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Backgrounder #1920 on Latin America

March 13, 2006

U.S.-Latin America Ties Need Commitment and Strategy

By

While the United States is preoccupied with the war on terrorism and promoting democracy in the Middle East, Latin America has drifted out of the U.S. sphere of influence, seeking an increasingly indepen­dent political course, electing leftist presidents, and forging links with undemocratic countries like Cuba, China, and Iran. Although elections decide leaders in every country except Cuba and market principles are gaining acceptance throughout the region, broad majorities seem disenchanted with those reforms, and some are opting to return to familiar traditions of populism and dictatorship.

America's long-standing principles of supporting democratic reform, helping to open economies, and maintaining security links are still valid. As the Bush Administration has improved trade relations in Latin America and sustained programs to combat drug smug­gling and terrorism, however, U.S. engagement lacks commitment and a clear strategy. Instability and decay­ing quality of life in some countries could affect U.S. cit­izens through declining export markets, resource constraints, and increased migration to the north.

To regain influence and foster a more prosperous, stable hemisphere, the United States should recom­mit to a three-part strategy of:

  • Broader democratic reforms,
  • Economic restructuring to establish truly compet­itive markets, and
  • Greater collaboration to fight transnational crime and terrorism.

To facilitate the implementation of this strategy, the U.S. should:

  • State clear objectives and ensure that actions match words,
  • Target support for better governance and an open economy,
  • Eliminate self-imposed roadblocks to better relations, and
  • Revive lagging public diplomacy efforts.

Inching Forward, Looking Back

Despite outward appearances of modernity, Latin America is in the midst of a relatively recent transition away from authoritarian rule and planta­tion economies. Most countries adopted republi­can constitutions after gaining their independence from Europe in the 1800s, but authority remained concentrated in powerful presidencies patterned after colonial viceroys. Only a few countries like Colombia, Costa Rica, and Uruguay developed durable democracies. Twenty years ago, when fal­tering economies and social upheaval triggered change, only six out of 23 Latin American countries could be classified as democratic. Now all except Cuba celebrate competitive elections, and most have adopted some aspects of market economies.

Yet according to a 2005 Latinobarómetro poll, only 31 percent of citizens in the 18 Latin Ameri­can countries surveyed said that they are satisfied with democracy, although they still preferred it to authoritarianism by a margin of 53 percent to 15 percent. Beyond elections, they viewed democratic institutions as generally weak or non-functioning. Only 34 percent of respondents said that they were aware of their rights and obligations as citizens, and a similar percentage felt that their justice systems functioned effectively. As few as 27 percent thought that their markets worked, although 63 percent still preferred them to state-run economies. Mean­while, unemployment, poverty, and high crime rates ranked as top concerns.[1]

Behind the Numbers.Poll responses show that partial reforms have not produced expected changes. Powerful presidencies still impose agen­das that are out of touch with public desires while subservient legislatures and judiciaries fail to curb their excesses. National ministries often usurp local authorities. Where power is concentrated at the national level, decisions flow through a small number of hands, creating bottlenecks. In most countries, party leaders, not voters, choose candi­dates who are placed on party lists and elected according to the proportion of votes collected by each party. The result is arbitrary rule with a dem­ocratic veneer.

In general, poor public education contributes to poverty and blocks social mobility while, in coun­tries like Cuba and Venezuela, indoctrination mas­querading as education helps to ensure a subservient public. Inadequate investment in pri­mary and secondary schools, scarce teaching mate­rials, reliance on rote memorization instead of critical thinking, and lack of accountability at the local level contribute to low academic attainment and seem to go hand in hand with low productivity. (See Table 1.)

Table 1
* The Corruption Index ranks countries on a scale of 1 to 10, with 1 being the most corrupt.
** Percent of school-age population.

Note: Shading indicates two or more instability risk factors such as high poverty, low educational attainment, unfree political system, or unfree economy.

