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World Terrorism Report: Latin America Net Assessment -- 2005

By Stratfor

Originally posted on June 21, 2005 21 35 GMT | Analysis Latin America and the Caribbean face many problems -- poverty, corruption, crime, and weak government and judicial institutions -- that go back to colonial times. These problems provide the backdrop against which the region's current geopolitical drivers operate.

Factors now driving the region include a tendency toward populism and left-leaning governments, increasing violent crime and insecurity, unsustainable economic models, collapsing oil and gas infrastructure and a growing confrontation between the United States and the Venezuelan-Cuban alliance.

Latin America is showing up on the global radar as a viable and important economic partner. The region has attracted particular interest from China as not only a source of imports but also a good market for exports. However, Latin America as a region is facing an economic downturn. After growing 5.8 percent in 2004, economic expansion is expected to decelerate to about 4 percent in 2005. This trend is exacerbated by the region's increasing crime, which creates an obstacle to economic development. Some countries' heavy debt burdens and labor laws create more disincentives for foreign direct investment. The failing oil and gas infrastructure in the region only adds to Latin America's economic woes.

Looking ahead, populism will be the dominant political driver for years in Latin America. The fuel for more populism will come from poverty, insecurity and weak economic growth rates. Brazil, Venezuela and other countries want to bind Latin America together more tightly politically and economically. However, efforts to achieve greater regional integration will be blocked by the populism and poverty stoking political instability in many countries.

Overview

Latin America and the Caribbean comprise 32 countries, including 19 that speak Spanish, 12 that speak English and one -- Brazil -- where Portuguese is spoken. The region's population will total about 590 million people at the end of 2005. This number includes 39.3 million in the Caribbean, and 551 million on mainland Latin America, which stretches from Mexico in the North American subcontinent, to Argentina and Chile in the South American subcontinent.

As of 2005, about 43 percent of the region's total population lives in poverty, according to definitions and methods of measuring poverty used by entities such as the International Monetary Fund (IMF) and World Bank. For the last 40 years, Latin America has been a consistent economic underperformer; on average, regional gross domestic product per capita has increased only 1.6 percent annually during that time -- less than the region's average population growth.

Three hundred years of Spanish and Portuguese colonial rule laid the foundations for many of Hispanic and Portuguese Latin America's current problems -- some of the world's most extreme social and economic imbalances between rich and poor, class and ethnic divisions, weak judicial and political institutions and fragile property rights, along with endemic corruption and distrust of private enterprise and commerce, which historically has been perceived as a rapacious exploiter of the poor. The region's chronic national indebtedness and low internal savings rates also can be traced back to colonial times, as can the region's tendency to accumulate presidential power at the expense of other branches of government and assert incremental bureaucratic control over economic activities.

The Region's History: A Snapshot

From the 15th through 18th centuries, Spain led the conquest and colonization of most of the Latin American and Caribbean region, with the English, French and Dutch joining the race for conquest in the Americas. Portugal became the owner of what today is Brazil as a result of the Treaty of Tordesillas, which established that Portugal would control all lands newly discovered or to be discovered lying east of a line running north and south 1,110 miles west of the Cape Verde Islands. Spain assumed control over everything to the west of that line.

All of the countries in what is today Hispanic Latin America won their independence in the 19th century. Between 1815 and 1822, Jose de San Martin led Argentina to independence, while Bernardo O'Higgins in Chile and Simon Bolivar in Venezuela guided their countries out of colonialism. Bolivar also freed from Spanish domination the colonial possessions that today are Colombia, Ecuador and Peru. These new republics sought -- and expected -- recognition by the United States, and many Americans endorsed that idea. Once the United States and Spain ratified the treaty under which the United States purchased Florida, U.S. President James Monroe's administration began extending recognition to the new Latin American republics.

However, independence and the creation of republics instead of crown colonies did not change the underlying political institutions and core laws that organized society in Latin America. New "criollo" leaders -- Spaniards born in the colonies -- wrote new constitutions and laws, but in practice they ruled as badly and corruptly as the Spanish Crown had ruled the colonies.

