia did not have the same fortune and is unlikely to sign a FTA with the U.S. in the short run. In the case of Peru, solid developments in infra-structure drove the country's economic upswing. Jobs were also on the rise, which helped improve the economics.

Oddly enough, Peru's sustained economic growth does not translate into stability or political legitimacy of president Alan García's administration. Contrary to what runs for Uruguay, where Mr Vazquez's importance to economic growth in recent times is acknowledged by the population, in Peru the successful economic performance is credited not to Mr García, but in spite of him. The president's popularity went up to 25% but rejection levels still peak at 70%.

Predictably enough, one can include Brazil among the region's highlights. Not much because of the country's growth, which failed to reach desired levels on account of high interest rates hampering the country's development potential. However, the course of Brazil's dealings with the economic crisis and the stance of its Central Bank on the matter have put Brazil among the survivors of the 2008 economic arena, at least for the time being. Fears that a crisis of such magnitude would undermine the nation's economic stability enjoyed since the beginning of Mr Lula's administration ushered the adoption of preventive measures that have become the envy of other nations. A sign of such successful moves is to be seen in that the Summit of South American Countries to discuss the impact and solutions for the crisis was orchestrated and led by Brazil itself. The summit held in Brasília showed the world that Brazil can and should lead the region in helping neighboring countries survive the hard times.

Political highlights

The Colombia of President Álvaro Uribe comes first to the mind when the subject turns to political victories. In 2008 Uribe reached a peak 85% in popularity. The manner through which the Colombian leader has dealt with the FARC from the beginning of his administration has attained admiration of worldwide leaders, at the same time it brought concern and tired ranting from uninformed leftists who insist in seeing the FARC, a bunch to which the ends justify the means, in shades of romantic leftism. Mr Uribe consolidated himself as a regional leader by relentlessly breaking up the guerillas' tight grip on the country. In addition to this, his national security policy and the ability to attract foreign direct investments played a crucial part to rally the population's approval to the crackdown on the FARC.

Mr Uribe's popularity was such that his partisans sought to rally enough support to promote the idea of a third tenure in office for the president. However not entirely keen on the idea, Uribe allowed this process to run loose for some time to see what would happen. It was but natural that such levels of popularity led to public cries for the president to seek a third term in office.

Despite the fact that the country's house of representatives issued its "no-go" to a third tenure, this certainly will be a pervasive motif in the next administration: whether he will take part in it or not, Mr Uribe will enjoy tremendous prestige and influence over the nation's affairs. A third reelection for presidential office has been dismissed, but the stage is set for Uribe's protégée, whoever it is, begin the campaign to succeed him in office. General Santos, the man directly in charge of the military's offensive strategies against the FARC, has amassed considerable appeal among the population, particularly after the actions that culminated in the liberation of Ingrid Betancourt. Santos has Uribe's blessing and support. The transfer of political capital seems inevitable between the two men, prompting the president's opposition to put up a real fight if they are to prevent Uribe from achieving yet another political victory in 2009.

The impact of the global economic crisis on regional economies

The year of 2008 saw the emergence of a Latin America in much better standing to fend off a crisis of such global magnitude. Although the crisis did not turn out a financial tsunami, certain negative impacts were felt more badly in some sectors than in others. In addition, not all countries in the region were consistently guarded against it. The growth figure for the region should reach 4.6%, thus showing that it has grown for the sixth year in a row. Such growth was largely driven by the improvement of poverty levels and measures against unemployment.

The slowdown in tourism industries was one among many hangover symptoms after the crisis, particularly felt by countries such as Mexico, Chile, Argentina and Brazil. Peru and Argentina were the most affected countries in this respect, while Mexico suffered a direct impact because of the American tourists that traditionally cross the border to enjoy Mexican beaches. Peru, traditionally a destination of hundreds of European tourists seeking to visit the country's historic cities and landmarks, is experimenting a dramatic downturn in the influx of visitors.

In addition to cutting on the revenues from tourism, the crisis is having direct impact over the region's exports. Demand for raw materials produced by Latin American countries has plunged. Brazil is in a better position to stand, but other countries cannot afford to depend on internal markets to make up for weak export revenue. The bulk and strength of the Brazilian economy may create mechanisms to compensate a lack of demand by foreign offtakers through promotion and increase in consumption of domestic markets.

Furthermore, the lack of external demand for the region's products leads to a diminished interest of foreign investors in Latin American countries. Barack Obama's new administration, for instance, should tender its own home market rather than foreign ones. Colombia stands as an example, with the country suffering from decreasing direct foreign investments in the last quarter of 2008. The same should hold true in early 2009 for Brazil, Peru and Chile. As a result, the Chilean government is fostering negotiations to obtain free trade agreements with other markets. Countries such as Japan, Vietnam and Thailand, among others, are soon to be trading with Chile under the auspices of tariff exemption arrangements. This is a positive move, particularly now that traditional investors are fleeing the country.