Sources: Freedom House, Freedom in the World 2005 (Washington, D.C.: Rowman & Littlefield Publishers, 2005); Marc A. Miles, Kim R. Holmes, and Mary Anastasia O'Grady, 2006 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and Dow Jones & Company, Inc., 2006), at http://www.heritage.org/index; Transparency International, "Corruption Perceptions Index 2005," at http://www.transparency.org/policy_and_research/surveys_indices/cpi/2005 (February 16, 2006); World Bank, World Development Indicators Online, at http://devdata.worldbank.org/wdi2005/Section1.htm (March 2, 2006); U.S. Central Intelligence Agency, The World Factbook, at http://www.cia.gov/cia/publications/factbook (March 2, 2006); Economist Intelligence Unit, Country Reports, 2004-2005; Organisation for Economic Co-operation and Development, Main Economic Indicators; U.S. Agency for International Development, "Haiti: FY 2001 Program Description and Activity Data Sheets," at http://www.usaid.gov/pubs/bj2001/lac/ht/haiti_ads.html (March 2, 2006); and International Monetary Fund, "Honduras: Enhanced Initiative for Heavily Indebted Poor Countries," Country Report No. 05/386, October 2005, p. 13.



Partial Economic Reforms Beget Partial Results
Ana Isabel Eiras

When Latin America aggressively opened its markets in the early 1990s, economists thought that this would eliminate bureaucratic distortions, attract foreign investment, and boost employment. However, beginning with Brazil¹s debt crisis in 1997, recession began to spread through the region, accompanied by political instability, financial crises, and a rise in poverty. Slow recovery left many Latin Americans wondering whether U.S.-style capitalism works.

Capitalism is the only economic system in history that is capable of combating poverty, yet its machinery involves more than trade and open markets. The main pillar is the protection of property rights through strong rule of law manifested in an independent and effective judicial system.

Strong property rights provide stability that allows people to take risks and engage in economic activity. An independent judiciary keeps government officials from abusing the private sector and enforces contracts.

Other pillars include low taxation, limited regulation, and stable currency values. With simple rules, low taxes, and low inflation, the cost of doing business drops significantly, so more people choose to start businesses. A large corporation can create 10,000 jobs despite high regulatory costs and high taxes, but countries need millions of jobs. The best job factories are small and medium-sized businesses. Although each small enterprise creates only a few jobs, hundreds of thousands of them can significantly reduce unemployment.

During the 1990s, Latin American governments removed some barriers by easing rules for foreign investment and by privatizing some state-owned industries.

Those measures generated growth for a time. However, except for Chile, few countries went on to strengthen property rights, develop the rule of law, and reform laws that protected unproductive labor. Moreover, many so-called privatizations merely converted state monopolies into private monopolies.

To promote prosperity, Latin America does not need a new set of policies.

Instead, it needs a commitment to property rights, the rule of law, low inflation, low taxes, and simple regulations. Untethered, ordinary Latin American citizens can then create wealth on their own.

Ana Isabel Eiras is Senior Policy Analyst for International Economics in the Center for International Trade and Economics at The Heritage Foundation.



Macro Success, Micro Duress.By adopting the broad liberal economic recommendations known as the "Washington consensus" in the 1980s, Latin America escaped hyperinflation and acute under­development. However, most Latin American economies are still manipulated to shield state or family-owned monopolies while placating the mid­dle class and the poor with social programs. Increased trade helps already established industries and contributes to economic growth, but it fails to create enough jobs to keep up with population growth. As a result, some 44 percent of Latin Amer­icans live in poverty.[2]

In general, weak property rights keep the poor from titling real estate, denying rights to sell or use it as collateral. Almost all Latin American constitu­tions make subsurface resources such as minerals and oil the property of the state and ripe for misap­propriation by corrupt officials. Lacking adequate revenue, governments fail to support adequate security forces to project state authority, leaving vast rural tracts potentially at the mercy of crimi­nals, subversives, or terrorists. Priorities such as border control, disaster preparedness, and infra­structure maintenance also suffer.

