October 24, 2007

Free Trade: Latin America’s Last Hope?

by Samuel Gregg D.Phil.

Costa Rica’s recent referendum ratifying the Central American Free Trade Agreement (CAFTA) was good news for Costa Ricans. Against a coalition of American and Costa Rican protectionists, trade unionists, and religious activists, the Costa Rican people voted for economic openness -- and for a future.

But Costa Rica’s 51 percent vote for CAFTA (confirmed in a recount on Monday) was also important because it was a sign of hope amidst many clouds darkening Latin America’s economic prospects.

Naturally, there are some Latin American success stories. After adopting CAFTA in July 2006, Guatemala experienced a tripling of foreign direct investment. Its trade also expanded from 5 percent in the first half of 2006, to 17 percent in the second half.

The World Bank’s recent Doing Business 2008 survey (www.doingbusiness.org) suggests, however, that much is going wrong in many Latin American economies. This annual survey provides objective measures of business regulations and their enforcement across 178 countries. Doing Business 2008 bluntly states that Latin America “is falling further behind other regions” in the area of economic reform.

When it came to “ease of doing business,” for example, Argentina dropped from its previous ranking of 101 to 109. Chile -- the region’s economic reform superstar -- fell from 28 to 33. To no one’s surprise, Venezuela now ranks 172 (out of a total of 178 countries). In Venezuela, it takes approximately 141 days to start a business and, as Doing Business 2008 comments, “The time to export stretched to 45 days, barely faster than in landlocked Burundi.”

Doing Business 2008 does highlight some positive Latin American developments. Small improvements in ease in doing business were recorded by Paraguay, Honduras, Costa Rica, El Salvador, and Guatemala. Columbia is listed as the region’s best reformer, rocketing from 83 to 66 on the list. Apart from reducing corporate tax rates, Columbia introduced an electronic tax filing system, “cutting the average time businesses must spend on tax compliance each year by 188 hours, or 41 percent.”

Nevertheless it is worrying that all other Latin American nations dropped in their ratings. It is especially concerning that a country with Brazil’s immense human and material potential dropped from 113 to 122.

An associated problem undermining Latin America’s economies is the region’s steady drift toward the populist-left. Doing Business 2008 reveals that all four countries with such governments -- Venezuela, Bolivia, Ecuador, Nicaragua -- declined in competitiveness. On October 12^th, Bolivia’s Catholic bishops pleaded with President Evo Morales not to turn Bolivia into another Venezuela. Clearly the bishops understand what is at stake.

Doing Business 2008 observes, for instance, that “Venezuela extended its prohibition on dismissals of workers earning up to 3 times the minimum wage. The result is a loss of job opportunities: the Venezuelan economy has lost about 850,000 jobs in small businesses since 2002.”

Yet another cloud darkening the continent’s economic future is a brutal fact many Latin Americans may not want to hear. It is simply this -- much of the world is losing interest in Latin America. As China and India’s economies continue to grow impressively, investment opportunities expand in the Persian Gulf, and economic reform accelerates elsewhere, foreign investors are shifting their attention away from Latin America.

Why, they say, should we invest in Latin American countries when (with the exception of Chile) it is easier to do business in such unlikely nations as Botswana, Georgia, Fiji, and Namibia?

Even more disturbingly, Latin Americans should know that protectionist sentiment is rising in America. An October 3^rd Wall Street Journal-NBC News Poll revealed that six in ten Republicans believe free trade has been bad for America and wanted Republican politicians to limit foreign imports. As Republicans have been America’s pro-free trade party since the 1970s, these results ought to concern Latin Americans anxious to access the world’s most prosperous economy. Given these trends, it is conceivable Americans will increasingly narrow their thoughts about Latin America to immigration issues.

In short, this is not the time for Latin America to abandon free trade agendas. As tempting as populist policies may be, free trade does effectively integrate Latin Americans into the global economy. This makes it harder for those forces in Latin America desperate to preserve the deadening mercantilist status-quo to resist economic reform’s liberating effects.

A continent without hope is a continent without a future. Free trade gives Latin America hope for the future. The alternative is unthinkable.

Dr. Samuel Gregg is research director at the Acton Institute and author, most recently, of The Commercial Society (2007).

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