STRATFOR.COM's Global Intelligence Update - December 30, 1999 By The Internet's Most Intelligent Source of International News & Analysis http://www.stratfor.com/ _________________________________________ Stratfor.com welcomes any comments or suggestions that you may have regarding our website and services. Look for our reader survey at http://www.stratfor.com/survey.htm _________________________________________ WHAT'S GOING ON IN YOUR WORLD? * All week, see our forecasts on the future of the world. * Also see the Year of the Crackdown, our in-depth analysis of China. FIND OUT AT http://www.stratfor.com/ __________________________________________ STRATFOR.COM Global Intelligence Update December 30, 1999 The Latin American Pressure Cooker SUMMARY Latin America's flirtation with free markets and liberalization is far from over, but it is moving into some turbulent times. Nationalist, populist and leftist forces are being energized by what is called anti-neo-liberalism. At the same time, Latin American elites who are finding themselves buffeted by market competition are re-examining their position. There remains substantial support for privatization and market liberalization, but the consensus of the 1990s is clearly fraying. Economic downturns coupled with instability in the northern tier of Latin America could reverse the trends of the 1990s. Latin America remains a complex and turbulent region although no uncontrolled crises are anticipated. ANALYSIS Latin America has been shaped in the 1990s by three forces, all in some way related to the collapse of the Soviet Union. The first, and most important, has been the opening of Latin America to market forces within countries, within the region and between the region and the rest of the world. The second has been the collapse of the left as a defining, continent-wide, powerful force standing in opposition to existing regimes. The third, which actually predated the second, has been the withdrawal of the military from the region's political life and a general trend toward constitutional government. The effect of market forces on relatively closed economies can be enormous and devastating. We see the most extreme case in the former Soviet Union, where the introduction of a market economy has led to massive social disruption, growing inequality and economic chaos. The Soviet experience and that of Latin America's are similar. Latin America historically limited the free market in various formal and informal ways. Most countries controlled the flow of foreign capital and used informal political and social arrangements to limit competition. As in the rest of the world, the movement toward market economies swept through Latin America, and with it came substantial political and social problems. The shift toward market economies created competitive pressures on state entities and private companies controlled by oligarchs. It increased efficiency, but also increased unwelcome pressure on entities that were not used to challenges. On the other side, the application of market forces to previously managed environments has created substantial social dislocation in order to restructure the economy more efficiently. This includes geographical dislocation of populations, increased inequality as the capital formation process gets underway, the collapse of traditional businesses and the massive disruption of stable social relations. Market economies tend to create two types of opposition. The first comes from the elite who see competition as threatening to their social position and economic advantage. The second is from the lower classes, who see their lives disrupted as the market re- engineers society. Since the pay-off from market disciplines is far from immediate, they frequently experience massive social disruption and increased work-place rigors without experiencing the benefits. In Latin America we are seeing the beginning of the inevitable backlash against the free market. The attack is coming from three directions. The first is from those sectors of the elite that see themselves as losing out relative to other sectors. This is particularly intense among the elite who have failed to establish strong relations internationally in Europe and the United States. Second, there is a backlash among the middle classes, and particularly among managers who work for established, state- controlled or protected enterprises that are under new competitive pressure. For them, the free market has created both job security and lifestyle issues. Finally, there is a backlash from labor, which sees itself experiencing increased productivity pressures without equivalent improvements in pay. This is a broad coalition, yet it is not yet a deep coalition, because economic growth over the course of the last decade has smoothed out many of the tensions. But over the past year or two, the growth surge has become both uneven and in some cases reversed. As the inevitable business cycle generates recession while structural problems limit growth, the cushioning effect of growth will disappear, while the negative effects intensify. We are at an early stage in this process. The question is, of course, how long and deep this process will run. The Latin American Left Re-emerges One of the benchmarks of this process is the status of the Latin American left among its intellectuals. As in Europe, Latin American universities are historical centers of left-wing activity. During the 1990s, this sector was fragmented, marginalized and relatively unimportant. The collapse of the Soviet Union and the triumph of the United States and market economics was a severe blow to them. As important, the fact that Castro's Cuba was thrown onto the defensive for most of the 1990s meant that the Latin American left was isolated from its intellectual and, to some extent, organizational center. Throughout Latin America, the left ceased to be relevant to the real issues facing the continent. The left is now beginning to re-emerge. Its main target is the market system, which it calls "neo-liberalism." Its opposition to neo-liberalism differs from traditional Marxism in several ways. First, it focuses on environmental issues in ways that Marxists never did. Second, it raises the question of the "fourth-world" of indigenous people more aggressively than Marxists did. But the most important change is the elevation of nationalism to center stage. The left in Latin America has always been anti-American. That is not the same as being nationalist. Today's left attacks neo- liberalism not only for what it does