current issues in ipe

7/29/2019 Current Issues in IPE

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U.S. Democracy Shortcomings

The U.S. Supreme Court ruled 5 to 4 in January this year that the government could not limit

spending by U.S. corporations and labor unions that favored particular candidates in upcoming

elections. This reversed many earlier decisions. The reasoning of the majority was that thegovernment could not regulate political speech. The concern of Democrats is that large

corporations would generally favor Republican candidates and be able to exert great influence

over electoral outcomes because of their deep pockets, while the pockets of labor unions thatwould favor Democrats are far shallower. These concerns will be tested for the first time in the

November elections.

There are other limitations on democracy in the United States. The U.S. Senate is itself adeliberate contradiction of democracy in that each state, regardless of size, has two senators;

each California senator represents 18.5 million people, and each senator from Wyoming

represents fewer than 300,000 people. The very fact that 60 votes and not a simple majority of 51

are needed to open debate in the Senate is undemocratic. Much has been written over the years

about the U.S. Senate being one of the worlds most important debating institutionsand,indeed, there have been great debates in the Senate over the yearsbut this cannot be stated with

a straight face today.One can ask a different question about U.S. elections: Is it the state of the economy, stupid, that

determines outcomes? Or, if not the actual state, the trend of the economy? The U.S. economy

has its points of strength and weaknessit has recovered from the great recession in 2009, but

it is not clear how steady this recovery will be about September 2010. If the state of the economyis the central explanation of why incumbents do well or badly, this implies that the tactical

techniques used to influence electoral outcomes are marginal. If one accepts this viewpoint, theanti-Washington sentiment that attracts so much current attention is more noise than bedrock

opinion. The noise may become deafening if the economy looks weak around mid-September or

may dissipate in the unlikely situation that the economic data will look stronger at that time.Democracy manifests itself not only in electoral contests, but even more importantly in the daily

lives of Americans. Free speech is one such right, but even this is limited under certainconditions. Protection of the civil rights of Americans is another example, and the reason that

institutions such as the American Civil Liberties Union exist is that limits on civil rights are often

imposed.

The United States clearly is a republic (citizens pledge allegiance to the flag of the United

States and to the republic for which it stands), but much has been written over the years about

the combination of republic and democracy. The strength of democracy has been

demonstrated many times in U.S. history, but it is also evident that severe limits have been

placed from time to time on the fullness of this democracy. There are many reasons for these

limits; they include the power of tradition (womens suffrage is an example of this), the desire of

incumbent office holders to perpetuate their incumbency (gerrymandering), the seeking of

advantage by political parties over opponents (spending limits placed on electoral candidates),

and concerns that arise in times of turbulence (out of fear of undermining governmental powers).

There is much validity in the warning that eternal vigilance is needed to protect liberty.


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Problems Facing Latin American Countries at Year-end 2006

Latin America has caught the attention of news media that normally pay little heed to the region

because of what is seen as a leftward trend in presidential election outcomes. Three recent

examples are the victories of Rafael Correa Delgado in Ecuador on November 26, Hugo Chvez

Fras in Venezuela on December 3, and Daniel Ortega Saavedra in Nicaragua on November 5.Lula was reelected president of Brazil on October 29. Andrs Manuel Lpez Obrador came

within half a percentage point of being elected president of Mexico on July 2. In Peru, the

election barely went against the populist-leftist candidate Ollanta Humala and, instead, AlanGarca Prez was chosen as president on June 4. Earlier, on October 31, 2004, Tabar Vzquez

Rosas was chosen president of Uruguay; Evo Morales Ayma won an unprecedented majority to

become president of Bolivia on December 18, 2005; and Michelle Bachelet Jeria, a socialist, waselected president of Chile on January 15, 2006.

