The Pacific Pumas An Emerging Model for Emerging Markets - by Samuel George - Lateinamerika Verein eV

 
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The Pacific Pumas An Emerging Model for Emerging Markets - by Samuel George - Lateinamerika Verein eV
The Pacific Pumas
An Emerging Model for Emerging Markets
by Samuel George
The Pacific Pumas An Emerging Model for Emerging Markets - by Samuel George - Lateinamerika Verein eV
Introduction

As the global economy sails against stiff headwinds, it is easier to highlight what countries are doing wrong, not what they are doing
right. Focusing on sluggish growth or dwindling reserves may yield a compelling indictment of the global economic system, but it offers
little guidance for improvement.

We understand that there are problems. It is time we focused on the solutions.

Following the financial crisis of 2008, emerging markets seemed capable of reinvigorating global growth. More recently, developing
countries have faced trying macroeconomic conditions as the United States tightens monetary policy.

But the all-too easy grouping “emerging markets” by no means constitutes a cohesive bloc. Countries across the globe may experience
turbulence, but some have taken steps that will help them weather the storm, and to subsequently emerge as responsible, contributing
members of the world economy.

Herein lies the importance of the Pacific Pumas. We believe Mexico, Colombia, Peru and Chile are forging a path for Western Hemisphere
emerging markets that are committed to sound macroeconomic policy, global integration and stronger democratic institutions.

Their work may be incomplete, but success breeds influence, and their model has proven attractive for a number of other countries in
the region.

For over 30 years, the Bertelsmann Foundation and the Bertelsmann Stiftung have developed an expertise in European and trans-
Atlantic issues. In the 21st century, Latin America could play a pivotal role in expanded trans-Atlantic relations, unifying developed
and developing economies. We began our coverage of Latin America by looking to the past with the 2013 study Surviving a Debt Crisis:
Five Lessons for Europe from Latin America. Now we turn to the region’s future with the Pacific Pumas—the budding stars of Latin America.

Bertelsmann Stiftung founder Reinhard Mohn once wrote that the foundation’s projects “could examine ways that would make democracy
more efficient and capitalism more human”. We believe this is exactly the trend we are discovering in Mexico, Colombia, Peru and Chile.

To highlight these positives instead of belaboring the pitfalls, we present the The Pacific Pumas: An Emerging Model for Emerging Markets.

Annette Heuser 		Andreas Esche
Executive Director			Director
Bertelsmann Foundation		               Bertelsmann Stiftung

                                                                                                                                 Introduction   1
The Puma:
    A powerful, fast, agile, lean and stealthy animal.
    Efficient and resourceful, this New World cat can thrive
    in mountainous highlands and humid rainforests.

    It is a fitting mascot for the emergence
    of Mexico, Colombia, Peru and Chile.

2
Executive Summary

The Puma: A powerful, fast, agile, lean and stealthy animal. Efficient and resourceful, this New World cat can thrive in mountainous
highlands and humid rainforests.

It is a fitting mascot for the emergence of Mexico, Colombia, Peru and Chile.

These four countries along Latin America’s west coast have taken great strides in recent years, and they are poised to emerge as regional
leaders. Like the animal, these Pacific Pumas are comfortable operating quietly, away from the spotlight. But their positive momentum
is difficult to ignore.

United in the Pacific Alliance, the Pumas represent more than 200 million people with a US$2.22 trillion GDP; their combined global
trade accounts for half of the Latin American total, while the depth and breadth of their free-trade agreements have positioned them to
increase commerce with Europe, the US and Asia.

This is the story of the advancement of Mexico, Colombia, Peru and Chile—the Pacific Pumas—and of the opportunities they have
moving forward.

The text is divided into two sections:

   • The first section considers the emergence of the Pumas individually. It begins with an overview of the four large Latin American
      countries that have matured economically and politically precisely as their region, the Pacific, has become a cauldron of global
      growth. The second chapter highlights the macroeconomic stability of the four, while the third considers their democratic
      maturation. The section concludes with a chapter on the Pumas’ embrace of globalization, suggesting their preparedness for
      a 21st century economy.

   • The second section analyzes the Pumas’ global opportunities. Through the Pacific Alliance, Mexico, Colombia, Peru and
      Chile can leverage their individual success through a pact large enough to attract international attention. Chapter 5 debates
      the importance of the Alliance, while Chapter 6 considers its ramifications throughout Latin America. Chapter 7 examines
      the importance of the Pumas in greater trans-Atlantic relations, and Chapter 8 reviews the opportunities and challenges the
      Pumas face in dealing with China.

Together, the two sections outline a golden opportunity for the Pacific Pumas to achieve internal prosperity and stability, while emerging
as regional leaders and strategic partners of the US, Europe, and East Asia.

Significant challenges remain: Violence, corruption and inequality still plague parts of these countries, while the four countries’
macroeconomic foundations will be tested in the coming years. Yet the text is optimistic, arguing that hard work and propitious timing
have put the Pumas in a position to finally achieve their potential.

The Pacific Pumas have much ground to gain, but if they can continue along their current path, they may well be forging an emerging
model for emerging markets.

