27 January 2012
Is Colombia foreshadowing the new road for Latin America? Yes and no. Latin America can trump its horns by pointing to its recent economic boom—commodity driven—producing impressive GDP outputs, while the U.S. and Western Europe muddle through their own economic crisis and possible collapse. Never before has Latin America been flushed with so much money and buzz, but the challenge ahead is what to do with such impressive reserves.
Will Brazil finally be a confident Latin American leader, or will it always live up to the old joke, “Brazil is the country of the future and always will be”? Will Chile continue being the exemplary nation that has reached an unprecedented period where the Chileans now aspire to create a Silicon Valley in Santiago, or will they mishandle their fiscal management and fall victim to the Dutch Disease and become an economy that is dependent on the price of copper? Will Colombia be a country that shows the world that they can rid themselves of their violent past, and finally worry about growing their economy instead of allocating their resources towards keeping cartels and guerillas from growing cocaine? Latin America in some corners is known as the Forgotten Continent, or the backyard of the U.S. But now it has an opportunity to be fully integrated in the global economy for the right reasons. The challenge is continuing the economic growth while simultaneously addressing local issues. Not an easy task.
Latin America has had the unflattering distinction of being the most unequal region in the world. Upon visiting countries such as Brazil, Peru, and Colombia, one cannot fail to notice the walled houses and gated communities, against a backdrop of shantytowns and favelas. Inequality in Latin America is borne of many causes: education, income inequality, and the ineffectiveness of public spending. Minority groups such as African Americans and indigenous groups do not have the same opportunities as “white” Latinos. The richest tenth amongst Latin Americans earn 48 percent of the total income, while the poorest tenth earn an alarming 1.6 percent (World Bank). According to the United Nations Development Programme, in terms of world inequality, Ecuador ranked 7th, Brazil 8th, Colombia 10th, Paraguay 11th, and Chile 14th. It does not matter how fast a country is growing economically, if the rewards are only for a selected few—predominantly the elite—then there is no chance for a country to have real change and real opportunities for its citizens. Consequently the local economy will reflect that, by lacking economic diversity.
In Latin America’s defense, income inequality has decreased as of late. It has occurred both in countries where growth has been rapid (Colombia, Peru, Chile, and Brazil) and where growth has been mediocre (Argentina and Ecuador). Brazil and Chile have been in the forefront in confronting their nation’s inequality, placing development at the forefront of their priorities. More countries in Latin America and abroad have taken note of their program’s achievement, to the point of being often emulated. Brazil’s Bolsa Familia and Chile’s Copper Funds are two prime examples in addressing development; both are completely different, but equally effective in their respective goals. If both programs are an indication of the new Latin America in the next 50 years, then perhaps Latin America will no longer be a vague afterthought.
Brazil has two faces; one is the beautiful portrayal of beaches, amazing coastlines and the cheerful samba. The other face is poverty, favelas, child labor, income inequality, and malnutrition. Brazil’s Bolsa Família is just one measure to combat these ills, but it has arguably been the most successful. Bolsa Família was enacted in 2003; merging four pre-existing cash transfer programs (CCTs) into a single one. Its goals are straightforward: create a social safety net and provide relief to Brazil’s poor. Bolsa Família pays mothers a small sum on the condition that their children attend school 85 percent of the time and receive basic health care, such as vaccinations, pre- and post-natal care, and nutritional monitoring. Payments are relatively small, around 22 reais ($12) per month per child, with a cap of 200 reais ($109), costing about 0.5 percent of Brazil’s GDP. Since its inception, Bolsa Família has reached 12.5 million families across Brazil. The results have been nothing short of amazing.
For a Brazilian household, 22 reais could go a long way. According to a recent government report, the number of Brazilians living under extreme poverty has fallen from 17 million in 2003 to nine million in 2009. Since 2003, the number of Brazilians with incomes below 800 reais ($437) a month has decreased more than eight percent a year every year, according to a report published by FGV. One-sixth of the poverty reduction in Brazil can be attributed to Bolsa Família, a remarkably stunning accomplishment by one single program. After President Lula left the executive office, 20 million Brazilians rid themselves from the strains of poverty, due to the outbreak of jobs and government-led social policies that helped alleviate the gross inequality.
