Latin America's New Consensus and the end of the Monroe Doctrine

By Conn Hallinan, Foreign Policy in Focus. Posted November 6, 2008.

When the Mexican dictator Porfirio Díaz said the great tragedy of Mexico was that it was so far from God and so close to the United States, the comment summed up the long and tortured relationship between the Colossus of the North and Latin America.

Starting with the Monroe Doctrine in 1823, the United States has routinely dictated the hemisphere's political and commercial life and, on a score of occasions, overthrown governments it found inimical to its interests.

But the world has suddenly turned upside-down.

South America now boasts the third-largest trade bloc in the world, Mercosur, which includes Argentina, Brazil, Uruguay, and Paraguay. Venezuela is in the process of joining as a full-fledged member while Chile, Bolivia, Peru, Colombia, and Ecuador have associate status, and Mexico is an "observer." Even without the coming expansion, Mercosur represents the bulk of the continent's landmass and its two most powerful economies.

A dozen countries also recently formed a new political organization known as the Union of South American Nations (UNASUR); Mexico and Central America have observer status in the European Union-like entity.

Testing Newfound Independence

The global economic meltdown will sorely test this newfound independence in the coming months. In the past, if Washington sneezed, Latin America came down with pneumonia. Will the current economic conflagration derail South America's growing autonomy, allowing the United States to again dominate the region?

The economic crisis will certainly impact South America. Currency values from Brasília to Mexico City have fallen. At the same time, most Latin American countries are in a better position to weather the storm than the United States, Europe, and Japan, where banks play a larger role in the economy.

"No one can avoid the events of the past few weeks," says Riordan Roett, director of the Johns Hopkins Western Hemisphere Studies Program, "but we are seeing some countries better insulated than other countries." Brazil's foreign exchange reserves, for instance, amount to more than $206 billion, which should cover the country's need for export credit until "the most acute stage" of the crisis is over, says Brazilian Finance Minister Guido Mantega.

And because the government of Luiz Inácio Lula da Silva has reduced poverty, thus expanding its internal market, the country is in a better position to endure the global financial turbulence. "Brazil is not immune to the crisis," says Mantega, "but this affects the countries with problems in their banks more, and countries like Brazil less."

Argentina also has a substantial central bank reserves — $47 billion — and is hinting that it will delay replaying its $6.7 billion debt to western creditors until it can negotiate better terms.

Venezuela and Brazil are leading an initiative to form the Bank of the South (BancoSur), an institution that would pool a portion of participating countries' reserves, and ultimately replace the International Monetary Fund, and its onerous insistence on cutting social and infrastructure programs as conditions for its loans, with a more development-friendly approach. Besides Brazil and Venezuela, Bolivia, Ecuador, Colombia, Paraguay, and Uruguay have signaled their interest in joining.

Venezuela has reserves of $30 billion, the largest per-capita total on the continent, says Martin Saatdjian of the Ministry of Foreign Affairs, but the government is being careful. It's considering a "minor devaluation" of the bolivar, Venezuela's currency, and "austerity spending for the next fiscal year" if the crisis "deepens and the price of oil drops," says Saatdjian.

Caracas is spreading its oil wealth throughout the continent, which has cushioned the impact of the economic downturn. The fact that Venezuela bought $2.4 billion of Argentina's debt beginning in 2005 has helped Buenos Aires build a rainy-day fund.

Diversifying Trade

Starting in the late 1990s, South America stepped up its efforts to diversify trade with the rest of the world, in particular resource-hungry China. Beijing buys Chilean copper, Cuban nickel and cobalt, Brazilian and Uruguayan soy, and Venezuelan, Ecuadorian, and Bolivian oil and gas.

Trade between Latin America and China totaled $102.6 billion in 2007, and the Chinese currently plan to invest up to $100 billion over the next five years. Brazil, Chile, and Argentina have a total of $28 billion in two-way trade with China, and China is investing heavily in Chilean copper and Venezuelan, Bolivian, and Ecuadorian oil and gas. Beijing is currently negotiating a free-trade agreement with Peru. Almost half of China's foreign investment goes to Latin America. While China's economic growth is slowing down, that term is relative. Its economy is still growing at 9% annual rate, and the Chinese government is taking steps to keep growth from falling any lower.

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