                                                                                                                        Executive Summary    3
4
Table of Contents

I. The Pacific Pumas ....................................................... 6

   1. The Pacific Pumas .................................................. 7

   2. Pumanomics .......................................................... 10

   3. Improved Governance ............................................ 14

   4. Puma Integration .................................................. 20

II. Global Opportunities ................................................. 26

   5. The Pacific Alliance ............................................... 27

   6. Latin America Divided? ......................................... 31

   7. A Trans-Atlantic Triangle ....................................... 34

   8. Harnessing the Dragon .......................................... 40

III. Prepared to Pounce? ................................................ 44

                                                                                 Table of Contents   5
I. The Pacific Pumas
    1.   The Pacific Pumas
    2.   Pumanomics
    3.   Improved Governance
    4.   Puma Integration

6
1              The Pacific Pumas

As the world grapples to stimulate         class already accounts for more than half   and political structures. Countries that
employment,        development      and    the population.4                            have bent to the left have done so without
innovation, a new club of countries has                                                adopting the statist model popularized
emerged as an engine of regional growth.   Inflation, a scourge of Latin American      by Venezuela’s former president Hugo
Through      sound      macroeconomics,    development, has been held in check         Chávez and his Alianza Bolivariana para los
improved governance, and increased         across the Puma economies. Strong           Pueblos de Nuestra América (ALBA) coalition.
global integration, Mexico, Colombia,      foreign reserves have allowed members to    Countries that have tacked to the right
Peru and Chile have rallied in recent      assume countercyclical macroeconomic        have done so without eliminating social
years. Rather than following the lead      positions—a rarity in Latin America.        programs or leaning on the barracks.
of their increasingly protectionist and    Puma sovereigns are investment grade,       Crucially, Puma central banks have
interventionist neighbors, these Pacific   and their issuances are hot. In January     maintained the independence required
economies have taken their cues from       2013, Mexico issued US$1.5 billion in       to pursue macroeconomic stability.
the Asian Tigers of the 1980s.1            bonds at a yield of 4.2 percent, 110
                                           basis points higher than comparable US      • Global Integration
While global attention has been trained    Treasuries. Later in the month, Colombia    Mexico, Colombia, Peru and Chile
on Brazil, the “Pacific Pumas” on          issued US$1 billion in bonds at only        have aggressively pursued liberalized
Latin America’s figurative and literal     88 basis points above US notes. Both        trade, adopting a strategy that proved
periphery have quietly become economic     issuances were oversubscribed.5             successful in East Asia in order to more
overachievers. This anonymity will be                                                  fully integrate with East Asia. Taking a
short lived. The four countries have       On paper, the Pumas roar. But what          page from ASEAN’s playbook, the Pumas
already spearheaded a regional free        is driving these figures, and are           have spearheaded more deep-seated
trade and cooperation pact, the Pacific    they sustainable?                           regional integration. The Pacific Alliance
Alliance, which has captured global                                                    has already removed duties on 92 percent
attention. Given the rise of China and     THE ANATOMY OF A PUMA                       of inter-Puma trade—a figure scheduled
the US pivot to the East, the Pumas are    The Puma’s success stems from political     to increase to 100 percent within 15 years.
poised to play a significant role in an    and macroeconomic stability, an embrace     This is an impressive accomplishment
emerging Pacific century.                  of global integration and expanding         for a region where integration has long
                                           private consumption.                        been elusive.
Puma economic growth has been strong
and consistent, averaging 4.69 percent     • Improved Governance                       While the US has concluded free
annual growth since 2005.2 Setting         Latin America is notorious for weak         trade agreements (FTAs) with Mexico
aside 2009, a year of global economic      democratic institutions, short time         (1994), Chile (2004), Peru (2009) and
tailspin for which Latin America bore      horizons and malleable “rules of the        Colombia (2012), the Pumas have
little responsibility, average annual      game”. Yet, in recent years, the Pumas      expanded well beyond the Western
Puma growth nudges above 5.5 percent.      have generally adhered to established       Hemisphere, participating in numerous
These figures compare favorably to         democratic systems with reasonably          inter-continental trade pacts. Mexico,
the Association of Southeast Asian         legitimate elections. The “rules of         Peru and Chile are members of the
Nations (ASEAN) over the same span         the game” have been observed by             Asia-Pacific Economic Cooperation and
(4.42 percent growth, or 4.80 percent      major political parties, and (Mexico’s      are active negotiators in Trans Pacific
excluding 2009).3                          Andrés Manuel López Obrador aside)          Partnership (TPP) dialogues. All four
                                           transitions from right-leaning to left-     Pumas have successfully negotiated FTAs
This    economic    performance    has     leaning executives, and vice versa, have    with the European Union. The Mercado
coincided with rising incomes. The         been smooth.6                               Común del Sur (MERCOSUR), an economic
Colombian, Chilean and Peruvian middle                                                 bloc of mostly Atlantic South American
classes each expanded by more than 10      Not only have Puma countries executed       countries,7 has not.
percent between 2000 and 2010, while       transitions admirably, but their new
some estimate that the Mexican middle      leaders have accepted existing economic