Many analysts use the word populist rather than leftist in the foregoing characterizations. A

populist in my mind refers to a leader who spends money the government does not have, and that

is not true for Chvez and the others. The high price of oil has provided the money that Chvezspends to win support at home and to attract allies elsewhere in Latin America and the

Caribbean; and the other left-leaning presidential winners, where a record in office exists, have

pursued prudent fiscal policies. That was the pattern established by Lula when he first assumedthe office of president of Brazil in 2003. These three socioeconomic realitiesnot creating

enough jobs, high income inequality, and great povertyare the main problems faced by

governments in Latin America. Steady and significant economic growth is essential to createjobs for all those seeking work and to lower poverty levels, but economic growth may

simultaneously increase income inequality. Most Latin American countries, unfortunately, have

not had steady and sufficient economic growth to deal with two of the three problems that I

believe are at the heart of the regions recent political outcomes. Looking at the region as awhole (Latin America plus the Caribbean), recent growth in gross domestic product has been

poor to middlingranging from close to 0 to minus 1 percent in 2001 and 2002, and averaging

about 4 percent a year for the remainder of the period since 1996. On a per capita basis, GDP

growth was about 1 percentage points lower. GDP growth was low in the 1980s, in factnegative on a per capita basis for much of that decade.

One must therefore ask why Latin American economic performance has been poor; and there is

no simple answer. The region has gone through some unfortunate experiments, including fiscallaxity (or populism, if that term is preferred), retention of import substitution and pessimism

about sustaining export competitiveness for much too long, and protectionism cloaked in the

guise of economic integration. After the debt crisis of the 1980s exposed the frailty of thesepolicies, most countries altered their economic policies by reducing import protection and

espousing export promotion as the engine of growth. The inflation caused by fiscal profligacy

was replaced by greater fiscal discipline, and modest rates of inflation now are the norm in the

region. However, there is no consensus on what economic policies should be in the years ahead.Politicians in country after country excoriate the pressures put on them during the past 15 or so

years, presumably by the United States, to adhere to the Washington Consensus, which laid out a

set of mainstream economic policies, but these politicians have not clarified what the alternativepolicies should be.

A return to import substitution is not feasible. Blaming the Washington Consensus for their

problems Latin American elites allowed deep inequalities to take hold early in their national

development programs, and these are proving hard to correct. Indigenous people were not


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brought into the social mainstream through education and training and remain alienated to this

day in many countries; this complicates achieving economic growth. On the other hand, Latin

American countries have well-educated and talented people who can provide leadership foreconomic development. Yet, if one compares economic advancement in Latin America and East

Asia since World War II, the Latin Americans come off poorly. Part of the explanation for this is

the intransigence of political positions and the inability to reach political compromises tostimulate economic growth. This intransigence is evident in Mexico today and played a largerole in the Argentine economic crisis five years ago.

Earlier, I said that political elections are an outcome, whereas economic and social issues are the

basic inputs in understanding recent election outcomes in Latin America. The reality is more

complex: political stubbornness is also a basic input to economic outcomes.


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Free Trade Area of the Americas:How to Screw Up a Perfectly Good Proposal

When President George H.W. Bush first proposed a hemispheric free trade area from Alaska toTierra del Fuego in June 1990, the idea was greeted with considerable enthusiasm in Latin

America and the Caribbean (LAC). The hemispheric countries that had reservations kept them

mostly to themselves. Now, 14 years later, the Free Trade Area of the Americas (FTAA) is on

life supportnot dead, but its survival uncertain. It is worth asking why this change took place.First, some background. When the proposal was made, most LAC countries had only recently

shifted away from an import-substitution trade model, which downplayed the importance of

exports, to a policy of export-led growth.Alongside this export pessimism, most LAC countries

did not encourage inward foreign direct investment (FDI) based on concern that such investmentwould limit their control of economic policy. This unease over FDI was discarded after 1982

when Mexico came hat in hand to Washington seeking debt restructuring. LAC countries learned

that the need to obtain creditor concessions on debt servicing truly frustrated their development,and the lost decade of the 1980s ensued.

The timing of the Bush proposal was thus ideal. Myjudgment at that time was that hemispheric

free trade would come into existence. The expectation was fortified when the Clintonadministration renewed the idea at the Miami summit of 1994. A schedule for amassing the

factual base of country trade programs was established using three hemispheric organizations as

the virtual secretariatthe trade unit of the Organization of American States, the Inter-American

Development Bank (IDB), and the Economic Commission for Latin America and the Caribbean.