In 1823, France invited Spain to restore the Bourbon power and form an alliance to make war upon the new Latin American republics with backing from Russia, Prussia and Austria. George Canning, the British foreign minister, proposed that the United States and Great Britain join to warn off France and Spain. However, John Quincy Adams was suspicious of Britain's motives and concerned about Russia's efforts to extend its influence down the Pacific Coast from Alaska to California, which Mexico owned at the time. Adams argued against Canning's offer, and shortly thereafter Monroe delivered a message to Congress in which he laid out what always has been called the Monroe Doctrine. The United States informed Europe that the American continents were no longer open to European colonization, and that any effort to extend European political influence into the New World would be considered by the United States "as dangerous to our peace and safety."

Immigrants from countries such as Italy, Portugal, Spain, Germany, France, Holland, Poland and England in the 19th and early 20th centuries brought Latin America capital, industrialization and a new work ethic that formed the core of contemporary Latin American economies and the foundations of endogenous private enterprise in Latin America. Immigrants gave Latin America a middle class, and some became wealthy and influential in their new countries. These immigrants rarely mixed or intermarried with the older "criollo" elites that traced their blood lineage back to Spain and the Conquistadores, and as a rule they also did not mix with the poor classes consisting of the free descendants of African slaves, poor mestizo peasants or indigenous people.

Nationalism, militarism, revolution and the creation of the first modern political parties were the dominant political drivers in Latin America during the first four decades of the 20th century. In some countries such as Venezuela, for example, the first organized political parties were socialist or communist. By the 1940s, however, European-style social democracy and Christian democracy had started to take root in many countries. In Argentina, Col. Juan Domingo Peron melded blue collar workers, militarism and nationalism with fascist undertones into a populist political movement that came to be known as Peronism.

Contemporary Latin America

Since approximately 1950, Latin America and the Caribbean have experienced recurring cycles of sustained economic growth followed by prolonged economic decline. The intensity and duration of these cycles varies from country to country, but generally each economic cycle lasts an average of 10 years.

Latin American economic policies have shifted from "import substitution industrialization" policies in the 1950s and 1960s, to policies in the 1970s that emphasized large-scale international sovereign borrowing by regional governments. The Latin American debt crisis that erupted in Mexico in 1982 and quickly engulfed the entire region resulted in a "lost decade" in terms of economic stagnation, increasing poverty and falling per capita income. However, this crisis ushered in new macroeconomic proposals from U.S.-trained economists and technocrats, which led to market-friendly macroeconomic policies that opened up Latin America to international trade and investment.

U.S.-centric "neoliberalism" and the "Washington Consensus" were embraced during the 1990s by reformist governments that slashed trade barriers and privatized state-owned enterprises faster than any other developing region in the world. The North American Free Trade Agreement (NAFTA) among the United States, Canada and Mexico was negotiated in 1992 and implemented in 1994. By the end of the 1990s, however, regional economic growth slowed again.

Economic growth for all of Latin America and the Caribbean was 3.7 percent in 2000. However, from 2001 to 2003 the regional economy grew a total of only 1.8 percent. Latin American and Caribbean economies bounced back robustly in 2004, growing 5.8 percent because of higher international commodities prices and China's seemingly insatiable demand for Latin America's exportable commodities; but this growth is already showing signs of slowing.

Geopolitically, the Cold War shaped the last 50 years of Latin America's evolution. From the 1960s until the end of the 1980s, Latin America and the Caribbean were battlefields in the global confrontation between the United States and the former Soviet Union.

Security was always the top U.S. strategic priority in the region. When the Cold War ended, the United States sought to engage the region more broadly by calling for a hemispheric free trade zone and placing more emphasis on consolidating democracy and respecting human rights. However, trade expansion was derailed when Mexico's peso collapsed in 1995, and three years later -- starting in Venezuela -- Latin Americans started showing more support for left-leaning leaders who blamed the region's social and economic difficulties on U.S.-imposed neoliberalism.