                                                                                                                 The Pacific Pumas    7
The strategy has paid off. Resource-rich          million) has four, and nearly five, cities                 If Latin America’s west coast was a
    Peru and Chile have tapped into East              with more than one million inhabitants.10                  global backyard during the American
    Asian growth, providing the raw materials         Multiple, large urban centers portend                      century, it could well be center stage in a
    that help build that region’s megacities.         expanded consumption that will be                          Pacific century.
    Mexico and Colombia have exploited                buttressed by gross fixed investment,
    closer commercial ties to the US. All told,       forecast to average 8.39 percent annual                    The Pumas are already making economic
    Puma exports increased by an annual               growth across the Puma economies over                      and geopolitical waves. United in the
    average of 4.66 percent (unweighted)              the next six years.11 The emergence of true                Pacific Alliance pact, the Pumas together
    since 2000 and are forecast to grow six           middle classes in these four countries                     are more populous than Brazil. They
    percent annually through 2017.8                   will help them expand their economies                      account for roughly 37 percent of Latin
                                                      beyond digging things out of the earth                     American GDP and 50 percent of the
    • Private Consumption                            and shipping them overseas.                                region’s trade. The Mercado Integrado
       and Investment                                                                                            Latinoamericano (MILA), the Pumas’
    Funneling raw materials to global                 THE PUMAS IN A                                             shared stock exchange, will be the
    superpowers is old hat for the Pacific            GLOBALIZED WORLD                                           largest in Latin America should Mexico
    Pumas. However, increases in private              Puma momentum is real, and the                             join, as expected, in 2014. Smaller Latin
    consumption hint that their recent                timing could not be more propitious.                       American countries have taken note.
    success is rooted in more than simply             In the near term, emerging markets                         Costa Rica has already joined the Pacific
    capitalizing on strong commodity prices.          may     face   trying    macroeconomic                     Alliance, and Guatemala, Panama and
    As poverty decreases and the middle               conditions, but the Pumas’ relative                        Uruguay are keen to follow, suggesting
    class broadens, Puma countries are                fiscal and monetary balance have them                      that the Pumas could emerge as leaders
    forecast to see private consumption               positioned to withstand the turbulence.                    in Latin America.
    expand at an average annual rate of five          In the medium and long term, as the
    percent over the next six years.9                 US and Europe pivot to the east, and as                    But the Pumas’ strategic influence
                                                      emerging Asia shifts up the development                    extends beyond the region. For the United
    Mexico, a country of roughly 120 million          tables, the Pacific Pumas occupy prime                     States, the Pacific Alliance represents
    people, has ten cities with more than one         real estate in a reconfigured global                       a key ally in an effort to influence 21st
    million inhabitants, and 18 with more             economic ecosystem.                                        century trade. For Europe, where growth
    than 700,000. Colombia (population 46                                                                        remains anemic, the Pacific Pumas offer

                                Puma Growth in the 21st Century (Percent Change)

       14

       12

       10

        8

        6

        4

        2

        0
              2001    2002     2003     2004       2005     2006      2007      2008       2009      2010        2011     2012     2013    2014
       -2

       -4

       -6
                                           Chile                   Colombia                     Mexico                    Peru

                                               Source: International Monetary Fund Data (Forecasts after 2013)

8
economic opportunities. For Asia, the                  The notion that Mexico is emerging                       But the Pacific Pumas have a golden
Pumas offer resource security and access               from its drug war would be news to                       opportunity, forged by hard work and
to market expansion.                                   citizens of Guerrero, where the murder                   good timing. Neighboring countries have
                                                       rate rivals that of Cote d’Ivoire.12 Chaos               demonstrated that economic bonanzas
THE OPPORTUNITY OF                                     in neighboring Venezuela fuels the                       can be easily squandered on subsidized
A CENTURY                                              perception of a safer Colombia, but                      gasoline and metro passes. Are the Pacific
The Pumas are far from perfect. From                   viewed independently, it can still be a                  Pumas prepared to run with the Tigers of
the urban shanties looming over Ciudad                 dangerous place.13 Peruvian growth is                    the East? Or will they be ensnared in the
Juarez to isolated rural communities                   in part predicated on fickle commodity                   traps of the past?
along the Strait of Magellan, bare feet                prices, and its democracy upon a fickle
and callused hands do not always square                electorate. Chile remains saddled with a
with the strong growth figures. The                    flawed constitution, one of many legacies
optimism in Mexico City is not always                  of a painful military dictatorship.
felt in Chiapas.
                                                       Significant challenges remain, to be sure.

                                                   The Pumas: Getting to Know You
                                                                                       Forecasts
 Country                                 Indicators                                                                             Rankings
                                                                                      2013- 2018

                                           Average                                  Private       Gross Fixed     Ease of
                                                         Average
                                              GDP                                Consumption      Investment       Doing                        Macroeconomic
              Population    Population                   Annual        2013                                                  Competitiveness
                                            Growth                                 Average          Average      Business                        Environment
                 2014       Aged 0-14                     Export     Inflation                                                    Rank
                                         2004 - 2013                                Annual          Annual         Rank                              Rank
               (Millions)    (Percent)                   Growth      (Percent)                                               (Latin America)
                                          (Removing                                 Growth          Growth         (Latin                       (Latin America)
                                                       2004 - 2013
                                             2009)                                 (Percent)       (Percent)     America)

   Chile        17.40          21           5.42          3.61         1.73          5.00           6.88            1               1                 1

 Colombia       46.05          28           5.05          6.59         2.22          4.47           6.43            3               6                 4

  Mexico       119.41          29           3.39          5.72         3.60          3.58           6.75            4               3                 6

   Peru         31.42          29           7.28          4.83         2.81          5.43           7.38            2               5                 2

            Chart Sources: Indicators - IMF Data, World Bank Development Indicators; Forecasts - Economist Intelligence Unit Reports, January 2014.
              Ease of Doing Business Rank – The World Bank; Latin American Competitiveness Rank and Macroeconomic Environment Rank from
                                             Global Economic Forum’s 2013 - 2014 Global Competitiveness Report.

