The Heritage Foundation

Backgrounder #1529 on Latin America

March 19, 2002

March 19, 2002 | Backgrounder on Latin America

An Agenda for the President's Visit to Latin America: Security, Democracy, and Trade

When President George W. Bush makes his first official visit to Central and South America this month, beginning with a stop at a United Nations conference in Mexico, he will have several opportunities to make clear just how important the region is to the United States. His trip comes at a time when Latin American economies are slowing down, unemployment rates are rising, and crime is discouraging foreign investment. He will be able to make his case for strengthening cooperation in the fight against terrorism and the narcotics trafficking that feeds it, as well as for continuing democratic reforms and opening markets further to trade.

Encouraging Latin American leaders to continue implementing the difficult economic and political reforms that will bring lasting stability to their countries and the region will require strong leadership and diplomacy. President Bush, by pledging America's consistent and coordinated support to its neighbors in these areas of vital concern, can make sure that this trip is one that bears fruit for many years to come.

The U.S. Agenda at the U.N. Conference

President Bush will begin his trip to the region on March 22 by participating in the United Nations International Conference on Financing for Development, which is being held in Monterrey, Mexico. His agenda for this meeting is short, since he will attend only one day of the conference, but his counterparts will no doubt listen to his remarks closely. On the difficult issue of financing development in poor countries, the President should:

  • Stress that long-term economic development depends on economic freedom, not aid. Research repeatedly shows that economic freedom, not aid, fosters lasting prosperity. President Bush should emphasize to the world leaders attending the conference that unless a country takes steps to strengthen the rule of law and build strong institutions, international assistance will have no substantial or sustainable effect.
The President, speaking last year at the World Bank, called for enfolding "all the world's poor in an expanding circle of development."1 This year, he should stress that the type of environment that enables such development to occur is one that is shaped by limited government, good governance, the rule of law, sound economic policies, democratic freedoms, and free enterprise.

Embracing short-term, dependency-producing strategies that attempt to solve development issues with continued handouts from the United States and other prosperous nations is futile without institutional reform to reduce corruption, to lower taxation and government regulation, and to boost investment. According to The Heritage Foundation/Wall Street Journal 2002 Index of Economic Freedom, the world's freest economies have the highest levels of per-capita income.2 A recent study by Richard Roll, professor of economics at the University of California at Los Angeles, and John Talbott, President of the Global Development Group, investigated 14 institutional determinants of per-capita income and found that nine of these determinants explained at least 80 percent of the difference in the level of per-capita income among countries. Among those determinants, property rights (positively) and the existence of black markets (negatively) had the greatest effects.3
  • Resist efforts to send money to failed states, authoritarian regimes, and enemies of Western democracy that refuse to reform. Because the United Nations gathers a broad range of governments from liberal democracies to authoritarian dictatorships--including aid recipients--under one tent, its development objectives reflect a view that demands few reforms while obligating more prosperous nations to provide assistance to poor nations. Discussions in past U.N. meetings on poverty eradication have included such schemes as currency transaction taxes in world financial markets and increased levies on developed nations to funnel more money into the U.N.'s unaccountable bureaucracy.

    The President should make it clear that he cannot ask Americans to throw away their hard-earned tax dollars in countries that fail to implement sound policies that will lead to economic development, particularly in light of evidence that aid without reform is futile. Donor nations should not be obligated to contribute to any general assistance funds that limit their ability to choose when and where their development dollars are best spent.

The U.S. Agenda in Mexico

After attending the U.N. conference, President Bush will meet with President Vicente Fox to discuss economic development, trade issues, immigration policy, and border security. Though the North American Free Trade Agreement (NAFTA) helped bring Mexico back from the brink of economic contraction in 1995, and though the election of its first-ever opposition party president in 2001 validated Mexico's embrace of democracy, much more must be done to further the increasingly important U.S.-Mexico relationship. One issue of particular relevance will be President Fox's Puebla Hacia Panama development project to create industries and jobs as a way to stem the migration of Central American workers to the United States via Mexico.