Social and Political Drivers

The trend toward populism has dominated the region politically since Hugo Chavez became president of Venezuela in December 1998. With the exception of Chilean President Ricardo Lagos, every Latin American president elected since 1998 won by campaigning on two themes: against ruling parties and candidates that embraced "neoliberalism," and against corrupt traditional political elites. Vicente Fox in Mexico, Alvaro Uribe Velez in Colombia, Lucio Gutierrez in Ecuador, Alejandro Toledo in Peru, Luiz Inacio "Lula" da Silva in Brazil, and Tabare Vasquez in Uruguay all won elections by campaigning as outsiders against the traditional political elites, who had lost their credibility with voters. Nestor Kirchner in Argentina would have won a run-off vote in 2003 against former President Carlos Menem if Menem had not dropped out of the race at the 11th hour, making Kirchner president by default.

As populism has gained momentum, Latin America's democracies also have moved toward the left. Left-leaning governments are in power in Brazil, Chile, Uruguay and Venezuela. Since 2003, popular revolts have forced two Bolivian presidents and one Ecuadorian president out of office. The leading candidate in Mexico's 2006 presidential election is a self-described socialist. Central America's governments (except Panama) lean to the right, but these countries face major internal security crises related to crime that could destabilize their governments in the near future.

Weak government and judicial institutions constitute another regional driver with political and social implications. Weak government institutions allow corruption to flourish with impunity, fail to deliver essential public services and do not serve or protect the interests of the general public. Weak judicial institutions fail to protect individual rights and private property rights, including intellectual property.

Poverty -- endemic in the region but most pronounced in Brazil, Bolivia and Central America -- is another regional driver and the core cause of the region's violent crime, drug trafficking, armed insurgencies and political instability. The regional crime wave involving slum gangs, drug traffickers, arms smugglers, political militants and corrupt police and military personnel has direct implications for economic growth, social stability and effective governance.

With some exceptions, like Chile and Costa Rica, all of Latin America suffers from a critical and growing crime problem. As regional insecurity escalates, economic development and business costs also increase in terms of canceled investment opportunities and increased operating expenditures for security for personnel and fixed assets -- thus the region is caught in a cycle of poverty leading to increasing crime and crime leading to more poverty. Furthermore, millions of poor Latin Americans constitute a simmering cauldron of social discontent that can erupt into violent revolts and even civil wars.

Latin America's governments have lost the ability to stem violent crime because they are not investing enough in expanding law enforcement institutions and modernizing their judicial systems. This is a long-term structural problem that defies easy solutions. In the elections across the region during the next 18 months, crime and insecurity will be major issues for many voters.

Current Geopolitical Issues

# Unsustainable Economic Models -- The economic stabilization and trade openness achieved during the 1990s has not been dismantled regionally. However, momentum toward more free economies has reversed in many countries. This is particularly evident in popular demands and government policies to raise income taxes and royalties on foreign oil companies in Argentina, Bolivia, Ecuador, Venezuela and other countries.

Moreover, with the exception of Chile, institutional weaknesses prevalent in Latin American economies make it hard for firms to capitalize on investment opportunities that more stable and open economies create. Regional debt profiles have improved, but many countries still face heavy debt burdens which drag on economic growth and leave public and external finances vulnerable to shocks. Latin America also gets low scores for independent judiciaries, protection of financial assets and private property and the rise of organized crime. Labor laws in many countries are disincentives for investment in physical and human capital.

# Collapsing Oil and Gas Infrastructure -- All of the major oil- and gas-producing countries in Latin America -- except Brazil, Peru and Trinidad and Tobago -- have infrastructure or political problems that translate into energy supply shortages. Because Mexico's political elites have refused to reform the Mexican Constitution to allow private investment in the oil and gas industry, Petroleos Mexicanos is forced to start looking offshore for new oil and gas supplies. In Venezuela, the Chavez government's mismanagement of Petroleos de Venezuela has caused the state oil company to lose about 1.2 million barrels per day of crude oil production capacity since the end of 1998.