                                                                                                                                               The Pacific Pumas   9
2                Pumanomics

     The argument in favor of Puma economies            GDP growth alone cannot fix this. Latin                   3) fiscal responsibility.      Each    is
     is about more than growth statistics: Latin        America must match expansion with                         considered individually.
     America has grown before. But previous             long-term     macroeconomic     stability
     economic expansion has often been built            to make that growth inclusive and                         THREE PILLARS OF
     upon shaky fundamentals, with those                consistent over the long term.                            MACROECONOMIC STABILITY
     in privileged positions accumulating                                                                         • Central Bank Maturity
     as much wealth as possible before the              Mexico, Colombia, Peru and Chile have                     Improved central bank performance
     entire system collapsed.                           not accomplished this yet. But recent                     and independence has solidified Puma
                                                        trends suggest that they are on their way                 macroeconomic stability. Gone are the
     Cycles of Latin American booms and                 to doing so. The Pacific Puma economies                   days of switching on the printing press
     busts1 entrenched long-standing and                have demonstrated consistency, stability                  to cover fiscal deficits. Inflation has
     flagrant inequality while governments’             and resilience despite persistent global                  been held within central bank bands
     short time horizons undermined any                 economic turbulence. Uniquely for the                     across the Puma economies.2 Not since
     coherent development strategy. In the              region, the Pumas have paired consistent                  Mexico in 2009 has annual inflation in
     last half century, millions of indigent            growth with low inflation and fiscal                      a Puma country topped five percent,
     campesinos streamed into Latin American            prudence. They have stoked investment                     and the Andean Pumas have averaged
     cities whose formal job market could               and private consumption while also                        2.62 percent since 2010 (besting a
     not adequately absorb them. They made              making inroads against poverty.                           global average of well over three percent
     their livings in makeshift economies just                                                                    through that span).3
     as they made their homes in makeshift              These developments have rested
     favelas that tumble down hillsides in              upon three pillars of macroeconomic                       Low inflation combined with burgeoning
     cities such as Bogotá, Caracas, or                 stability: 1) central bank maturity,                      reserves    (on   average,    Mexican,
     Rio de Janeiro.                                    2) floating exchange rates, and                           Colombian, Peruvian and Chilean reserve

                                                      Inflation (Annual Percentage)
      14

      12

      10

        8

        6

        4

        2

        0
               2005         2006          2007            2008           2009            2010            2011           2012       2013         2014

                                          Mercosur                        Pumas                      Advanced Economies

                                               Source: IMF Data, Inflation, Average Consumer Prices (Unweighted)
                                       Note: Argentine inflation–and thus Mercosor inflation–is likely higher than reported.

10
Puma Reserve Accumulation (Percent Change since 2009)
  120

  100

   80

   60

   40

   20

    0
                  2009                        2010                           2011                     2012                     2013

                                      Colombia                     Peru                      Chile           Mexico

                                                     Source: IMF International Financial Statistics
                                                        2009 = 0, Reserves Reported in SDRs

    Strong reserves have positioned the Pumas to outlast turbulence in currency markets.

positions have increased by 80 percent             • Floating Exchange Rates                           previously proven disastrous in emerging
just since 20094) have permitted the               Emerging markets have struggled to                  markets where rigid currencies and brittle
Pumas to assume countercyclical fiscal             establish successful exchange rate                  monetary systems ultimately cracked
and monetary positions—a rarity in                 regimes since the end of the Bretton                under stress. However, with the flexibility
Latin America. Chile tapped its sovereign          Woods monetary system in the 1970s.                 of the float, Puma central banks were not
wealth fund in 2008 to finance a fiscal            Many initially turned to some form                  forced to exhaust reserves defending pegs,
stimulus, while all four aggressively cut          of a peg—crawling or fixed—in order                 nor were they forced to gamble against
base rates during the global financial             to anchor exchange rates and stymie                 speculators betting on devaluations. The
crisis, offering more dovish monetary              hyperinflation. These pegs proved                   Pumas absorbed the rapid depreciation
policies that would be risky under                 difficult to defend and they often                  and rebounded swiftly.6
inflationary pressure. With the exception          unraveled into currency crises both in
of the Bank of Mexico, they have slowly            Latin America and in Asia.                          The Pacific Pumas’ mettle will be
retightened rates as growth rebounded.                                                                 tested as the US begins to unwind easy
                                                   The Pacific Pumas have been early                   monetary policies forged during the
A subtle, more targeted intervention               adopters of managed currency floats,5               global recession. The mere rumor of US
approach has helped. The Central Reserve           meaning that domestic currency                      Federal Reserve “tapering” in August
Bank of Peru, for example, has increased           conversion rates are allowed to fluctuate           2013 led to Mexican and Colombian
reserve rates on Peruvian banks to curb            based on market impulses. Central banks             depreciations and general disquiet
annual credit growth that had exceeded             help guide or stabilize movements via               in emerging market currencies. Yet,
20 percent—a more precise intervention             forex interventions, such as calls or puts          due to strong fundamentals and hard
than blunt base-rate hikes.                        on US dollars, or swaps that offer hedges           fought international credibility, Puma
                                                   without committing reserves.                        currencies have not faced as intense
Thanks in large part to central bank                                                                   pressure as currencies in other major
independence, the Pacific Pumas have               The flexible rates have allowed the Pumas           emerging markets such as South Africa,
established the credibility required               to absorb shocks to their real economies,           Turkey and Argentina. Moreover, given
to float their currencies on the open              perhaps best evidenced during the global            their ambitions to boost exports, the
market—an important accomplishment                 financial crisis that began in 2008. By             Pumas could well benefit from weaker
for mid-sized economies that are                   January 2009, Chilean, Colombian and                currencies, and their dedication to the
dedicated to maintaining sovereign                 Peruvian currencies had all fallen sharply          float is unlikely to waver.7
monetary policy and free flows of capital.         against the dollar as investors rushed
                                                   to perceived safety. Such pressure has

