Thursday, December 11, 2008

The Case for Globalization

Wednesday, December 10, 2008 / Latin Business Chronicle

Latin America needs more globalization as well as other factors to boost prosperity and sustain economic growth.


At a time when countries with too close trade ties with the United States - such as Mexico and the Central American nations -- are suffering from the U.S. recession, it may seem a bit callous to be recommending that they boost trade further.

Yet, history has shown that countries with high trade levels to the outside world - and especially those with a diversified range of export markets and export products -- fare better in downtimes than those that concentrate on only a few markets and one or two products.


Take the case of Venezuela, for example. Oil revenues account for some 90 percent of Venezuela's export earnings, more than 50 percent of the government's budget revenues and around 30 percent of gross domestic product, according to Oxford Analytica. And most of its oil is sent to one market alone - the United States - despite efforts by President Hugo Chavez in recent years to diversify. Of Venezuela's total exports (oil and non-oil), 61 percent went to the United States, according to a Latin Business Chronicle analysis of World Bank and U.S. Census Bureau data.

Venezuela's problem is that it has failed miserably in diversifying its oil-dependent economy. In fact, the non-oil sector has been considerably weakened since Chavez came to power in 1999.

As the United Nations Economic Commission for Latin America and the Caribbean (ECLAC) said yesterday in a statement on the crisis and poverty in Latin America, the "most seriously affected will probably be those countries that are most dependent on remittances, or that have more direct links with the United States market, as well as those with scantly diversified export structures that rely on the commodity markets that have suffered most of the impact of the global crisis, as well as countries with weak financial systems."


While Mexico clearly will be impacted by a decline in remittances from workers in the United States, as we reported in our special report last week on Latin America's Winners & Losers, countries like Venezuela will needlessly suffer because of the lack of any efforts to boost non-oil trade and investments in the good times. Venezuela's exports last year accounted for only 29.3 percent of its GDP. That compares with Panama - the most globalized country in Lain America - where exports accounted for a whopping 68.3 percent of its 2007 exports, according to the Latin Globalization Index from Latin Business Chronicle.

While Venezuela next year likely will expand its economy by 2.0 percent (its worst result since 2003 and the second-worst in Latin America), Panama's will grow by 7.8 percent (the best performance in Latin America).

But high trade levels are not enough. Latin American nations should also aim to achieve higher foreign direct investment and tourism as well as Internet penetration - three other factors used to measure globalization. When measured as a percent of GDP, Panama is the clear winner in the FDI category, while the Dominican Republic leads tourism receipts and Chile tops Internet penetration. Similarly, Venezuela is the big FDI and tourism receipts loser (with both only accounting for 0.3 percent of its GDP).


The Latin Globalization Index also includes remittances. While its value may be more controversial -- richer nations may need fewer remittances, for example -- it's still an important element to measure a country's links to the outside world.

While Venezuela is among the least globalized countries in Latin America, it's not the worst. That honor goes to Brazil. Despite the trade boom last year - and its success in boosting foreign direct investment - the South American country is still an inward-looking nation. Its exports only accounted for 14.7 percent of its GDP in 2007. And despite boasting Latin America's highest levels of FDI, when measured as a percent of GDP, it only accounted for 2.6 percent last year. Clearly, Brazil has plenty of room to grow when it comes to boosting ties with the outside world.


Finally, globalization is only one tool to achieve greater prosperity. Increased globalization should be accompanied by other key factors for reducing poverty in Latin America such as a stable macro economy (including low inflation), investor-friendly policies, transparency (Venezuela is the second-most corrupt country in the region after Haiti), strong law enforcement (protecting everything from individual citizens against petty crime to big foreign multinationals against piracy), vibrant competition, a professional civil service (dominated by technocrats not politically-loyal ignorants), political freedom (including fair elections and a free press) and improved education (at all levels). Combined with greater trade liberalization, these elements will go a long way in providing Latin America with sustained economic growth and expanded prosperity.

Joachim Bamrud, the editor-in-chief of Latin Business Chronicle, was a Panama correspondent for Reuters, UPI and The Miami Herald in the early 1990s and is the author of Panama Jack, a spy novel set in Panama and China.