ALCA versus ALBA edit

June 6, 2006

The decision by Bolivia to nationalize its natural gas and petroleum industries is going to result in heavy losses for Brazil, but it also shows that populism and contract breaches continue to be an "easy way out" for Latin America to justify its refusal to introduce much needed reforms. Nations in the region tend to periodically succumb to the temptation of using their vast natural resources to reach political objectives.

-->Venezuela's Hugo Chavez, for example, has embarked on a hemisphere-wide populist crusade, and he is surfing right along thanks to high oil prices. Argentina's Nestor Kirchner has imposed a 20 percent tax on grain exports and a prohibition on beef exports, to fuel his domestic anti-inflation demagoguery. Now, Bolivia's recently-elected Evo Morales follows through on an election promise, nationalizes domestic oil and gas production, and along with it installations in his country that are the object of massive investments by Brazil's state-owned oil and gas giant Petrobras.

It's actually easy to churn out inflammatory speeches in favor of national sovereignty. Just as easy as identifying foreign scapegoats for domestic ills, such as the proposed Free Trade Area of the Americas (FTAA), the International Monetary Fund (IMF) or multinational companies. It is, however, curious to note that in today's Bolivia, we Brazilians are the "gringos". In Bolivia these days, Petrobras is publicly held responsible for sucking away resources that belong to the poor and destitute.

In this, the most recent chapter of a sad Latin American tradition, the economy should deliver at least one important lesson: there really is no free lunch. Nationalization by Bolivia should quickly turn into incompetent management and out-of-control pandering and employment for political reasons. Cheap populism rapidly changes into a production and investment crisis, with inflation picking up the pace, low growth rates and an escalating debt load. Purely assistance-oriented policies will soon be exposed as very limited, in terms of their ability to generate improve incomes and job creation.

Brazil has a long list of "counter-examples" for the populist approach. Aircraft manufacturer Embraer, mining giant CVRD and steel maker CSN are among Brazilian companies that became far more efficient after being privatized. One of the main reasons for the accelerated growth of Brazil's agribusiness sector in the last decade is the reduction of government interventionism, including the end of pre-set price policies, manipulated stockpiles and taxes on exports, and market deregulation moves such as the shutdown of agencies like the Sugar and Alcohol Institute (IAA) and the Brazilian Coffee Institute (IBC).

I have long insisted on the need for Brazil to observe the sustained growth accomplished by nations in East Asia, a heavily populated region whose deficiencies when it comes to natural resources are widely known. In spite of deep scars that separate those countries politically - particularly Japan, China and Korea - Asia has grown thanks to structural reforms that have ensured vital elements, such as a secure legal system, efficient education programs at the basic or elementary level and solid trade integration. Starting in the 1980s, East Asia developed the so-called "flying geese" model, which takes advantage of regional synergies through massive cross-investment, the highlight being technology transfers, especially from Japan, through minority stakes held by the Japanese in companies based in less-developed neighbours.

In this way, the wedge-shaped flight of the geese was led by Japan, followed closely by the so-called "newly-industrialized economies", or NIEs: South Korea, Taiwan, Hong Kong and Singapore. Then came the more dynamic members of the Association of Southeast Asian Nations (ASEAN) - Thailand, Malaysia and Indonesia, with the Philippines and the nations of Indochina trailing. More recently, the formation of the geese was altered by the grand arrival of China and India on the scene. Thus, the integration of Asian countries has been carried out through the cross border expansion of companies and the transfer of technology, all of it geared to systemic competition in a globalized marketplace.

At the other extreme is the current trend observed in the Americas, where political and trade fragmentation are the norm. We've seen the Free Trade Area of the Americas (FTAA, or ALCA in Portuguese or Spanish) virtually buried, after more than 500 meetings involving 34 nations from throughout the Americas between 1994 and 2003. The FTAA proposal was replaced by two distinct integration models. On one hand, countries like the United States, Mexico and Chile forged ahead with dozens of bilateral trade agreements that are no longer restricted by regional geographic boundaries. These are far-reaching agreements, connecting primarily the American nations along the Pacific Ocean. There are also recent agreements of great significance involving the three nations already mentioned and the European Union, China, Japan, Korea and other key players.

On the Atlantic side of the Americas, what has emerged is the "Bolivarian Alternative for the Americas", or ALBA, an expression coined by Hugo Chavez and Fidel Castro for a model of integration centered on the alignment of objectives that are politically and ideologically motivated. The open confrontation by Chavez with the former president and current candidate for the presidency of Peru, Alan García, the probable departure by Venezuela from the Community of Andean Nations (CAN), the politically-motivated purchase of a portion of Argentina's debt by Chavez and now the nationalization of gas and petroleum reserves in Bolivia, are all central elements in this proposed new model.

It is not difficult to predict that ALBA's characteristics will be increasingly anti-American, with growing state intervention and protectionism in the economies involved. The rift between the two integration models can only become greater, as as it expands, it shoots down the dream often mentioned by Brazilian president Luiz Inacio Lula da Silva of one day creating CASA, or the Community of South American Nations.

How will Brazil react to the current situation? At a time when populism ceases to be a matter of simple electoral rhetoric, to strike directly at Brazil's trade interests, we recall a phrase by former Mexican external affairs minister and renowned political observer Jorge Castañeda, in an article published recently by Brazil's most prestigious daily, O Estado de S. Paulo: "Brazil is much too big, much too serious, with interests and responsibilities that are much too significant for it to align itself with primitive anti-imperialism. The truth is that this is the type of game where only the small can allow themselves to take part."

Another famous phrase uttered decades ago - "Brazil is not a serious country" - has often been attributed to former French leader Charles De Gaulle. Aside from that aspect, we can at least say that all other elements of Castañeda's phrase are statements of fact. It is indeed time for Brazil to reflect on its chosen paths for global integration. For years, Brazil has been included among the world's emerging powers - the so-called BRIC countries, alongside China, India and Russia. Brazil should take a closer look at what fuels economic growth in developed countries, such as members of the Organization for Economic Co-operation and Development (OECD), East Asian countries, and even some a lot closer to home, like Chile. In the various groups and organizations that make up the modern world, and now that president Lula's hoped-for CASA has become something of a shack in a shanty town (the word casa means home in Portuguese), it is time for Brazil to step forward and acknowledge that it has a lot more to learn from the OECD, NIEs and BRICs than from ALBA.