Monday, January 13, 2014

Latin America in 2014: part I


Muchos años después, frente al pelotón de fusilamiento, el coronel Aureliano Buendia había de recordar aquella tarde remota en que su padre lo llevo a conocer el hielo.  Macondo era entonces una aldea de 20 casas de barro y cañabrava construidas a la orilla de un rio de aguas diáfanas que se precipitaban por un lecho de piedras pulidas, blancas y enormes como huevos prehistóricos.  El mundo era tan reciente, que muchas cosas carecían de nombre, y para mencionarlas había que señalarlas con el dedo[1].
 Gabriel García Marquez, One Hundred Years of Solitude

Few novels have had as powerful and magical beginnings, and when GGM’s book, once translated, reached Europe and the US in the late 1960s, it instantly put Colombia on the literary map.  Subsequent García Marquez novels were anxiously expected and read, and by and large, didn’t disappoint although never quite matching their trailblazer.  Soon, the world rediscovered older Latin writers such as Neruda and Borges, and welcomed the likes of Vargas Llosa, Cortazar, Fuentes and others. 

Since then, through periodic ups and downs, Latin America has more often than not faded from the headlines.  I believe that in 2014 it will make a return.  Paraphrasing García Marquez again, time is not passing, it is turning in a circle. 

There have been many attempts to draw parallels, to put Latin countries in neat boxes, in short, to simplify the Latin reality.  Like all generalizations, these efforts contained some elements of truth that had little overall predictive value.  Indeed, while there have been two principal colonizing influences, Spanish and Portuguese, there also have been important[2] immigration flows from Italy, Germany, France and the Middle East.  At present, there appears to be a political and economic cleavage between Atlantic (Venezuela, Brazil, Argentina) and Pacific (Chile, Peru, Colombia, Mexico) countries but this distinction wouldn’t have existed thirty years ago.  Finally, there is a tendency to bundle Latin American countries together as commodity producers; many do export commodities but their customers are somewhat different and so is the mix between hard and soft commodities.  In the end, because of topography, demography and history, one should consider each country separately.  Evidently, being in the same neighborhood, there has been and always will be interaction among them.

2014 should bring to the fore a number of important challenges and issues which will probably result in heightened volatility and tensions in this region, and ultimately, major changes.  Let us consider these Latin countries on a case by case basis.

Colombia
No single factor explains the resurgence of the Colombian economy better than the drastic improvement in the security climate in the country, and in particular the beating back of the FARC and drug traffickers since 2003.  Pipeline attacks is a good index of security levels as it affects the most dynamic sector of the economy. 

This chart from Valores Bancolombia shows that attacks reached their lowest point at the end of President Uribe’s second term in office. Unfortunately, they are now back up to their level of a decade ago.

President Santos has staked his legacy on reaching a peace accord with the FARC.  By all accounts, he is thoughtful and deliberate, and he is correct in emphasizing the huge benefits that peace would bring.  The question is how do we get there?  Was the relaxation of the pressure on the insurgents necessary?  Will waning support from Venezuela pressure the FARC to settle?  Will FARC leaders, lately seen relaxing on the beach in Cuba, lose their fighting ardor and want to retire?  Will the Colombian population accept terms that would allow reinsertion of the FARC in society and politics?  More crucially, will a successful political negotiation with the FARC bring an end to the involvement of its members in drug trafficking and violence?

On a macroeconomic level, the Colombian economy is both healthy and dynamic; it enjoys a large domestic market and relative proximity to North America.  A key challenge is developing an efficient infrastructure which is all the more necessary by an unforgiving topography; after some significant delays, it appears that the legal and regulatory framework for large scale project development is now ready.

Right now, President Santos looks likely to win reelection next May; this would be good to convince the FARC if they want to make a deal.  But the November 2013 deadline for a deal has already passed, and it is unlikely that the negotiations can be extended much longer unless the security climate is improved.  2014 should therefore force the parties to make some tough decisions:  the President either breaks the negotiations or he applies greater military pressure on the FARC to force a settlement; the FARC either settle soon or face the risk of harsh military retributions with no domestic or international support.

My guess is that, as elections approach and time for negotiations runs out, violence rises but the security climate improves, and we have already seen what this means for the economy.




[1]  Many years later, as he faced the firing squad, Colonel Aureliano Buendia was to remember that distant afternoon when his father took him to discover ice.  At that time Macondo was a village of 20 adobe houses, built on the bank of a river of clear water that ran along a bed of polishes stones, which were white and enormous, like prehistoric eggs.  The world was so recent that many things lacked names, and in order to indicate them in was necessary to point.  (Unfortunately, this translation fails to convey the poetry and rhythm of the original text)

[2]  Not in absolute numbers but in terms of their importance for the host countries.

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