Posted on 12/29/2001 6:46:28 PM PST by al-andalus
Will Mexico Pull Away From Latin America?
December 29, 2001 08:01 PM ET
By Andrew Hurst
MEXICO CITY (Reuters) - While the world is transfixed by the U.S.-led war on terrorism, a geopolitical shift is under way in Latin America which may widen in 2002.
Countries such as Colombia, Venezuela and Argentina flounder in South America, but Mexico is more firmly anchored than ever to its mighty neighbor, the United States, and appears set fair to weather financial storms that may lie ahead.
In the language of emerging market economists, Mexico is seen as having "decoupled" from Latin America.
It is increasingly embedded in the North American economy together with the United States and Canada who together forged the North American Trade Agreement (NAFTA).
"There is no question Mexico is moving northward," said Gray Newman, chief Latin America economist at Morgan Stanley in New York.
But spectacular progress in moving into the U.S. economic orbit has not delivered millions of Mexicans from misery, and many are driven to risk their lives illegally crossing the frontier with the United States in search of a better life.
Still, many Latin American countries must wish they only had Mexico's problems to wrestle with.
Colombia is in the grip of a civil war pitting a guerrilla army against the military. Oil-rich Venezuela is deeply divided over its populist leader, soldier-turned-politician Hugo Chavez, who is mounting an increasingly aggressive challenge to the nation's business establishment.
Argentines wait on tenterhooks as their economy teeters on the brink of bankruptcy, and Brazilians look forward nervously to a cliff-hanger presidential election next year that could unsettle their country if a populist leader is elected.
Mexicans, meanwhile, are just praying for a U.S. recovery that looks likely to haul them out of recession.
"Mexico is in a different place from the rest, thanks to NAFTA," said Miguel Diaz at the Center for Strategic and International Studies in Washington.
LATIN AMERICA NO LONGER COHERENT ENTITY
A perceived shift by Mexico away from the rest of Latin America is part of a broader trend in which each emerging economy is viewed by investors on individual merits rather than as an integral part of a uniform regional bloc.
"Latin America as an economic entity seems to be losing a lot of coherence. Brazil is as far from Mexico as Spain is. Brazil and Argentina have very different economic structures," said Damian Fraser, Latin American economist at UBS Warburg.
For some economists, Mexico has more in common with Poland or Hungary in terms of its evolution than with its Latin American neighbors. Brazil mirrors China in the way that it dwarfs all other countries in its own geographic region.
As a consequence, Mexicans see themselves less vulnerable to fall-out from a possible meltdown in the Argentine economy, which is hanging on grimly to a fixed currency peg with the dollar long after Brazil and Mexico floated their currencies.
But even Brazil and Chile are seen as having a strong chance of withstanding the aftershocks, if Argentina is finally driven to default on its $132 billion public sector debt.
"During the Argentine crisis, we have seen a much more mature reaction from the investor base than we did...during the Brazil devaluation crisis of 1999," said Paolo Leme, director of emerging market research at Goldman Sachs.
Mexico's success in strengthening democracy, enacting free market reforms, taming inflation, and moving into the North American economic orbit has produced much new wealth but failed to haul millions of Mexicans out of grinding poverty.
QUESTIONING THE WASHINGTON CONSENSUS
Analysts now openly question whether after 10 years the so-called "Washington consensus" -- shorthand for a raft of market reform policies backed by the International Monetary Fund and the World Bank -- can alone close the huge gap between haves and have-nots that plagues Latin America.
"The Washington consensus has not delivered," said Carol Graham, Latin American specialist at the Brookings Institute in Washington. "Latin America has elections, low inflation, solid fundamentals but far more losers than winners."
"It's a time when a lot of people wonder where all this reform effort led to," Graham said, referring to ambitious sell-offs of public assets and a rolling back of the state that took place in the 1990s throughout the region.
New-found wealth from a growing export sector in countries such as Mexico will never trickle down to the poor unless Latin American countries spend more on mass education and social security, analysts say.
"There is no progress on defining a longer-term social contract," said Graham. "That will require progressive taxation like in the more developed economies."
Michael Shifter, an analyst at the Washington-based think tank, InterAmerican Dialogue, said, "Formulas applied are not working and are generating discontent in Latin America."
Mexican President Vicente Fox, struggling to win support for an ambitious tax reform bill which he says is essential to boost revenues and fund social reforms, has put stamping out poverty and improving mass education high on his agenda.
FAILURE TO REFORM COULD YIELD PENALTY
Failure could reverberate throughout Latin America at a time of growing concern among economists that China, following its accession to the World Trade Organization (WTO), will prove an increasingly formidable competitor for Latin American exporters such as Mexico.
"If Mexico fails to move forward (on reform), people are going to say, if Mexico cannot do it, can Brazil?" Morgan Stanley's Newman said.
With economies in the region expected to grow an average of 0.5 percent in 2002 after forecast growth of 0.6 percent this year, reforms need to come thick and fast for Latin America to reap lasting benefit from recovery when it comes.
One glimmer of hope comes from approval by the U.S. House of Representatives of a bill to give the White House expanded authority to negotiate trade pacts.
If the Senate also approves the so-called "fast track" bill it would give the U.S. president power to negotiate trade deals -- such as one covering 34 Western hemisphere countries -- which Congress could approve or reject, but not change.
A trade deal with the entire region on board could give more Latin American countries a chance to pursue the export-led growth which Mexico achieved until this year's slowdown.
LATIN AMERICA NO LONGER COHERENT ENTITYI'll say.
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