The G20 and Latin America: A “Rendezvous With Destiny” or a False Start?
Today, world leaders will convene in London for the highly anticipated G20 summit. Without a doubt, the current global economic crisis has transformed the geopolitical landscape and is heralding profound shifts in the international distribution of power. No longer are such momentous gatherings restricted solely to the G8 industrialized nations.
The debilitating ramifications of the crisis are not geographically localized, and therefore, any solution requires a global response that includes not only the most developed nations, but also the emerging market economies of the world. In this respect, Latin America is an integral part of the equation. At today’s opening, Brazil, Argentina, and Mexico will represent the region’s interests, as President Obama initiates his study of Latin American realities. Although not dubbed as such, the area nations could play a pivotal role in London and the gathering could be looked back upon as an economic summit dominated by the developing world, with Latin America being an important constituent.
Furthermore, the Brazilian president will join Mexican President Felipe Calderón in pushing for increased trade financing and export credits to bolster the precipitously declining figures for world trade. Lula has advocated that the world’s largest economies, including Brazil, should contribute up to $100 billion to boost global trade through financing and export credits that has all but evaporated over the past year, especially for less credit worthy borrowers from Latin America and the Caribbean. Averting protectionist measures from developed countries will also be a major concern for Brazil. In an interview with CNN over last weekend, Lula dubbed anti-trade measures a “drug” threatening to poison the system and strangle any hope of an economic recovery in the near future.
Similar to Brazil, Mexico will also be concerned with greater global financial regulation and increased funding for the IMF. Both countries are reportedly dickering with the IMF, and earlier this week, Calderón stated that Mexico would be ready to accept between the odd $30 and $40 billion from the IMF’s new flexible credit line to fund infrastructure projects in the country. This new credit line was set up earlier this month to replace the short-term liquidity facility that failed to attract any borrowers due to its rigid repayment schedules. Recipients can now use the modified fund as a type of collateral and draw upon the cash only if their economic conditions further decline. The fund targets functioning emerging market economies for its generosity, precisely like that of Mexico, that have maintained sound fiscal policies during the boom years but have since found themselves particularly vulnerable after the downturn. Calderón’s recent insistence that Mexico, along with other major developing countries, must assume a responsibility to limit their own carbon emissions will not be lost upon the world’s rich nations.
Latin America Pushes for a Common Agenda for Developing Countries
To further convey this sentiment, the Arab and South American nations made strong commitments to push for reforms to the system of international organizations now in effect and increase trade between the two blocs, which has tripled to $18 billion since their initial commercial bilateral exchanges inception in 2005. In this respect, Latin America has taken audacious steps to protect itself from anti-trade restriction by diversifying its trading partners. Brazil’s Lula stridently noted that, “the wealth of the Arab world is now becoming an important factor in development…and you have to protect it.” With the World Bank estimating a steep decline in world trade of up to 6.1 percent, and the WTO predicting the figure to be as high as 9 percent, diversification in terms of links with non-traditional trade partners is beyond dispute. Only this tack can be counted on to limit the severity of the present economic blows now being visited upon the developing world.
The Outlook for Deterring Protectionism
To rectify the problems confronting global trade, the leaders at the G20 summit will be faced with the conflict that has troubled statesmen for the centuries: the incommensurability between a nation’s domestic and its international experience and obligations. Ultimately, a nation will judge a policy based on its domestic relevance as well as its legitimacy. By this standard, many American citizens and their European peers have been more concerned with protecting jobs at home, as well as their agriculture and manufacturing sectors, at the expense of trade relations abroad. Thus far, however, the decline in trade is largely the result of falling demand and limited financing and credits rather than protectionist measures. In an effort to increase trade financing and offset further declines, Brazil, Argentina, and Mexico have supported proposals by Gordon Brown to secure a $100 billion fund and another from World Bank President, Robert Zoellick for $50 billion. This fund would be largely reserved for the poorer nations in which the governments of the world’s largest economies would provide most of the financing and assume most of the risk. Orchestrating an agreement at the G20 to introduce these liquid funds into the system would send a positive message in support of world trade.