Specifically, the priorities for President Bush's agenda in Mexico should be to:
  • Encourage Fox to continue his economic reforms and expand investment to help create more jobs and opportunities for businesses in Mexico. During his campaign for president, Vicente Fox promised to provide more employment opportunities for Mexicans at home by curbing monopoly licensing, making it easier for Mexicans to create new businesses, extending access to credit to small businesses and individual entrepreneurs, and strengthening property rights.4 Although NAFTA has stimulated the creation of new commerce by fostering a partial opening of Mexico's markets, however, most Mexicans' living standards remain much as they were in 1980.5 Much more needs to be done to bring the poorest people out of poverty and to promote the development of a broad middle class.6

    According to the 2002 Index of Economic Freedom, the Fox administration should be encouraged to follow through with these promised reforms:
  1. Remove Mexico's restrictions on foreign investment in the oil and gas distribution, postal services, transportation, telecommunications, and agricultural sectors.
  2. Facilitate entrepreneurship by streamlining procedures to obtain business licenses and property titles.
  3. Strengthen the rule of law by fostering an independent judiciary.
If these reforms are carried out, more working-class Mexicans will be able to prosper and will less likely need to seek employment in other countries.
  • Pledge greater cooperation with Mexico to improve border security, infrastructure development in border communities, and coordination among U.S. and Mexican agencies. In December 2001, the U.S. Director of Homeland Security, Tom Ridge, hailed a Smart Border Declaration with Canada, calling for more technologically advanced entry/exit procedures to speed the flow of goods and monitor and facilitate the flow of people using an Easy Pass system for pre-approved travelers, as well as to share intelligence information.7 A similar program is envisioned for the border region of Mexico, where existing technology and procedures were declared outdated by the director on a recent visit.8 But enhancing the movement of pre-cleared people and goods at border checkpoints is only one of many challenges and will not solve the problems of illegal migration, smuggling, or the fact that there are significant differences in the two border regions and populations.

    Whereas U.S. and Canadian citizens have similar incomes, education levels, and employment opportunities, this is not the case with Mexican citizens. Many Mexicans choose to migrate and stay in the United States illegally rather than wait for an approved visa. In fiscal year 2001, 1.2 million undocumented aliens were arrested crossing the border.9

    The persistence of drug trafficking and human smuggling also highlights the need for better planning and enhanced security along the porous frontier. Although some progress is being made in professionalizing Mexican law enforcement agencies, they remain understaffed, underpaid, and plagued by corruption. President Bush, who has increased the budget for overall U.S. border security by $2 billion for the next fiscal year, should offer U.S. help for Mexico in training its customs, immigration, and police agencies and in working on ways to improve coordination of law enforcement efforts.

    Finally, the U.S.-Mexico border has experienced explosive population growth, but without a corresponding investment in infrastructure or security.10 Informal communities lacking adequate sanitation have sprung up, primarily in Mexico, while water is in short supply on both sides of the border.

    The United States made a NAFTA commitment to finance environmental and infrastructure projects through the North American Development Bank (NADB). However, because of its rigid charter, the bank has been unable to offer loans at attractive interest rates, particularly on the Mexican side of the border where currency exchange provisions push the rate above 20 percent. Rather than permanently funding public works through a less-than-effective bank, the Bush Administration should replace those efforts with direct grants to border cities to improve such services as water supply, sanitation, and sewage treatment.11

The U.S. Agenda in Peru

During his visit to Peru, President Bush will meet with President Alejandro Toledo Manrique, who narrowly won election last June. The new president inherited a caretaker government from President Alberto Fujimori, who resigned in the wake of a corruption scandal in November 2000. These days, Toledo could use the goodwill Bush's visit will provide. His approval rating is only 31 percent12 because he has too often promised more than he could deliver and has been unable to unify his fractious cabinet of leftist and conservative ministers behind a specific national agenda.

After defeating local guerrillas and drug traffickers in the past decade, Peru is experiencing a resurgence of drug-fueled terrorism. During the past year, the Sendero Luminoso (Shining Path)--guerrillas suppressed by the Fujimori government--reconstituted itself as a narcoterrorism movement with about 400 members and some 1,000 supporters in southeastern Peru's Apurimac Valley. At the same time, coca cultivation has increased substantially in that region. Authorities also fear an invasion in the north of rebels from the Revolutionary Armed Forces of Colombia (FARC) who might seek refuge in Peru's Amazon jungles. About two dozen counter-subversion bases and over a hundred police outposts that were closed at the end of Fujimori's term are being considered by the government for reactivation.13

For the most part, Peruvians still believe in democracy and free markets, thanks to the bad taste left from Fujimori's authoritarianism and broad disgust with Venezuela's radical populist regime.14 Homegrown movements to create a decentralized, federalist government and to overhaul the justice system have enthusiastic support.