to the poor, but also for what it does to the nation. Attacks on the World Trade Organization or the International Monetary Fund, as examples, focus on the impact on the poor, the effect of international organizations on national autonomy, and the ability of the nation to determine its own fate. This redefinition of the left, frequently undertaken by older, Marxist intellectuals, brings the left into coalition with the other sectors that oppose market reforms. It creates a broad-based coalition reacting to the internationalization of the national economy, the loss of power by the national government, and the social costs of the market compared to the deferred benefits. This makes for a heady populist mixture. New Coalition Forming in Venezuela This mixture is already at work is in Venezuela, where Hugo Chavez, former army colonel and leader of a failed coup earlier in the decade, has been elected President. In Venezuela, a coalition has formed between elements of the military who support Chavez, broad masses of the lower classes and even some segments of the elite. Chavez's platform includes opposition to continued privatization, social support for the poor, creation of reserved areas for the indigenous, increased autonomy for the military, but without any attempt at large-scale expropriation from the wealthy. The complexity of his social program, like the ambiguity of a left- wing colonel, is not, as some observers have argued, confusion on Chavez's part. Rather it represents the first step in a coherent coalition that is forming throughout Latin America. The coalition does not resemble what went before and in many ways neither the label "leftist" nor "populist" really succeeds in describing the reality. It is much more complex than either, both socially and intellectually. Chavez's problem also points to the other side of the equation. For all of his rhetoric, Chavez remains as dependent on the international financial markets as his predecessor. As a developing country, even one with massive petroleum resources in a market with rising prices, Venezuela must have access to the global capital markets in order to maintain development. That puts Chavez into a serious trap. His coalition is nationalist, egalitarian and consumption oriented. He has risen to power by promising Venezuelan control over Venezuelan wealth and by promising to increase the standard of living for the poor. He cannot deliver the latter without either cutting dramatically into investment for development or by borrowing in the international markets. If he genuinely implements all of his policies, the foreign markets will close off to him. He will then be forced to turn oil revenues toward consumption, creating economic crises a few years down the road. The Latin American Economy Chavez's problem is paradigmatic for all of Latin America. Latin America confronts contradictory desires. On the one hand, it is increasingly uneasy with the internationalization of its economy. On the other hand, it is dependent on foreign capital and trade for development. Chavez, like the rest of Latin America, can finesse this problem so long as there is economic growth. For Chavez, that means higher oil prices. For the rest of Latin America, if that growth ends, then the contradiction can no longer be contained and a massive crisis will ensue. We continue to have a positive economic outlook for Latin America. There are three reasons for this: * Primary commodity prices appear to have bottomed out after a generation of decline. Although it will take a while for this to ripple through the region's economies, this will certainly stimulate the region's economic growth. * Investments made during the 1990s are beginning to pay off. The long run is beginning to happen. * Demographics favor Latin America. As the advanced, industrial world faces an aging population and stable or contracting work force, Latin America possesses a valuable resource in increasingly short supply: labor. Thus, it appears to us that the next decade will be promising economically, if the social and political consequences can be staved off. In other words, if the forces that are gearing up to block market reform can be restrained or restrain themselves, then Latin America appears to be set for a major surge. That is a huge "if." The problem is that the political and economic clocks run on different time scales. Economic development on a continental scale measures time in generations. A generation is a substantial part of an individual's life. Capital formation can require a generation (or several) to make intense sacrifices that include not only deferred consumption but radical transformation in traditional relationships and patterns of life. This personal dimension sets the political clock. When the political clock meets the economic clock, the political frequently trumps the economic. The question posed by Latin America is whether the market liberalization of the last generation can be sustained. One dimension of the answer is to be found in the rapidity with which sustainable, distributable economic benefits can be generated. Another, very different, aspect that must be considered is the geopolitics of the region. In general, Latin America has had the most stable borders of any single region of the world, save North America. Not only have borders remained formally stable for a good part of a century, but cross-border conflicts have been relatively few. Usually, when they have occurred, they have been short, sub-critical conflicts in which the survival of either nation is not at stake. This has not always been the case. Quite the contrary, earlier this century and in the 19th century, Latin America experienced some of the most brutal wars of its time. Colombia's Civil War This brings us to Colombia, which is experiencing an intense civil war in which it is far from clear that the government is winning. Arrayed against the government, indeed, frequently penetrating the government, are the drug lords and Marxist guerrillas - among the few that continue to function in Latin America. The drug lords have a geopolitical problem. They grow and manufacture narcotics in the Andean countries. They need to transport it to their markets in the United States. The United States has deployed military resources to block that transport. This has resulted in an increased advantage enjoyed by Mexican drug lords with easier access to markets, and has weakened the Colombians. The Colombian drug lords must achieve two things. The first is maintaining security for their operations