Demographics and Globalization

Expanding population spells trouble for societies lacking competitive markets. The Population Ref­erence Bureau estimates that the population of Latin America and the Caribbean will grow from 559 million in 2005 to more than 700 million in 2025.[3] Economies that rely on raw materials exports and estate-based agriculture cannot pro­vide enough new employment to satisfy demand. Adding millions of new adults to the labor force each year will quickly exhaust the supply of jobs in a region where official unemployment already hovers around 10 per­cent and underemployment (where reported) is between 20 percent and 50 percent.[4]

As other developing coun­tries advance with more schools and better curricula, most of Latin America will continue to spend meager amounts on out­dated public education systems that rely on rote memorization and authoritarian teaching techniques. Secondary school attendance rose from 29 per­cent in 1990 to 65 percent in 2001.[5] However, the Partner­ship for Educational Revitaliza­tion in the Americas found in its 2001 report that most of the region was spending less than $1,000 per pupil per year in primary and secondary schools compared to about $6,000 in Canada and the United States.[6] With local workers less prepared than those in industrialized countries, not enough jobs avail­able, and large wage differentials between the region and the United States,[7] Latin America's jobless and underemployed will continue to migrate northward.

Table 2
Source: World Bank, World Development Indicators Online, at http://devdata.worldbank.org/wdi2005/Section1.htm (March 2, 2006); U.S. Central Intelligence Agency, The World Factbook, at http://www.cia.gov/cia/publications/factbook (March 2, 2006);
Economist Intelligence Unit, Country Reports, 2005, and Country Profiles, 2003-2004 and 2004-2005; U.S. Census Bureau, "Cumulative Estimates of Population Change for Metropolitan Statistical Areas and Rankings: April 1, 2000 to July 1, 2004," at http://www.census.gov/population/www/estimates/metropop//table07.csv (February 11, 2006); and Global Insight, "The Role of Metro Areas in the U.S. Economy," U.S. Conference of Mayors, January 13, 2006, at http://www.usmayors.org/74thWinterMeeting/metroeconreport_January2006.pdf
(February 7, 2006).

China. Since the 1990s, the People's Republic of China has become a major player in the Western Hemisphere. Capitalist reforms have transformed it into a hybrid economy that incorporates some market principles. It is now the world's fourth largest econ­omy and has a gross domestic product of $1.6 trillion, which is growing about 9 percent per year according to the World Bank. However, China does not have sufficient oil, natural gas, or mineral resources to sat­isfy its energy and manufacturing needs. It needs trade partners to buy its electronics, apparel, toys, and footwear, and it would like to compete with the United States in America's backyard.

To do so, China has positioned itself to take advantage of Washington's waning interest in Latin American ties. It collaborates on spy satellite tech­nology with Brazil and is cultivating military ties with other South American states.[8] It has pursued petroleum partnerships with Venezuela, Ecuador, Colombia, Argentina, Brazil, and even Mexico. To obtain other commodities, China offers tempting investments in infrastructure. However, by encour­aging dependence on commodity sales, China could be retarding industrialization and job growth in Latin America. Moreover, China's state-to-state business deals are reinforcing the region's culture of monopolies and anti-competitive practices.

Diverging Paths

Despite the efforts of the great liberators of the 19th century, Latin America has never been unified under a single banner, but a new order is emerging on the heels of presidential elections in 2005 and 2006. More countries are electing leftist govern­ments as opposed to centrist or conservative ones. For the most part, moderate socialist governments are beginning to bridge the gap between traditional dictatorships and liberal democracies, blending state intervention with politics of choice. These include the governments of Brazil, Chile, Costa Rica, Uruguay, and even Mexico, which has a con­servative president.

Elections have also produced a small but poten­tially growing number of hard-left regimes in which the majority of voters are poor and undered­ucated. These governments-characterized by cen­tralized rule, polarization between leaders and opponents (typically considered enemies), and state control of major resources and industries- are opposed to free trade, representative democ­racy, and U.S. influence in the region.