                                                                                                                   The Pacific Pumas | Pumanomics    11
• Fiscal Responsibility                                                Peru has flipped a structural deficit into         more implausible following the country’s
     Fiscal responsibility is a tall order for                              a surplus, which it has maintained for             energy reforms.
     growing emerging-market countries.                                     all but two years since 2006. Colombian
     Hugo Chávez’s final reelection push                                    external debt has dropped from 40                  The Pacto por México, a reform coalition
     in Venezuela in 2012 highlighted the                                   percent of GDP in 2003 to 22 percent               spearheaded by President Enrique Peña
     electoral bounty to be reaped from a                                   today with hard currency reserves nearly           Nieto, did pass a fiscal reform in October
     well-timed stimulus.8 Meanwhile, as                                    double their 2009 value.11 Bogotá has              of 2013 that should increase tax intake,
     Chilean President Michelle Bachelet                                    even codified fiscal discipline with               but conservatives believe that the reform
     found in the years that she nurtured                                   legislation that requires a deficit below          extends the depth of duties paid by the
     Chile’s sovereign wealth fund (2006 –                                  one percent of GDP by 2020, even while             existing tax base without increasing the
     2008), fiscal discipline during a boom                                 transfers to conflict victims and at-risk          breadth of the base—a nettlesome issue
     can cause discontent, even within one’s                                groups are expected to increase.12                 in a country where many jobs remain off
     own constituency.9                                                                                                        the books. The reform also raises taxes
                                                                            Mexico remains the fiscal wild card. The           on Mexico’s manufacturing maquiladora
     However, the Pacific Pumas have                                        country’s Finance Ministry reports tax             sector—a       move        competitiveness
     demonstrated fiscal restraint through                                  intake worth only 9.8 percent of GDP               specialists question given its sluggish
     their years of growth. Chile has knocked                               in 2012, far less than the Organization            growth in 2013.14
     public debt below 10 percent of GDP                                    for     Economic      Co-operation   and
     and its structural deficit to roughly one                              Development (OECD) average of 33                   All four Pumas will face fiscal tests in
     percent. Meanwhile, it has replenished                                 percent.13 Mexico has leaned on the                coming years as citizens’ expectations of
     its sovereign wealth funds: Now endowed                                coffers of the state-owned oil company             services to be provided by the state grow.
     with over US$15 billion,10 the funds                                   Petróleos Mexicanos (PEMEX) to bridge the          Puma governments must find ways to
     are more valuable than prior to the                                    funding gap, but this revenue strategy,            improve tax efficiency without negatively
     2008-09 stimulus.                                                      near-sighted to begin with, may become             affecting growth momentum.

                                                                    Debt and Fiscal Deficit in 2012

                                            260

                                            240                                                                                                             Japan
                                                                                                                               Maastricht Deficit
                                            220
                                                                                                                               Criterion (≤3% of GDP)
         Government Debt (Percent of GDP)

                                            200         Maastricht Debt Criterion
                                                        (≤60% of GDP)
                                            180

                                            160                                                                                 Greece
                                            140
                                                                                                           Italy                Portugal
                                            120                                                                                            Ireland

                                            100                                                                                                 United States

                                                                                 Germany                       Canada                        United                  Spain
                                             80                                                                                              Kingdom
                                                                                                        Brazil
                                             60

                                             40                                                                    Mexico
                                                                                 Colombia
                                                                                                                   Australia
                                             20                 Peru
                                                                              Chile
                                              0
                                                  -5   -3              -1               1              3                 5        7              9              11

                                                                                      Deficit (Percent of GDP)

                                                                                      Source: IMF Data, Pedro Aspe

          In an era of debt and stimulus programs, the Pumas have demonstrated impressive fiscal restraint.

12
Poverty Reduction in Latin America
                          60

                          50
  Percent of Population

                          40

                          30

                          20

                          10

                          0
                               Chile   Chile             Peru     Peru          Colombia Colombia            Mexico Mexico           Latin   Latin
                               2000    2011              2001     2012           2002     2012               2002   2012            America America
                                                                                                                                     1999    2012
                                                                          Poverty              Extreme Poverty
                                                                              Source: CEPAL

                The Pacific Pumas have made inroads against poverty while maintaining a business friendly environment.