Peru's comeback could bolster troubled democratic neighbors. President Bush and President Toledo will meet with the presidents of Bolivia, Colombia, and Ecuador. They will likely discuss the threats of drug trafficking and terrorism emanating from Colombia and U.S. assistance through the Andean Regional Initiative (ARI) enacted in January 2002. The Andean presidents will seek assurance from President Bush that the United States will not abandon the region as the Colombian army begins to pursue a 38-year-old narcoinsurgency that already operates across the borders in neighboring states. Although the bulk of ARI security assistance is dedicated to narrowly defined counternarcotics programs, the four Andean leaders may also seek more comprehensive help to combat the growing terrorist threat. Other key issues will include boosting trade to strengthen their sagging economies, consolidating democratic institutions, and establishing the rule of law.

In these talks, President Bush should:
  • Encourage President Toledo to promote political and economic reform. Momentum is building for judicial reform, government decentralization, and even a new constitution, but there is little agreement among civic groups on specifics. Priorities should be the judiciary, which is subservient to the executive branch; Peru's overly centralized government, which has little reach into outlying districts and municipalities; and the political party system, which collapsed when President Fujimori encouraged the development of personal followings or movements. Accordingly, President Bush should reallocate U.S. assistance to offer expertise on judicial reform from the U.S. Department of Justice's Administration of Justice Program, provide funding for local non-governmental organizations (NGOs) that have the most effective proposals for such reforms as decentralizing government, and continue supporting the efforts of the International Republican Institute and National Democratic Institute to help revitalize Peru's political party system.

    Peru's lack of commercial competitiveness and uncertain climate for investment also demand attention. Although unemployment is relatively low by Latin American standards, the fact that nearly half of the Peruvian labor force still works in the informal sector is evidence of burdensome and arbitrary government regulation of business. The government competes with private industry in such enterprises as public construction and road building. Stronger guarantees of property rights proposed by renowned Peruvian economist Hernando de Soto during the first Fujimori administration were never fully adopted. Though improving this environment is a job for President Toledo and the Peruvian congress, Washington can encourage change by supporting local NGOs that advocate free-market reforms and by tying future trade initiatives to the adoption of these reforms.
  • Pledge to reinforce Andean security measures with greater civilian and military agency cooperation. President Bush should emphasize America's support for local efforts to reduce drug trafficking and defeat terrorist activities. He should redefine U.S. security assistance to the Andean region beyond its counterdrug focus to include counterterrorism.

    The President should pledge a better coordinated effort with Andean civilian and military security agencies in military-to-military, police-to-police, customs-to-customs initiatives rather than allowing a hodgepodge of U.S. agencies to work with dissimilar counterparts as they did during the Clinton Administration. He should back Peru's decision to reactivate rural military and police outposts to repel FARC incursions in the North and the Shining Path rebel movement in the South. He also should welcome Colombia's decision to end its unproductive peace process with FARC guerrillas and its decision to expand its police and military forces to defeat them.
  • Offer to sign free trade agreements with the Andean countries on the basis of each country's demonstrated commitment to eliminating the drug traffic and fighting terrorism. America's trade policy toward the Andean region has focused on the Andean Trade Preferences Act of 1991 (ATPA), which sought to strengthen the legitimate economies of the Andean countries and create viable alternatives to the profitable drug trade.15 The act was a limited accord that removed trade barriers between the Andean countries and the U.S. market only for products selected by the United States, which were not necessarily those for which the Andean countries had a competitive advantage. Andean textiles and apparel, rum and sugars, syrups, and sugar-containing products are not included in ATPA.16

    The United States has proposed an extension of ATPA to include several of the products for which the these countries are competitive, but the United States will still select those products and their level of trade preference. A better alternative would be to offer bilateral free trade agreements to each of these countries to remove substantial barriers to trade, and to provide a sustained incentive for the type of reforms that attract investment and help to reduce risks for investors making long-term decisions.17

    Bolivia, Peru, and Ecuador would qualify today for a free trade agreement, based on their previous efforts in the war on drugs and current commitments to liberalize their markets. Colombia--under siege from drug traffickers, terrorist guerrillas, and "self-defense" groups--requires a different approach. President Bush should first offer to broaden narrowly focused counternarcotics assistance to Colombia to include training, equipment, and security assistance to defeat the terrorist rebels. As Colombia demonstrates its commitment to demobilizing the guerrillas and curbing the drug traffic, the United States should offer Colombia a free trade pact as well.

The U.S. Agenda in EL Salvador

In San Salvador, Bush will meet with Salvadoran President Francisco Flores to discuss the proposed U.S.-Central America Free Trade Agreement (CAFTA) announced on January 16, 2002. In addition, they will discuss efforts to strengthen El Salvador's democratic institutions and continued disaster relief for the destruction wrought by a series of earthquakes that destroyed some 335,000 homes a year ago. Flores, the leader of Central America's third largest economy after Guatemala and Costa Rica, is likely to raise the issues of extending temporary protective status (TPS) for some 1.5 million Salvadorans living in the United States and bolstering defenses against rising crime.