Is Bolsa Família a formidable blueprint for future poverty reduction programs across the world? New York seems to think it is, launching a similar conditional cash transfer scheme: Opportunity NYC. Peru in 2005 established a similar CCT, called Juntos. Bolsa Família admirers have even reached Africa, with the case in point being Nigeria enacting Care of the Poor (COPE), which targets female-headed households. Bolsa Família is not the answer to save all, but it is effectively and accurately aimed at the poor. It targets areas the poor need most help with: allowing Brazilian women a chance to live a dignified life and giving children the natural right of basic education, allowing them the opportunity to become direct participants in Brazil’s future growth.
In Chile, income inequality remains relatively high; very few countries have a worse income distribution than Chile. Recent data show that the richest 10 percent of the population earned 45 percent of the nation’s income, and in 2003 the richest 20 percent earned close to 55 percent of the national income. Education in Chile is also a constant social issue, where public education compared to private education is often referred to as two separate countries. Then there is basic poverty: the poverty rate in Chile has dwindled down to near 10 percent, but from a disturbing 20 percent rate in the last decade.
In spite of the grim inequality data that hinders Chile, compared to prior periods, Chile is on the right path to prosperity. Chile currently is considered a darling of the emerging market family, exporting salmon, cellulose, wines, fresh fruit, and agricultural products. Bilateral trade agreements have been a priority for Chile, signing more than ten Free Trade Agreements, including the U.S. and Canada.
Chile has grown, but it has not forgotten its people. As such, the first order of business was to create a mechanism to sustain economic ascension. Historically, Chile’s economy was inextricably linked to commodity prices, especially copper, accounting for roughly 10 percent of GDP. To mitigate this risk, Chile created the Copper Stabilization Fund in 1985. After much success from the original Copper Fund, the Chilean government in 2006 passed the Fiscal Responsibility Law, enacting two new sovereign wealth funds—the Pension Reserve Fund (PRF) and the Economic and Social Stabilization Fund (ESSF).
The Pension Reserve fund can be best described as a savings fund. Its objective is to combat an expected future government pension liability deficit, a protective and conservative measure to reduce the risk of economic quandaries. The PRF also has the responsibility of transferring wealth from one generation to the next to solidify future sustainability, what would be a supplement to the U.S.’s Social Security program.
In 2007, the Economic and Stabilization Fund was given the green light to replace the Copper Stabilization Fund. The ESF’s objective is to accumulate copper revenues whenever copper prices are higher than the historical average market price or the forecasted market price in the next ten years, in order to supplement the revenues into the Chilean budget when copper prices are at a low. For example, during the 1997-1998 Asian Crisis, Chile withdrew $200 million from the Copper Stabilization Fund to help keep the economy moving along. During the 2008 world financial crisis, Chile was able to recover much faster than the U.S. and Western Europe because of their sovereign wealth funds, used as a deterrent from creating balloon-like budget deficits and loss of revenues.
The benefits of Chile’s growth tied to its sovereign wealth funds have also trickled down to the Chilean people. Extreme poverty fell from around 17 percent in 1987 to less than four percent in 2010. The World Bank estimates that less than two percent of the population lives below the international poverty line. GDP per capita is above 15,000, ranked 57th in the world by the IMF (2010). Chile’s two sovereign wealth funds amount to $21.8 billion, reserves that can be used to address the ever-present income inequality and public education.
Chile’s success has not gone unnoticed. Brazil established their own fund not too long ago, with reserves of $250 billion. Colombia and Peru are also in planning modes of initiating their sovereign fund, to combat currency fluctuation and secure foreign reserves, respectively. Countries in Latin America and abroad are realizing that no harm is done by creating a rainy day fund, discovering with the recent U.S. and European economic drama that the good days don’t last forever.
Bolsa Família and Chile’s Sovereign Wealth Funds are just two of many good ideas that have come out of Latin America. Undoubtedly, more needs to be done to narrow the inequality gap. Minority rights are still an issue in Latin America; gender equality—whether in the workplace or at home cannot be swept under the rug; economic and political stability needs to be continuous to sustain growth; and the list could go on. It is encouraging that Latin America is beginning to learn to stand on its two feet, gaining confidence and ridding of itself of past debacles, violence, insecurities, turmoil, and instability. Latin America is by no means close to the finish line, but at least, it can talk about the future with optimism. Former Chilean President Bachelet once said, Chile could “look at the future without fear.” The same can now be said for the majority of Latin American nations.
This article was originally published in the Diplomatic Courier's January/February 2012 issue.