THE (LATIN) AMERICAN                                            Poverty is down throughout the Americas,          could pave the way for foreign direct
DREAM: PUMA EMPLOYMENT,                                         including in the more statist countries of        investment, which has steadily increased
CONSUMPTION, AND                                                the ALBA alliance, such as Venezuela,             for the Pumas.19
INVESTMENT                                                      Ecuador and Bolivia. But the Pumas have
With this improved macroeconomic                                matched ALBA improvements without                 Businesses and investors are taking
foundation, the Pacific Pumas have                              the economic distortions.                         notice: The World Bank’s Doing Business
fostered a positive environment for                                                                               report ranked Chile, Peru, Colombia
consumption, investment and business.                           As the middle class expands, the Economist        and Mexico (in that order), as the
Poverty remains a fact of life for millions                     Intelligence Unit forecasts that the Pumas        most business-friendly countries in
of citizens in these four countries, as                         will enjoy five percent annual private            Latin America.20
it is for billions of people in emerging                        consumption expansion over the next six
markets around the world. Yet the Pumas                         years, representing a newfound domestic           While much work remains,21 Puma
have made rapid progress in this regard                         growth motor encompassing 214 million             economies are humming, poised to
as well. The Colombian poverty rate has                         people.17 Gross fixed investment,                 capitalize on opportunities presented by
dipped from 45 percent in 2005 to 34.1                          forecasted to grow 8.39 percent                   an emerging Pacific Asia while creating a
percent in 2011.15 Peruvian poverty fell                        annually across the Puma economies                roadmap for the rest of Latin America.
17 percent between 2006 and 2010,16 and                         over the next six years, will buttress
Chilean poverty has been cut in half since                      consumption increases.18 An Alliance-
the 1980s.                                                      wide commitment to infrastructure

                                                                                                                             The Pacific Pumas | Pumanomics   13
3              Democratic Maturation

     The Pacific Pumas is the story of                for the niceties of democracy, but it was          pragmatism of the four. Many feared that
     macroeconomic maturation: an emerging            not particularly ideological. The PRI may          the ascension of supposedly left-leaning
     region’s model for integrating into a            be responsible for perpetuating Mexico’s           President Ollanta Humala in 2011 would
     globalized world. Of crucial importance to       deeply ingrained culture of corruption,            put Peru on a populist course: The
     the narrative, however, are the improved         but it is not guilty of polarizing                 Peruvian stock market sank 12.5 percent
     democratic governance and institutions           the electorate.                                    following the election.4 By the end of
     of Mexico, Colombia, Peru and Chile.                                                                2012, however, the markets had recovered
     A country’s governance and economic              In Colombia, “full electoral competition           and Humala polled favorably among 75
     health are mutually dependent, and               has been unbroken since 1974.”2                    percent of Peru’s major business leaders,
     institutional distortions, just like             Perhaps owing to the threat of left-wing           even while his national approval rating
     economic distortions, can ultimately             violence, or perhaps as a remnant of               fell below 50 percent.5
     cause a financial system to collapse.1           the 1957 Frente Nacional power-sharing
                                                      agreement, Colombian governance has                The Pumas’ moderation not only
     Puma democracies are imperfect, but              not suffered the ideological vicissitudes          fosters democracies strong enough
     improved stability, moderation, and a            of its neighbors. Chile, for its part, has         to withstand populist impulses, but
     commitment to reform differentiates              a long history of compromise-oriented              it enables the private sector to expect
     them not only from other growing Latin           democracy dating back to the 19th                  that the rules of the game will remain
     American countries, but from many                century (with the glaring exception of the         relatively consistent.
     emerging markets around the globe                military dictatorship of 1973 – 1990).
     as well.                                                                                            Individually, Mexico, Colombia, Peru
                                                      Peru, with a history of populism, military         and Chile all face different governance
     Mexico’s    20th-century   bureaucratic          interventions and wild-card presidents,3           challenges. A closer look at each case
     authoritarian government had little time         has the most tenuous claim to                      highlights both the progress made and

                                                           Political Overview
                                                                                       3+ Democratic
                             Current Executive              Previous Executive         Elections Since               Key Issues in 2014
                             (*end of current term)
                                                                                            2000
                                                                                                           • Potential constitutional reforms
                        Michelle Bachelet                Sebastián Piñera
                                                                                                           • Resolving student protests
           Chile        Nueva Mayoría (Center Left)      Coalición (Center Right)            3             • Will Bachelet be dedicated to the
                        2014-2018*                       2010-2014
                                                                                                              Pacific Alliance?

                                                         Álvaro Uribe
                        Juan Manuel Santos                                                                 • Legislative elections (March)
                                                         Primero Colombia
        Colombia        Partido de la U (Centrist)
                                                         (Center Right)                      3             • Presidential elections (May)
                        2010-2014*                                                                         • Ongoing peace negotiations
                                                         2002-2010

                                                                                                           • Implementation of Energy Reform
                        Enrique Peña Nieto               Felipe Calderón
                                                                                                           • Can Pacto por Mexico succeed
          Mexico        PRI (Centrist)                   PAN (Center Right)                  3               without PRD?
                        2012-2018*                       2006-2012
                                                                                                           • Can the Mexican left find its voice?

                                                                                                           • Will Humala lose the left?
                        Ollanta Humala                   Alan García
                                                                                                           • Protests of FDI in Mining Sector
           Peru         Gana Perú (Center Left)          APRA (Center / Center Left)         3             • Sustaining growth despite
                        2011-2016*                       2006-2011
                                                                                                             weakening terms of trade