El Salvador has enjoyed a decade of peace. Its adoption of free-market policies and privatization of key government industries has helped the economy, which became the 17th ("mostly free") state among 161 ranked in the 2002 Index.18 That progress may be difficult to sustain, however, without local investment in human capital and stronger measures to curb crime. Only a quarter of all Salvadoran students make it to high school, and the country's violent-death rate of 130 per 100,000 is higher than that of Colombia.19 Kidnappings perpetrated by violent Guatemalan and Salvadoran gangs threaten public safety. And Colombian drug traffickers have taken advantage of El Salvador's rugged coastline and small police force to extend drug transit operations throughout Central America.

President Flores has invited neighboring leaders--from Belize, Costa Rica, Guatemala, Honduras, Nicaragua and Panama--to join in a broader discussion of the region's economy as well as development and public safety issues. For example, the isthmus is still recovering from recent droughts and damage caused by Hurricane Mitch in 1998, and El Salvador from earthquakes that struck in 2001. Guatemala, El Salvador, and Honduras have poorly educated workers that migrate to find work in Mexico and the United States. Guatemala suffers from violent crime and is listed by the U.S. Department of State as a major drug transit country.

During these meetings in San Salvador, President Bush should:
  • Promote the proposed Central America Free Trade Agreement. The leaders of Honduras, El Salvador, Nicaragua, Guatemala, and Costa Rica have welcomed President Bush's offer to explore a free trade agreement. The CAFTA would motivate participating nations to advance economic reforms that could be sustained by the growth that follows trade. CAFTA is the fruition of efforts begun by the Reagan Administration with its Caribbean Basin Initiative (CBI)--a series of trade preferences to help Caribbean and Central American economies develop--which was launched in 1984, a period in which the Soviet Union and the Castro regime in Cuba were backing Marxist insurgencies in the region. As a complement to U.S. security assistance, the CBI's goal was to bolster these economies during the 1980s.

    After the insurgencies were defeated in the 1990s, Central American leaders felt they were losing economic opportunities to the more comprehensive NAFTA signed in 1994. Even after President Clinton's October 2000 announcement of the Caribbean Basin Trade Partnership Act, which expanded preferences on apparel made in the region, Central American policymakers continued to seek NAFTA parity. President Bush's intent to include Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua in a free trade agreement would reward that quest by offering broader market opportunities to spur economic growth.

    President Bush should stress America's commitment to the advancement of free-market reform in the region and should encourage his counterparts to do so as well. This is important for two reasons: First, economic reform will speed up free trade negotiations; and second, once reforms open economies to much wider citizen participation, many of the poor will be able to move into the ranks of the middle class, the backbone of a democratic society.
  • Encourage Central American states to develop human capital through education reform. The average amount of schooling completed by citizens of El Salvador, Honduras, and Nicaragua is about four years. In Guatemala, it is three years, while Costa Rica leads with six.20 With the exception of Costa Rica, education--especially in rural areas--is poorly funded and controlled by politicized national bureaucracies. Poor schooling is partly responsible for the large pool of unskilled labor in these countries. Unable to find manual labor at home, many of these workers migrate to Mexico and the United States to seek employment. President Bush should offer U.S. help by supporting local non-governmental organizations that will advocate and help implement such reforms as decentralizing education authority from national bureaucracies to local communities, introducing accountability into the systems, and increasing support for private and public education in rural areas and marginal urban neighborhoods.
  • Pledge support for the region's democracies to combat crime. The United States already provides police and counternarcotics training for all Central American states, but El Salvador, Guatemala, and Honduras need increased assistance to boost the numbers of police and improve their training in order to combat crime from gang members deported from the United States, unemployed ex-combatants who were involved in the civil conflicts of the 1980s, and Colombian drug traffickers who are now moving up from South America. Besides pledging to support the training of more professional law enforcement personnel, President Bush should instruct the U.S. Immigration and Naturalization Service to notify Central American justice and police authorities before alien gang members and criminals are deported back to their country of origin.

Conclusion

By his visit to Mexico and first official trip to Central and South America, President Bush can show that Latin America is once again a U.S. priority. He will have the opportunity to cement cooperation on common goals: bolstering hemispheric security, free trade, and democracy.

In all forums, the President's position must be unequivocal. Terrorism, now fueled by drug trafficking in Colombia, must be confronted. Liberalized trade and market reforms are needed to fight off such threats and to offer economic opportunity to the broad majority of the region's citizens. Free people exercising choices in government and in open markets are the real keys to hemispheric stability and prosperity.