in Colombia. This means weakening those elements of the Colombian government that would seek to block them. Regardless of their view of Marxism, that means they have a joint interest with the guerrillas. Second, while they fight to maintain their autonomy, they must find shipping routes for getting their oil into the United States. They have two options. One is to ship northward, into Panama and then northward. The second is to ship through Venezuela and up through the Caribbean islands. In either event, it is clear that the pressure on the Colombian drug lords compels them to increase the scope of their theater of operations to try to secure a route for their product. Given intense U.S. pressure on the northern route, it is clear that their remaining option is through Venezuela. This makes things interesting indeed. Venezuela is the major exporter of oil to the United States. It is also increasingly a focus of the drug war. It is also the country that is most deeply into an experiment against economic liberalization. Forecast for the Region Thus, Venezuela is a pressure cooker for all of the forces roiling Latin America. Indeed, along with Venezuela, we might include in this region, Colombia, Panama, Ecuador and Peru - the northern tier. In this region, dependent primarily on the export of commodities, including oil, natural gas and cocaine, the economic prospects are relatively bright, given the rising price of commodities. But the political aspects are the most unsettling, particularly where internal political forces intersect with the national security interests of the United States. Drugs and oil make a heady mixture. Add a Marxist insurgency and the limited ability of the United States to resist increased involvement in the region. We see a serious danger of a regional conflict in which the United States becomes increasingly involved. As Colombia's troubles spill across its borders and drug logistics intersect with U.S. oil supplies and the Panama Canal, the ability of the United States to ignore the problems is limited. Indeed, as global great power rivalries increase, the willingness of other great powers to use these conflicts as a means for containing the United States cannot be discounted. The northern tier of Latin America is more dangerous than it appears. The rest of Latin America, particularly Chile, Argentina and Brazil, remains economically promising but politically doubtful. The key is the ability of these countries to maintain an intense and smooth growth rate. We believe that, on average, the growth rate will be intense, but that it will not be smooth. There will be short, very sharp business cycles. Two years of intense growth followed by a year of intense contraction is, on average, sustainable. But politics does not survive on the "average." We have serious doubts about the ability of Latin America to maintain political equanimity in the face of economic adversity. The anti- market coalition will, we now feel, ultimately limit economic growth in favor of stability. This is not to say that there won't be growth, but simply that the wide-open, free markets anticipated a few years ago will give way to more sedate, regulated, traditional Latin American markets. We are not much more hopeful about Central America and Mexico. Mexico in particular is troubling, particularly as the intensifying power of the drug cartels begins to effect the functioning of the rest of the economy. Mexico's ability to maintain its stability, while caught between American pressure and the drug cartels, is extremely dubious. As opposition to market reforms converges with antipathy toward American interference in Mexican internal affairs, the anti-market coalition in Mexico might, ultimately, be more intense than in the rest of Latin America. In all of this, we must not forget the role of Castro's Cuba. The Cuban economy is a disaster saved only by the American embargo. Castro can explain his abysmal economic performance by blaming the embargo. Of course, since Castro has unlimited access to financial resources in Europe or Canada, as well as markets for what goods he has to sell, his explanation doesn't hold up to scrutiny. But it doesn't have to. It justifies his failures to those who want it to be justified. And those are precisely the forces that are being revitalized in Latin America. For the generation of older leftists, Castro and Cuba represent an ideal to emulate. For the rest, Castro's survival symbolizes that it is possible to survive without capitulating to international financial disciplines. The fact that he has just barely survived is explained by the embargo, and enhances the myth of his resistance. Castro is more than a symbol, of course. He is a geopolitical challenge to the United States in two ways. First, he remains a base 90 miles from the United States for whoever wants to use it. Russian electronic listening posts are still in Cuba, and we would expect more Russian and Chinese facilities to show up as the their rivalry with the United States intensifies. Second, while Castro has scarce resources available, only a fraction available to Mexican or Colombian drug lords, he does have the ability to foment political movements as Latin America turns into more fertile ground. We do not expect communism to fall while Castro is alive and he seems to be in good health. Therefore, Castro will flourish in the new environment. We are not predicting a radical turn for Latin America. Rather, we are saying that the radical turn, a turn to untrammeled market capitalism, may not be quite as radical as might have been anticipated. We see the evolution of a limiting coalition. That coalition might not be able to simply block market reforms, but it will be able to limit them and shape them. We see this backlash compounded by growing instability in northern Latin America. Colombia is already in chaos. We see tremendous pressure growing on Venezuela from various sides. Venezuela is important to the United States for oil and to Colombian drug lords for logistics. It is in the midst of a massive social experiment. This is an explosive and dangerous mixture. Therefore, Latin America will continue in the next decade to behave as it did during much of the last century. Buffeted by contradictory social, political and economic forces, Latin America will not move on a straight line. Its economic promise will encounter its political limitations, and it will continue to muddle through, rather than, as was hoped, to break through. 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