14
remaining tests that must still be met in    increased just as those across the border     THE COLOMBIAN PEACE
order to unlock the growth potential of      have dropped precipitously.                   PROCESS: FARC, FISH HEADS
the Pacific Pumas.                                                                         AND TOADS
                                             For industry, Mexican oil-based electricity   Colombia’s emergence has not been
                                             runs at roughly twice the price of US gas-    hindered       by    unsophisticated      or
THE MEXICAN REFORMS: A                       based electricity. Bloated energy costs       spendthrift economic management,10 but
CRITICAL STEP FORWARD                        eat away at the price advantages Mexico       rather by the persistent social instability
Mexico cannot unleash its true economic      hopes will entice US firms to relocate        that has plagued the country for
potential until the country addresses the    south, threatening Mexico’s hard-fought       decades and that has displaced roughly
bottlenecks that protect vested interests    foothold in global manufacturing. A           ten percent of the population.11 From
but preclude market sophistication.          successful energy reform9 could attract       guerrillas to paramilitaries to drug cartels
Trade policy reforms in the early 1990s6     the investment needed to unleash              (and the interconnections between the
positioned Mexico to become a global         the energy revolution in the country’s        three) the problem has always been the
manufacturing hub, but they proved           industrial sector.                            violence and the deterring effect this has
incomplete. In particular, sections of                                                     had on private investment, especially
the service sector—largely unaffected        On December 12, 2013, the Mexican             on long-term infrastructure projects.
by opened borders—survived the               Congress approved an energy bill that will    This same violence has also prevented
reforms with inefficiencies intact. With     open the country’s oil and gas sector to      Colombia from becoming a truly
an underperforming energy sector,            international investors. The legislation,     inclusive democracy.12
inefficient taxation and stifling private-   which proved more investor-friendly than
sector monopolies, Mexico needs a            initially expected, represented a major       A lasting peace that extends beyond
reform package with punch.                   breakthrough in President Peña Nieto’s        major metropolitan areas is fundamental
                                             quest for reform.                             to    unlocking     Colombia’s       growth
In his first year at the helm, President                                                   potential. The last two Colombian
Enrique Peña Nieto of the centrist PRI       The process has not always been               presidents have expended significant
party has attempted to make up for           smooth. Conservative PAN factions and         political capital addressing the lingering
decades of action deferred. His current      business leaders remain bitter about          conflict, though they have chosen sharply
push for reform is an intensely political    fiscal reform, spearheaded by the leftist     divergent tactics. President Álvaro Uribe
process, with the future of the Mexican      PRD. Meanwhile, the PRD withdrew              (2002 – 2010) confronted the guerrilla
economy hanging in the balance. The          from the Pacto por México in November         head-on. His violent military offensive
process has been turbulent, but it           2013, objecting to PAN leadership of          punished the largest rebel force, Fuerzas
appears to be yielding results.              energy reform.                                Armadas Revolucionarias de Colombia (FARC),
                                                                                           halving the faction’s troops and killing a
Through his Pacto por México agreement       The Pacto’s initiatives are, therefore, no    number of its influential leaders.
of December 2012, President Peña             faits accomplis. They are multi-step legal
Nieto brought the country’s three major      and political processes that could be         President Juan Manuel Santos, who took
political parties, PRI, PAN and PRD,7 to     ambushed by protests that bring Mexico        office in 2010, seeks to capitalize on the
outline a broad and ambitious agenda         City to a grinding halt or vested interests   rebel’s reduced capacity and influence
for fiscal, banking, education, telecom      willing to fight tooth and nail to protect    by negotiating a definitive peace accord.
and political reforms. While these are       privileged positions.                         At first glance, the talks between the
all important, it is energy reform that                                                    Colombian government and FARC
could prove the crucial springboard for      Nevertheless, the process underscores         leaders (which have occurred in Havana
Mexican growth.                              impressive    political   sophistication.     since November 2012) would seem
                                             President Peña Nieto may be the reform        unlikely to yield lasting results. After
Between offshore oil and shale gas,          movement’s figurehead, but the policy         all, the FARC’s ideological leaders are
Mexico has the resources for an energy       proposals are not populist in nature.         not believed to have significant control
revolution, but PEMEX, the state-owned       Rather, they are a concerted effort to        over a disjointed guerrilla movement
energy giant, lacks the capacity to fully    create the institutional foundation           that may be more interested in drug
exploit either. Despite massive shale        required to support the weighty potential     profits than in the movement’s original
gas reserves (the world’s sixth largest,     of the Mexican economy. The press might       Marxist principles.
according to Duncan Wood of the Wilson       refer to the lengthy dialogues between
Center8), PEMEX has been unable to           parties as “horse trading”, but for           However, the Havana dialogues are not
meet spiking domestic gas demand.            Mexico—a one-horse country for much           meant to end the violence, at least not
With pipelines from the US operating         of the last century—it is evidence of a       immediately. Rather, they are geared
at capacity, Mexican gas prices have         burgeoning democracy.                         towards establishing peace with the

                                                                                            The Pacific Pumas | Democratic Maturation     15
Paseo de la Reforma: Mexican Reforms Under President Peña Nieto
         Reform            Approval               Support            Opposition                            Reforms                              Goal
                                                                                           • Create autonomous regulators
                                                                                             (IFT & CFCE)
                                                                   PAN and PRD                                                            Economic growth,
        Telecom &                                                                          • Increase competition by auctioning off
                             June 2013          PAN, PRD, PRI      resist PRI efforts to                                                  employment,
       Competition                                                 protect Televisa
                                                                                             four TV chains
                                                                                                                                          and competition
                                                                                           • Create two free-to-air channels, along
                                                                                             with a government channel

                                                                   CNTE (dissident      • Evaluation system based on merit
                                                                   teachers’ union) won • C urb the power of teachers’ unions
         Education        September 2013        PAN, PRD, PRI                                                                             Society of rights
                                                                   some concessions to • End the practice of retirees selling or
                                                                   protect its members    passing down their positions