Cuba's New Friends.Isolated and broke in the 1990s after the loss of subsidies from the Soviet Union, Cuba's dictatorship has gained a new lease on life thanks to generous oil concessions from Venezuela. This alliance has given Fidel Castro breathing room and a renewed respect from Latin Americans who admire his longevity and fierce independence from the United States. How long the revival will last is uncertain. Castro appears to suffer from Parkinson's disease, and his brilliant if eccentric leadership of the hemispheric left appears to be nearing an end.

Until that moment arrives, populist imitators from Caracas to Buenos Aires are swaying masses of poor and working-class voters who see avenues for social mobility blocked in existing corporatist societies. Since 1990, numerous leftist parties around the hemisphere have joined the Foro de São Paulo, an organization that, like Castro, opposes representative democracy, market economies, and U.S. influence.

Venezuelan President Hugo Chávez has become Castro's most ardent follower and affluent sup­porter. Elected in 1998, Chávez has gradually constrained opponents and allowed Cuban moni­tors to form a shadow government within his own regime. He has supplied Cuba with subsidized petroleum since October 2000 and used oil profits to buy Argentine and Ecuadoran debt.[9] His lar­gesse allegedly has helped to finance the cam­paigns of like-minded populist nationalist candidates in other countries. Yet, despite its oil riches, Venezuela has one of the higher poverty rates in Latin America.[10]

A less strident member of Castro's anti-U.S. alli­ance is Argentine President Néstor Kirchner, who has aligned Argentina with Cuba and Venezuela to gain access to easy credit and discount oil. In November 2005, he simultaneously hosted the Organization of American States Summit of the Americas and a "People's Summit," at which agita­tors demonstrated against President George W. Bush. Further north, Bolivian President Evo Morales received help from the Cuban and Venezuelan embassies during his 2005 campaign and has vowed to become "Washington's worst nightmare."[11] Morales has since retreated from such harsh rhetoric, but he named a hard-line leftist cabinet and report­edly is creating a Cuban-trained security force paral­lel to the existing police and military.

In Peru, Ollanta Humala, a former army lieuten­ant colonel, is tapping discontent among Peru's majority poor and running even in the polls with conservative Lourdes Flores Nano for the April 9 presidential election. A self-described nationalist, Humala admires Chávez and, like Chávez, once led a revolt against his government. Politics seems to run in the family-his older brother Ulises has also entered the presidential race, claiming to be an ultra nationalist. Last year, another brother com­mandeered a rural police station in an escapade that left four officers dead.

Thanks to quirky candidates, Ecuador could turn more toward Cuba and Venezuela following elec­tions in October 2006. Former Economy Minister Rafael Correa-a critic of free trade and close ties with the United States-is running against an indig­enous mayor, a banana magnate, and former Presi­dent Lucio Gutierrez, who was dismissed from office last April by the national legislature. Ecuador is a major South American oil producer, and govern­ment officials claim that Venezuela is funding politi­cians who want to realign Ecuador with Chávez.

In Nicaragua, former comandante and perennial Sandinista Party Chief Daniel Ortega is making his fourth presidential re-election bid in a vote slated for November 2006. The Sandinistas deposed dic­tator Anastasio Somoza in 1979 and imposed their own authoritarian regime. In 1990, under pressure from U.S.-backed counterrevolutionaries, Ortega permitted elections, which he lost. On leaving office, Ortega and close associates reportedly looted the central bank and seized hundreds of mil­lions of dollars in property. Thanks to a devil's bar­gain with former President Arnoldo Alemán, the Sandinistas control the electoral tribunals and courts, increasing chances for a rigged vote.[12]

Potential Flash Points

The combination of personalistic populism, endemic poverty, and marginally educated popula­tions poses problems for both the hemisphere and the United States.

