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Nicholas Brady: Ties that bind

Sep 1, 2013

A cooling over the years in relations between Latin America and Washington is not only regrettable, but misguided, says Nicholas Brady, a former US Treasury Secretary. Developments in the global economy could reverse that dynamic

By Taimur Ahmad

When attempting to describe the ideal relationship between his country and the US, Argentina’s Guido di Tella, then ambassador in Washington, once said that what he really sought was "carnal relations" between the two nations.

Times have changed since 1989.

Today, it is hard to imagine such a quip being made by any Latin nation – let alone Argentina. Perhaps even less conceivable is the merest hint of intimacy with Washington from capitals in region.

Indeed, the relationship – both political and economic – between the US and much of the region to its south is unrecognizable from a quarter of a century ago.

While Wall Street has become ever more engaged with Latin America’s companies and financial markets, the relationship between the states has suffered from over a decade of what many see as benign neglect by Washington.

US influence in the region has also been in relative decline following a period of unprecedented economic growth for Latin America, where the region has diversified its trade ties and seen the advent of a new era of political leaders only too happy to challenge US influence, while championing regional autonomy.

For Nicholas Brady, US Treasury Secretary from 1988 to 1993, such a decline in regional relations is not only regrettable, but misguided.

In an interview with LatinFinance, Brady – the architect in 1989 of the Brady Plan to restructure Latin American and other less developed country debt – says that a rapidly changing global economy demands that the relationship between the two is once again prioritized. "It is clearly in the US’s economic and political interest to give Latin America more importance among its global priorities," he says.

"Both sides would benefit greatly if the relationship graduated from its current 'backyard neighbor’ status to that of important strategic partners on a much broader set of issues shaping global political and economic trends."

Mutual benefit

This is especially true as the US economy starts to recover, five years on from the global crisis – and as China, the main force behind Latin America’s growing economic independence, slows.

The region’s trade with China, which has surpassed that between the Asian country and the US, is worth over $250 billion a year, more than a 20-fold increase since 2000.

But Brady warns that "the dependence of many countries on commodity exports to Asia could become problematic as China’s economy slows." Moreover, he says, "the economies of the region are substantially linked to the global economy – which has shown a decidedly mixed performance."

Such a détente between Latin America and the US could, therefore, be born of necessity, especially if the region’s principal trading partner diminishes while America’s economy regains its footing.

But for that to happen, many Latin American countries will also have to overcome a number of legacy concerns. While bitterness over US political interventions in domestic affairs over past decades still rankles many nations, reverberations from the so-called Washington Consensus of the 1990s – the set of liberal economic reform policies championed principally by the IMF and the US Treasury – are still being felt in the form of populist politics across the region.

"The region’s politics will reflect the prevailing economic conditions," says Brady. But he notes that the region’s most successful economies – including Brazil, Mexico, Chile, Colombia and Peru – "are in fact following a pro-democratic, free market policies path.

"The citizens of these economies have now been able to observe how such policies can greatly benefit the people as millions across the region have moved up and into the middle class," he says.

Such a perspective should also allow them to see "the limitations and failings of anti-market, anti-investment populist policies being pursued by some Latin American countries," he says, singling out Argentina and Venezuela.

Brady points out that it was precisely the adoption of free-market reforms that set the stage for the region’s subsequent boom – and resilience in the face of the global economic crisis. "Economic principles and policies that formed part of the Washington Consensus were successfully implemented in many Latin American countries," he says. Indeed, one could argue that the original Washington Consensus was the Brady plan itself – without which market-based reform would not have been possible.

As it happened, Latin American nations would years later revel in buying back their Brady bonds, in some cases making a political point of reducing their foreign liabilities.

Biggest regret

If there were ever a surer testament to Brady’s sentiment towards Latin America, it is in what he says is his biggest regret: "That George H.W. Bush [US president between 1989 and 1993] was not re-elected. He had the courage to give his full support to our Latin American efforts where others were hesitant."

Despite what he sees as wavering US support for the region in subsequent years, he notes that bilateral trade is one area that has notched up notable successes. "The bilateral free trade agreements put in place between the US and Mexico, Chile, Peru, Colombia and Panama, and the CAFTA-DR for Central America and the Dominican Republic, have brought about mutual benefits," Brady says.

Today, Brady sees most Latin American economies as "fundamentally sound" and the region "much less vulnerable than it was 25 years ago, with foreign exchange reserves at an all-time highs, moderate inflation and solid banking systems," he says. "The region is second only to Asia in terms of its economic health."

But he warns that an incipient recovery in the US still has the potential to cause trouble for the region and emerging markets more broadly.

"The immediate problem today is the so-called carry trade where speculators borrow at low interest rates in the US and invest at high rates in the emerging markets," he says. "As the Federal Reserve raises interest rates in the US, there could be a huge rush for the door in emerging markets. Hopefully everyone is forewarned."

What’s clear, then, is that no matter the state of diplomatic relations, Washington will continue to wield considerable power in its former backyard – one way or another – for some time to come. LF

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