The hardest part is yet to come. This is not only about fighting the direct impact that such an economic crisis typically has on the economy. To demonstrate confidence and convince a frightened world through such confidence that the situation is relatively under control is certainly the hardest task to accomplish. The mission of Brazil is to serve as the region's mouthpiece to announce to a frightened world that the impacts of the crisis will be restrained and that the confidence of investors in Latin American nations should remain intact.

The impact of the global economic crisis on regional politics

The economic turmoil did not have direct impacts over regional politics. However, there were individual implications in many countries. Argentina, known for its poor ability to manage severe crises, can be taken as a typical example. The effects of the economic crisis in Argentina are likely to surpass those experienced by other Latin American countries owing to a lack of transparency in economy and politics in the period that preceded the outbreak of the financial turmoil. The export retention policy, enacted to promote the country's home market, not only tampered with inflation rates but also created such an environment that the country is in to bear the full brunt of the crisis when it finally hits the country.

The situation in Argentina is quite the opposite of Peru, for example, where the population does not mix economy and politics. Cristina Kirchner's popularity has been falling now that the outcome of poor economic management is being experience by her traditional electoral supporters (lower and lower middle-class). As a result, Mrs. Kirchner is already reaping the bad fruits in the National Congress and even among its own party, the PJ. Mrs. Kirchner's support in Congress and within her own party is no longer unanimous, and some have begun to question the Kirchner's leadership. A strong movement has started within the Casa Rosada calling for Nestor Kirchner to take a seat in either the house of representatives or the senate. The idea is that her husband could then personally knit together the congressional support that Mrs. Kirchner needs.

In terms of foreign confidence towards the dealings and affairs of the Argentinean government, the Casa Rosada is not particularly know for the wisest decisions. Some key advisors to Mrs. Kirchner have overtly considered default on payments owed to the Paris Club. Even though no default has been seen, the fact that members of the government's top echelon have blatantly spoke of such possibility was enough to bring the already low confidence of international observers in Argentina's government to even lower levels. On top of that one can put the distrust of foreign investors, who are concerned that the country will yet again call for a default on its bond payments.

Latin American geopolitics

BRAZIL

Arguably the year of 2008 saw a lot of sizzling in the continent. Brazil made a series of mistakes in foreign policy. The dispute with the Ecuadorian administration, which decided to inexplicably default on its indebtednesses, only took place due to Brazil's lax stance toward other countries in the region, the Bolivian situation being the most typical of them all. Following this situation, Paraguay defied Brazil and literally put the continent's leader on a tight corner. On the other hand, the country achieved an important victory through its leadership in times of economic crisis and by showing how other countries in the region are to collaborate with each other.

Brazil's foreign policy is widely known for suffering of split personality. On the one hand, decisions on continental matters are rife with ideologies birthed by the mind of Marco Aurélio Garcia. On the other hand, the Itamaraty sees the outdated views of Samuel Pinheiro somewhat shadow some proper decisions of Celso Amorim. The bottom line is that the lack of strategy of our foreign policy has the country acting only to solve emergency issues or "putting down fires". It is a well known fact that those who only fight fires little or no time to plan ahead.

VENEZUELA

The year of 2008 was not a good one for Venezuela. The government victory in most municipalities is far from representing absolute victory, much in contradiction to what president Hugo Chávez thinks and peddles. A careful observer will notice that strategic states, as well as the municipality of Caracas, ended up in the opposition's control. For the first time ever the Venezuelan opposition showed signs of organization.

However, it is unlikely that Chávez will be more quiet and responsive in 2009 as he turned out to be in 2008.

Granted, falling oil prices somewhat softened Chávez's tone of voice both home and out in the continent, but this hardly means that he will cease to brag about as before. It is anticipated that by the end of 2009 or beginning of 2010 a new referendum will be called, by which he will seek to remain in power through perpetual reelections. To cope with the economic crisis, Chávez relies upon a $70-billion fund in hopes to buy himself some time. In addition, the money the country lost that was invested in Lehman Brothers is but another sign of mismanagement and an ideological irony. Chávez, however, has nothing to be worried about; his personal money is invested in bonds of the U.S. government.

BOLIVIA

Bolivia has suffered even more turbulence in 2008 than Venezuela. But contrary to what happened with his neighbour and mentor, Evo Morales managed get out stronger in 2008. Through subtle, efficient negotiations, Mr Morales managed to pacify his seemingly fierce opposition, at least for the time being. By dealing personally with many representatives, Mr Morales managed to obtain from the Congress the approval he needed for his constitutional referendum. For this victory to come to pass, Mr Morales enjoyed key affirmative votes of the opposition itself. This situation caused the Podemos, the main oppositionist party, to crack apart.

All attentions in 2009 will be drawn to the referendum scheduled for the 25th of January, when president Evo Morales will try to enact the country's new constitution. Mr Morales successfully reversed the trend in support of the opposition and is now anticipated as the winner of the people's referendum.

After that, the political forces in Bolivia will carry their agendas with a view to the presidential elections of December. Since the country's political agenda is likely to dwell at political issues, the impact of the financial crisis may pose a serious obstacle.