Venezuela.Financed by huge government-con­trolled oil reserves, President Chávez sees himself taking over Fidel Castro's leadership of the Latin American left and strengthening hemispheric ties to such rogue nations as Iran and North Korea. Emboldened by defeating an August 2004 recall vote by padding the electoral rolls and intimidating opponents, Chávez has consolidated his single-party rule, eliminating internal checks on his pow­ers. A new "social responsibility" law permits the government to close radio and television stations for airing content "contrary to national security." A strengthened criminal code imposes jail sentences for even mildly protesting the actions of public offi­cials.[13] Meanwhile, prosecutors are rounding up opposition leaders for show trials conducted by provisional, handpicked judges.

Outside Venezuela's borders, Chávez is threaten­ing non-leftist states. In July 2005, he inaugurated a regional satellite television network called Telesur that airs Marxist propaganda and bashes Colombia for its relations with the United States. He is friendly with the Revolutionary Armed Forces of Colombia (FARC) narcoguerrillas and wants Wash­ington to end counterdrug efforts there. He opposes the proposed Free Trade Area of the Amer­icas while advocating his own Bolivarian Alterna­tive for the Americas (ALBA), a notional aid distribution network to be financed largely by Ven­ezuelan oil profits.

Although the highway from Caracas to its inter­national airport is in disrepair, Chávez has report­edly committed more than $3 billion per year in aid to Latin American neighbors.[14] Moreover, he has proposed two energy cartels, PetroCaribe and PetroSur, to integrate Latin America's state hydro­carbon industries. He is also stocking up on rifles, buying armored vehicles, and acquiring attack helicopters from Russia. And in May 2005, despite controlling the world's seventh largest oil and tenth largest natural gas reserves, Chávez announced plans to acquire nuclear technology from Iran, fueling fears that he may try to develop a nuclear bomb.[15]

Within the United States, Chávez's government has paid lobbyists up to $100,000 per month to polish his image before the public and U.S. Con­gress. It reportedly funds the Venezuela Informa­tion Office, a public relations firm registered under the Foreign Agents Registration Act. Although they claim no direct link to the Venezuelan state, pro-Chávez activist groups called "Bolivarian Circles" have surfaced in Miami, Chicago, and other cit­ies.[16] After years of persuading fellow OPEC (Orga­nization of Petroleum Exporting Countries) members to suppress petroleum production to raise prices,[17] Chávez has negotiated with selected Members of the U.S. Congress to sell small amounts of heating oil at a discount to poor neigh­borhoods in northern U.S. cities, helping them to gain political clout.[18] Although Chávez complains that outsiders meddle in Venezuelan politics, he is trying to drive a wedge between American voters and their government.

Colombia.With help from the United States, Europe, and Japan, Colombia is successfully prose­cuting a 20-year-old war on drug traffickers and ending a 40-year guerrilla insurgency. Coca and heroin cultivation, homicides, kidnapping, massa­cres, and sabotage against infrastructure are down, while desertions and demobilizations from rural irregular armies have increased following passage of a justice and peace incentives law.

For progress to become irreversible, Colombia needs to expand its security forces by at least half to pressure guerrillas and paramilitaries into com­plete demobilization. It also needs to assume greater responsibility for intelligence and coca eradication missions, which are now being man­aged by U.S. contractors. Colombia currently lacks air mobility and maritime patrol assets (light cargo transports and surveillance platforms) as well as integrated intelligence capabilities. Unless these shortfalls are addressed, progress could stall. Venezuela's arms buildup and continuing support for guerrillas could further complicate Colombia's prospects for peace.

Andean Region.The heartland of South Amer­ica is resource rich, but its societies are fragmented into minority elites and large indigenous and rural populations that have only recently gained suffrage and access to education. Bolivia, Colombia, Ecua­dor, and Peru have poverty rates above 45 percent. (See Table 1.) All have secondary school enrollment rates of only about 50 percent, except Bolivia, which increased attendance in the 1990s through investments in education. Most leaders still believe that social programs that put food on tables and roofs over heads are all that the poor really want, but continued migration to the United States and Europe proves otherwise. Coca production has risen steadily in Bolivia since 2002 and could rebound in Peru as well. Bilateral free trade agree­ments between the United States and these nations could create opportunities, but Andean societies need to better educate workers and liberalize econ­omies to take maximum advantage.