The information gathered in that process was more complete about hemispheric practices thanhad ever existed before. All of the data were made available on accessible Web sites. The

procedure set up following the Santiago, Chile, summit of 1998 led to scores of meetings ofministers, vice ministers, and negotiators in the various functional areas that were to be part of

the FTAA. A deadline of end 1994 was put in place for completing the negotiations. The process

seemed to be on track. The countries themselves, and the IDB on its own initiative, even

considered what the administrative structure of the FTAA would look like. All of us, it seems,were a bitnave.

Some negative aspects of the FTAA process were not fully understoodcertainly by me, but I

was not alone. One was the weak leadership shown by the United States for many years, and this

led many LAC countries to wonder just how serious the U.S. initiative was. Much of this

skepticism remains to this day. Brazils tenacity in seeking to limit the extent of any hemisphericfree trade agreement was not immediately apparent. Lula, before he formally became president,

openly stated his belief that the United States was pushing the FTAA in order to gain dominanceover the hemisphere, but his governments position became subtleronce he was in office.

However, most tariffs will not go to zero after Doha. About two score preferential trade

agreements exist just among hemispheric countries, including those in existence andcontemplated by the United States; the current complex system of overlapping discrimination

and restrictive rules of origin will not automatically disappear. The most salient argument for the


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FTAA is that it would create a single structure of preferences and rules of origin for the 34

countries negotiating the FTAA, or for as many who wish to join in the agreement. Getting rid of

the spaghetti that now exists would be a most welcome accomplishment. The task of negotiatingthe FTAA has been made abominably difficult by the framework agreed to in a ministerial

meeting in Miami in November 2003. This calls for a common set of undertakings by all the

negotiating countries and then discretionary adherence to obligations for all the rest. TheBrazilian stress has been on market access (especially lowering of tariffs) for the bulk of thecommon set commitments and less adherence by it on other areas, especially trade in services.

This has been called FTAA lite or FTAA la carte. The failure to obtain meaningful

concessions in trade in services would greatly reduce the attractiveness of the FTAA for theUnited States. The Miami framework also would allow plurilateral agreements under which

less than the 34 negotiating countries could conclude their own full-fledged (not lite)

agreements.

Other considerations should be noted. The United States has negotiated or is in the process ofconcluding free trade agreements (FTAs) with just about all Latin American countries other than

Venezuela and the four Mercosur countries (Argentina, Brazil, Paraguay, and Uruguay).

Mercosur and the EU may conclude their own FTA before the end of 2004. If all these deals goforward, this will set up a situation in which the four Mercosur countries have a preferential trade

relationship with the EU, while most other hemispheric countries will have preferential trade

relationships with the United States. In addition, individual hemispheric countries will continue

to have separate bilateral preferences with each other. Instead of a unified hemisphere, we willhave a divided hemisphere replete with spaghetti. If this comes about it will be because Brazil

did not want a full-fledged FTAA, and the United States opted for a raft of bilateral FTAs. An

FTAA lite could complicate this situation further in that the reciprocal rights and obligations ofits adherents would be less comprehensive than in their separate bilateral FTAs with the United

Statesalthough this may be mitigated depending on how many countries join in a

comprehensive plurilateral agreement under the Miami framework.

The foregoing description may be unfathomable to the reader. I had trouble getting it straight.But that is what is happening. This, in essence, is my main conclusion. All the machinations and

maneuvering are really complicating the trade structure in the hemisphere. I doubt that there is

any basis for supporting an FTAA if the current process adds to rather than eliminates thiscomplex web of cross discrimination and heaven only knows how many separate rules of origin.

Traders will need experts to figure out the best country from which to ship goods to other

countries in order to get the best tariff deal at the destination. The total structure that now seemsto be playing out is likely to be unstable. If that is correct, this will at least provide work for

another generation of trade negotiators to straighten out the mess.


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