America can partner in this quest by providing security assistance to combat narcotics trafficking and terrorism, by offering opportunities for closer trade relationships, and by providing advice and technical expertise for institutional reforms. Nevertheless, homegrown efforts are critical to the stabilization and revitalization of the region. As much as this trip depends on President Bush, it will be up to the Latin American leaders to show him what they can bring to the table in order to establish lasting partnerships with the United States.

Stephen Johnson is Policy Analyst for Latin America in the Kathryn and Shelby Cullom Davis Institute for International Studies, and Ana I. Eiras is Economic Policy Analyst for Latin America in the Center for International Trade and Economics, at The Heritage Foundation.

1. George W. Bush, "Remarks by the President to the World Bank," Washington, D.C., July 17, 2001.

2. See Gerald P. O'Driscoll, Jr., Kim R. Holmes, and Mary Anastasia O'Grady, 2002 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and Dow Jones & Company, Inc., 2002).

3. Richard Roll and John Talbott, "Why Many Developing Countries Just Aren't," working paper, 2001, at
http://www.anderson.ucla.edu/acad_unit/finance/wp/2001/19-01.pdf  (November 2001).

4. Alliance for Change, "The Economic Proposal of Vicente Fox," Mexico City, January 2000, p. 7.

5. World Bank, 2001 World Development Indicators, CD-ROM.

6. Weak protection of property rights limits economic activity by failing to protect property and contracts from government infringement. Burdensome business regulations make it difficult for entrepreneurs to formalize business licenses and property titles. Small entrepreneurs often have to bribe their way through the bureaucracy or face working in the black market where they are unable to build capital on their earnings.

7. "U.S., Canada Sign `Smart Border' Declaration," CNN, December 13, 2001, at http://www.cnn.com/2001/US/12/12/rec.canada.border/ (March 4, 2002).

8. Mary Jordan, "Ridge Calls Security at Border `Outdated,'" The Washington Post, March 6, 2002, p. A12.

9. "Processing Persons Arrested for Illegal Entry into the United States Between Ports of Entry," statement of Michael A. Pearson, Executive Associate Commissioner, Field Operations, Immigration and Naturalization Service, before the Permanent Subcommittee on Investigations, Committee on Governmental Affairs, U.S. Senate, November 13, 2001.

10. The U.S.-Mexico border comprises an area 124 miles wide and 2,000 miles long and includes 14 sister cities. In 1980, the border area population was about 4 million. In 1997, 10.5 million people lived there, and by 2020, that figure is expected to double. See U.S. General Accounting Office, U.S.-Mexico Border: Despite Some Progress, Environmental, Infrastructure Challenges Remain, GAO/NSIAD-00-26, March 2000, pp. 6-8.

11. Ibid, p. 23.

12. See La República at http://www3.larepublica.com.pe/2002/FEBRERO/pdf28/politica.htm (March 1, 2002).

13. Elizabeth Cavero, "Loret de Mola confirma al Congreso reactivación de bases contrasubversivas," La República, February 27, 2002, p. 2.

14. Only 6 percent approved of Venezuela's populist leader Hugo Chávez; see http://www3.larepublica.com.pe/2002/FEBRERO/pdf28/politica.htm (March 1, 2002).

15. Office of the United States Trade Representative, "Third Report to the Congress on the Operation of the Andean Trade Preference Act," January 31, 2001, p. 3, at http://www.ustr.gov/regions/whemisphere/atpa3.pdf.

16. See the Andean Trade Promotion and Drug Eradication Act (H.R. 3009), "Articles Eligible for Preferential Treatment" (Section 3), at http://thomas.loc.gov/cgi-bin/query/D?c107:4:./temp/~c107QcMDCP:e3467.

17. Ana I. Eiras, John C. Hulsman, Ph.D., Stephen Johnson, and Brett D. Schaefer, "Time to Change U.S. Strategy for the Andean Region," Heritage Foundation Backgrounder No. 1521, February 25, 2002.

18. See O'Driscoll et al., 2002 Index of Economic Freedom.

19. Andrew Bounds, "El Salvador's Open Economy Is Not Enough," Financial Times, September 8, 2000.

20. Inter-American Development Bank, "Basic Socio-Economic Data Report," at http://www.iadb.org/inst/sta/ENGLISH/staweb/#bsed (January 5, 2001).

About the Author

Stephen Johnson Senior Policy Analyst
The Kathryn and Shelby Cullom Davis Institute for National Security and Foreign Policy

Ana I. Eiras Senior Policy Analyst on International Economics
Center for Trade and Economics (CTE)