Political instability and insecurity in Colombia, Ecuador and Bolivia have set back efforts to develop new oil and gas production capacity. Argentina's policy of confrontation with energy companies to keep local prices down has discouraged new investment in capacity expansions.

# U.S. Confrontation with Venezuela and Cuba -- Security has been the top U.S. strategic concern in Latin America and the Caribbean since the Clinton administration. The United States has spent close to $3.5 billion in Colombia since 2000 to help its government battle drug traffickers and militant groups such as the Revolutionary Armed Forces of Colombia (FARC). The United States also is expanding its security presence in Paraguay, a longtime playground for international organized crime and political militant groups. The FARC is now active in Paraguay. Also, Washington gradually is being pulled into providing more security assistance to Central America's governments, where drug traffickers and street gangs called "maras" have overwhelmed existing law enforcement institutions.

However, the biggest U.S. security concern in the region now is the strategic alliance between Venezuelan President Hugo Chavez and Cuban leader Fidel Castro. Venezuela's oil wealth has given Castro an economic lifeline worth between $1 billion and $2 billion a year. Chavez is acquiring hundreds of millions of dollars in new weapons and military equipment from Russia, Brazil, Spain and China, including missile frigates and likely MiG-29 Fulcrums.

Also, Chavez has been trying to export his Bolivarian revolution regionally by providing political and financial support to radical leaders and grassroots social organizations in other countries, including Bolivia and Ecuador, since the start of 2005. The U.S. government is trying to build a limited containment strategy to rein in Chavez's plans. So far, this strategy has not garnered any support regionally, even from close U.S. allies such as Colombia.

# China -- China's interests in Latin America -- which are largely economic -- rapidly have increased. China's imports from Latin America surged from about $3 billion in 1999 to $21.7 billion in 2004; during the same period, China's exports to Latin America grew from $4.3 billion to $18.3 billion. The Asian giant's top five import markets in 2004 were Brazil ($8.7 billion), Chile ($3.7 billion), Argentina ($3.3 billion), Mexico ($2.1 billion) and Peru ($1.5 billion). China's top export markets in 2004 were Mexico ($5 billion), Brazil ($3.7 billion), Panama ($2.2 billion), Chile ($1.7 billion) and Argentina ($852 million). Chinese President Hu Jintao announced in November 2004 that China would invest $100 billion in Latin America during the next 10 years, including $20 billion in Argentina.

Beijing also has political and strategic goals in the region. China is building strategic geopolitical alliances with Brazil, Argentina, Venezuela, Cuba and Peru in pursuit of broader Chinese interests. These Latin American countries see their expanding strategic alliances with China as vitally important in securing new markets and sources of investment, and gaining more global influence in terms of offsetting what many Latin Americans perceive as strong U.S. hegemonic pressures in the region. China sees its new alliances as ensuring greater access to the region's commodities, and gaining the support of key Latin American countries for Chinese objectives in venues such as the United Nations and the World Trade Organization. Also, China sees Latin America as a promising consumer market for both low-cost and high-value Chinese exports.

Latin America's social instability and crime-related insecurity will have some deterrent effects on the rate at which foreign direct investment from China grows in Latin America in coming years. However, this will not be measurable for several more years, since the $100 billion of investment Hu pledged in November 2004 would be made over the span of a decade.

Latin America's governments are under strong popular pressures to achieve results in terms of economic growth and greater wellbeing for the poor. In 2004, exogenous factors resulted in regional growth of 5.8 percent -- the best performance in two decades. With the exception of Chile, however, that level of growth cannot be sustained regionally without deeper reforms than governments are willing to make, and much higher investment than currently comes into the region. This implies that poverty levels will not change substantially in coming years. It also implies that social discontent will remain constant in many countries, periodically flaring up into protests and even popular revolts in some countries, particularly in the Andes region.



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