Lending a Helping Hand
Moreover, the forecasts for a sharp contraction in growth make these lending institutions more important now than ever. The World Bank has estimated a zero percent growth rate for Latin America in 2009. Additionally, the once booming capital flows that poured into the region are down 57 percent in 2009 from a year ago, to a dwindling figure of $34 billion. This will significantly hurt large parts of the region, especially the small countries of the Caribbean that lack the foreign currency reserves of countries like Chile and Brazil to spend their way out of the crisis. Accordingly, these malignant economic conditions are now taking a human toll.
In a poignant speech expressing the dire necessity to institutionalize support for the poorer countries of the world, Zoellick, using a rhetoric that was not his style during his USTR days, professed that, “in London, Washington and Paris people talk of bonuses or no bonuses. In parts of Africa, South Asia, and Latin America, the struggle is for food or no food.” He predicted that an additional 53 million people will be pushed into poverty this year as a result of the crisis. This figure is heaped on top of the 155 million people who were forced to live below the poverty line last year as a result of sharp spikes in the price of food and fuel. For their part, and out of a diversity of motivations, Argentina, Brazil, and Mexico have all pledged to be a voice for the world’s most vulnerable nations.
For these reasons, recapitalizing the IMF and regional lending facilities such as the Inter-American Development Bank (IADB) has become a central concern for the cadre of developing county leaders of the G20. The aforementioned restructuring of the IMF flexible credit line has been a step in the right direction. To supplement these efforts, COHA would agree that the G20 should conform to the demands of the IMF to increase its funds from $250 billion to $500 billion. Also, China, Saudi Arabia and Brazil are being called upon to make greater contributions. In return for this much needed liquidity, however, they should be given a greater voice in this international forum. With the IMF voting rights set for renegotiation in January 2011, the summit seems like an opportune time to introduce the subject. President Michelle Bachelet of Chile recently expressed such a perspective when she stated, “we must call on the IMF for more democratic governing and to give more funds to the developing banks to be more effective in the countries [that need the funds] the most.” As the crisis continues to wreak havoc across the globe, it is becoming increasingly clear that the developing world must be further integrated into the existing system.
Aside from the IMF, the IADB is making a move to present itself as an important regional lending facility for Latin America and the Caribbean. In 2008, the IADB made 131 loans totaling $11.2 billion, which is a far jump from the 89 loans worth $7.7 billion allocated in 2007. Assuredly, the IADB is scheduled to become a major part of the solution for the developing countries of the Western Hemisphere. The bank, however, has not escaped the crisis unscathed. It has posted an estimated loss of $1.6 billion for the 2008 fiscal year.
As a result, IADB executives and member countries petitioned earlier this week to raise the bank’s capital from $101 billion to $280 billion. Increased loan requests for the 2009 fiscal year could be as high as $120 billion, up from last year’s requests of $7 billion, making fresh capital a necessity if the bank’s lending facilities are to meet new aggregate demand. To this end, the United States, the bank’s largest shareholder, has been cooperative. Treasury Secretary, Timothy Geithner, told the IADB that the U.S. was prepared to start a review of permanent IADB capital increases after the existing resources are exhausted. China and Brazil also have indicated that they are prepared to contribute to this fund. Sustaining the IADB’s liquidity is crucial to the economic health of the Latin American and Caribbean region during what deserves to be seen as a uniquely perilous time.
Moving Closer to a Multi-Polar World Order
It is truly a testament to these new times when Latin America, a region notorious for economic crisis, is giving the U.S. and Europe veritable schoolroom lectures on sound public finances. When the current crisis subsides, it could very well be that a new world system will emerge. The reverberations of the downturn may turn out to have leveled the playing field and now the Latin American representatives of the G20 will be coming to the negotiating table with an exceedingly stronger voice.