Central America.Despite elections and market openings, Central America's public institutions are still too weak and corrupt to deal with changes brought on by globalization: rural migration to cities, the need for more industrial jobs, rising gang violence, and transnational crime. Poverty is not as high as it is in the Andean region, but sec­ondary school enrollment runs from a low of 29 percent of the student-age population in Guate­mala to a high of only 62 percent in Panama. According to the Inter-American Development Bank, Central America and the Dominican Repub­lic now depend on $12 billion in remittances from migrants living in the United States and Europe. If economies fail to produce opportunities and jobs and if governments cannot protect citizens, dissat­isfied citizens will vote for populist demagogues or migrate elsewhere.

Mexico.Following the end of 71 years of single-party rule and more than a decade of free trade with the United States and Canada under the North Amer­ican Free Trade Agreement (NAFTA), broad-based prosperity continues to elude most Mexicans. Energy and telecommunications remain in the hands of monopolies, and one-fifth of Mexico's labor force is tied up in an 80-year-old dysfunctional land tenure system. In recent years, the Mexican economy has cre­ated only 200,000-500,000 jobs per year. This is insufficient for the 1 million workers who now enter the workforce annually, leaving many to seek employ­ment in the United States.

President Vicente Fox has done much to open Mexico's economy, but a divided congress has thwarted his attempts to privatize state monopolies, improve access to credit, and curb corruption. Next July, voters might replace him with the populist former mayor of Mexico City, Andrés Manuel López Obrador, whose economic proposals are as yet unclear. Running neck and neck in the polls is Felipe Calderón, the candidate of Fox's conservative National Action Party. Regardless of who wins, Mexi­can lawmakers could still block substantive reforms.

With his economic plans frustrated at home, Fox insists that jobless Mexicans have a right to seek employment in the United States. Despite collaboration on other issues, the Fox and Bush Administrations have come to an impasse on migration. Members of the U.S. Congress are advocating tighter controls to reduce flows and punitive measures against employers who hire undocumented workers. President Bush wants a guest worker program that will direct them toward legal entry points and encourage Ameri­can employers to pay taxes. If reforms are blocked by recalcitrant lawmakers on both sides, collabo­ration on other matters may halt as well.

Haiti.Haiti has suffered a perpetual political cri­sis for most of its 200-year history. Prime Minister Gérard Latortue, his coalition cabinet, and multina­tional peacekeeping forces are trying to help Haiti recover from years of despotic rule under former President Jean-Bertrand Aristide, who resigned in February 2004. After the Bush Administration gave Aristide safe passage to the Central African Repub­lic, it helped to arrange for peacekeeping forces, a transition government, and elections in the belief that elections would put Haiti back on a demo­cratic trajectory.

The successful election on February 7, 2006, which returned former President Rene Preval to office, is a positive step but may not be enough to bring lasting peace or economic progress. Aristide's corruption left a bankrupt government, and inter­national support needed for reconstruction is only trickling in. Recently, a U.S.-funded assessment team concluded that without "a firm international commitment, any new government will be ill-pre­pared to address the country's critical economic, institutional, and infrastructural needs."[19] Haiti's tiny 4,000-member police force cannot possibly address continuing violence and unrest between rival gangs. Moreover, migrant outflows and the growing presence of violent narcotraffickers in Haiti could threaten the stability of the neighboring Dominican Republic.

Cuba.Fidel Castro's 47-year-old stranglehold on this island nation still blocks the dreams and aspirations of 11 million citizens. Although no longer a direct threat to the United States since losing its Soviet sponsor, Cuba remains hostile, sharing electronic espionage and warfare capabil­ity with China and offering support for interna­tional terrorists and guerrilla groups. Nearly 80 years old, Fidel counsels Venezuela's Hugo Chávez as well as hopeful imitators like Bolivia's Evo Morales. However, his incapacitation or death would remove the force of personality that holds together the Cuban state and energizes the region's revolutionary movements.[20]

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