Mr. Obama heads South (geographically speaking, of course…)

Now that President Obama is heading for Trinidad and Tobago for the Fifth Summit of the Americas, I was thinking about the previous one.  For reasons too long to explain, in the previous Summit of the Americas in Mar del Plata, Argentina, I ended up in the same room with all the Presidents, and was able to listen to the debates (and no, I did not just walked in, as some German journalists are supposed to have done at the recent G-20 meeting; I had a proper identification…). The Presidential debate was presented in the press as one in favor or against of free-trade.  In my mind it was rather a debate on what does it mean that the Americas get “integrated,” and the possible dimensions of such integration.

As I recall, then President Bush had two interventions, a longer one and the other very brief (the latter was to support a proposal that the President Fox had presented in favor of setting a date for the resumption of the negotiations for the FTAA).  The longer one was a substantive one explaining that there was a window of opportunity in Congress to move with the FTAA negotiations, but that window was short, and therefore it was important to move fast. But to me the most interesting part was the rationale for the FTAA: he said that it was very important for the Americas to be together, because that was the only way we all could really interact with China.  As far as I can recall, he did not use words such as confront or compete.

That comment stuck in my mind.  In fact, the Americas as a whole (or the Western Hemisphere, as it is somewhat quaintly called in some official US documents) represent slightly more than 1/3 of the world GDP in current dollars and add up to about 900 million people (of course some contribute more than others; I always remember Michael Jordan’s teammate John Wennington when, after a game in which Jordan had scored 55 points and Wennington 2, he later said that he would never forget that night in which “Michael and I combined for 57 points…”).

In any case, for the central issue is what is the meaning of “integrate” or “be together,” so the Americas are be able to better interact with the rest of the world, China included. Argentina, as the host country then, but strongly supported by Brazil and the rest of MERCOSUR, proposed jobs and investments as the theme for the Summit.  The issue of the completion of the FTAA was left in brackets in the pre-negotiated declaration, and the final wording simply reflected that there was no agreement on this topic.

A way of looking at this debate was to recognize that trade was increasing in the Americas any way (with many countries having different sorts of trade agreements), and that the main constraints to increased commerce were not necessarily tariffs or the legal issues considered in the FTAA, but rather political and social problems (linked to fears about jobs, in LAC and the US) and logistical/infrastructural issues.  Or put it differently, the real debate was not whether there was going to be further integration in the Americas (it suffices to ride in the New York subway and see all the signs in Spanish and English).  The real question was whether the main requisite for such integration was to establish further legal rules of the type envisaged in the FTAA (some of which such as the complete free movement of financial capital had been controversial even in the negotiations with Chile), or rather the main problem was the lack of investments in infrastructure, in human capital, in safety nets, and, more generally, in social inclusion, which made economic integration less complicated.  The debate, therefore, was more between integration through a trade-based legal framework, and integration as in the European Union, where the poorer, weaker and more vulnerable countries were helped with investments in infrastructure and social cohesion (certainly there have been other helpful governance conditions in the EU, as well as the issue of a common currency).

Of course, both approaches may be needed, but many Latin American countries, particularly those in MERCOSUR, felt that integration needed more “hardware” than “software.”

In any case now, from the point of view of the US exports, the Americas are already the main market (more than 40%; see Table from the IMF Direction of Trade statistics): Canada is the main trading partner (21.4%) and LAC is more important than China, or all Developing Asia together, for that matter, and it is about equal to the European Union (see Table). Of course Mexico is somewhat more than half the share for LAC, but even the rest of LAC is a bigger export market for the US than China.

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This is in line with the point I made in a previous blog (http://www.rgemonitor.com/latam-monitor/256125/the_g-20_and_the_iadb) about LAC being an important part of global aggregate demand among developing countries (particularly for the US, as shown in the Table) and the need to help the region sustain its own growth in order to help smooth the current world cycle.  I also argued that, for the medium and long term, LAC was crucial at the global level in terms of energy and climate change issues.  It is important to remember that out of the four main suppliers of energy to the US, three are in the region (Canada, Mexico and Venezuela; the other is Saudi Arabia).

Going back to this Summit, the divergence in the agenda on economic integration between legal frameworks and investments does not seem to exist (there may be other controversies linked to Cuba and drug issues). Most countries are talking about investments in infrastructure, human capital, poverty alleviation, and social inclusion, among the more traditional issues, as well as sustainable energy, and climate adaptation and mitigation, as part of the new positive hemispheric agenda.

The issue is how to finance those investments and I already argued for the need of a substantial increase in the capital of the Inter American Development Bank. From the point of view of the US there is no other approach with better cost/benefit value.  The reason is that the increase in capital will be mostly a guarantee (the “callable capital”), which has never been invoked to cover IDB’s obligations in the 50 years of operations of the institution. Therefore, and notwithstanding different budgetary and accounting rules in different countries, it is not clear what real economic costs, if any, may have entailed for the guarantors the allocation of the callable capital to the Bank. But for the LAC countries is crucial because it allows the Bank to borrow in world markets with a triple A rating, and then pass those low interest rates to the borrowing member countries.  As borrowing member of the Bank, LAC countries have the greatest interest in that the callable is never invoked, in order to safeguard the AAA.

Currently, the Bank has a capital of about US$ 100 billion, of which only US$ 4 billion have been paid-in capital, and the rest is callable capital.  There are also reserves for about US$ 15 billion.  The shares are almost equally distributed between LAC countries and our non-LAC partners (Canada and different European and Asian countries), so a little over 2 billion of the paid-in capital has been contributed by LAC countries, with another 30% by the US, and the rest by the other non-LAC members of the Bank. (The Bank has also a Fund for Special Operations, the concessional window for poorer countries, which is far smaller than the Ordinary Capital, the contributions are in cash, and in which the US contributed about half, LAC another 26% and the rest by other non-LAC countries members of the Bank).

Doubling the capital of the Bank with a 4% paid in cash (as it is the proportion now) and adding US$1 billion to the FSO, would represent for the US less than 200 million dollars per year over 10 years in cash (the rest is all guarantees). The LAC countries collectively will have to contribute more than that in cash.  With that cash contribution (leveraged by the callable capital) the Bank, between 1961 and 2007, generated about 25 dollars in total value of projects per 1 dollar of cash paid in.  This certainly has helped the region and we are grateful to the non-LAC member countries that are our partners in this institution. But they have also benefitted from that expanded activity in the region, particularly through their exports to LAC resulting from those projects: for every cash dollar invested in IADB’s capital, the US and the other non-LAC members sold about 4 dollars in exports to LAC countries. This seems to be a good return, particularly now that what is needed is to sustain aggregate demand outside the US and the other industrialized countries.

In summary, for this Summit it looks like we have a common agenda on economic issues.  We also have a powerful financial instrument in the Inter American Development Bank, but needs reinforcing for the tasks ahead.  For that to happen, the role of the US is crucial, but as I argued in the previous blog, LAC has a lot to contribute to that partnership too. Mr. Obama, who is reported to enjoy basketball, may want to consider John Wennington’s anecdote: it is true that he only scored 2 points against Jordan’s 55, but his slam dunk with few seconds to go in the game represented the winning difference for the Bulls that night.