                                                                   PAN walked out on       • Establish universal pension system and
                                                                   debate, feelign its       unemployment insurance
                                                                   concerns, among                                                        Democratic
           Fiscal          October 2013            PRD, PRI                                • Increase tax rates for the wealthy
                                                                   them increasing VAT                                                    governance
                                                                                             and corporations
                                                                   in northern states,
                                                                   were ignored.           • Reduce maquiladora reimbursements

                                                                                        • Facilitate collection of loan guarantees by
                                                                                           creating specialized courts
                                                                   PRD sought changes,
                                                                                        • Allow banks to register losses in order to     Economic growth,
                                                                   but they were struck
          Banking         November 2013         PAN, PRD, PRI                              increase the amount and number of loans        employment, and
                                                                   down by PAN and
                                                                                           to SMEs                                        competition
                                                                   PRI
                                                                                        • Give government more regulatory power
                                                                                           over financial firms

                                                                                           • End ban on reelection for legislators and
                                                                   PRI, but PRI had           mayors
                                                                   to offer reform to
                                                                                           • Allow independent candidates to run for     Democratic
          Political       December 2013           PAN, PRD         entice PAN and PRD
                                                                                              public office                               governance
                                                                   to join Pacto por
                                                                   Mexico                  • Replace state elections-monitoring
                                                                                              institutions with a federal one (INE)

                                                   PAN, PRI        PRD opposed
                                                  (PRI allowed     profit-sharing and      • Open oil and gas industry to private and
                                              foreign-contracting private or foreign         foreign investment through cash, profit-     Economic growth,
          Energy          December 2013         rather than just   contracting and           sharing, and production licensing            employment, and
                                             profit-sharing to win pulled out of the       • Strips STPRM (Pemex union) of its five      competition
                                             PAN back after fiscal Pacto por Mexico          board member positions
                                                reform debacle)    in protest

                                     Source: Bertelsmann Foundation, The Economist, EL Universal, Reuters, Forbes, LA Times

     political wing of FARC, thus isolating            In the 1990s, the Colombian military                    Colombia one of the most dangerous
     the faction of of the movement that is            (and paramilitary) attempted to battle                  countries on the planet in the 1990s.
     fighting for illicit gains. As of now, the        the FARC by quitando el agua del pez—
     two factions are co-dependent. The                draining the water from the fish. In                    The current peace process represents
     political FARC provides ideological               practice, this meant locating the guerillas             a different strategy. Instead of draining
     legitimacy,13 while the operational FARC          and “removing” anything (or anyone) that                the water from the fish, the government
     offers financing, be it through drugs,            might hide or protect them. This led to                 hopes to remove the fish’s head. If the
     kidnapping or other destructive activity.         a spiraling tit-for-tat between different               government can make peace with FARC’s
                                                       armed forces, ultimately rendering                      political wing (its “brain”), this would

16
undermine the group’s justification                         received death threats from shadowy                         an outright overhaul of—the Chilean
for continued conflict. The remaining                       paramilitary organizations.15                               constitution. The three objectives are
“gangster” element of FARC, now lacking                                                                                 intertwined, and they reflect Chile’s
ideological support, would be isolated,                     The Colombian phrase tragar un zapo                         25-year effort to responsibly reform a
exposed, and doggedly pursued.                              (swallow a toad) might translate into                       severely flawed document.
                                                            English as “a tough pill to swallow”. By
An eventual peace deal might well                           offering institutional legitimacy and                       Forged under General Augusto Pinochet’s
guarantee political participation for the                   political inclusion to FARC leaders                         military dictatorship (1973–1990), Chile’s
former rebel combatants based on a quota                    in Havana, Colombian officials are                          1980 constitution carved out a series of
system (the country already reserves two                    swallowing toads by the handful. But                        authoritarian enclaves, designed to allow
senate seats for representatives from                       once Colombia can achieve what has                          General Pinochet to cloak his heavy-
the country’s indigenous communities,                       been an elusive peace, it can then begin                    handed rule in the guise of democracy.16
and two lower house seats for                               to flex its economic muscles.                               With     an     influential,   unchecked
Afro-Colombians).                                                                                                       military presence, weak legislature,
                                                            CHILEAN DEMOCRACY:                                          concentrated      presidential   powers,
The plan is contingent upon the                             UNFINISHED BUSINESS                                         and a binomial electoral system that
Colombian right accepting the left into                     On March 11, 2014, Michelle Bachelet                        ensured disproportionate conservative
the democratic sphere, by no means                          donned Chile’s presidential sash for a                      representation, Pinochet’s constitution
a given. In February 2014, Semana, a                        second time after having handily won a                      hardly provided a bedrock for Latin
Colombian weekly, offered evidence that                     December 15 run-off election (Bachelet                      America’s most advanced democracy.
the Colombian military—independent                          previously served as president from 2006
of the government—was spying on                             – 2010). According to her 2013 electoral                    Much to Chile’s credit, however,
the peace talks.14 That same month                          platform, she will focus on education,                      subsequent governments did not
two prominent left-leaning politicians                      tax reform and adjustments to—if not                        attempt to delegitimize this constitution

                                            Timeline – The Colombian Peace Process
      1948 - 57                 1960s - 1990s                       1998                          2000                       2001                       2002
 • 250,000-300,000          • Many of Colombia’s         • Conservative President • Pastrana’s “Plan        • Government, FARC            • Indpendent Alvaro
   killed in “La Violencia”,   left- and right-wing          Andres Pastrana           Colombia” wins bilions     sign San Francisco           Uribe assumes
   a 10-year civil war         extremist groups form.        Arango grants FARC        in mainly military aid     agreement,                   presidency, promising
   between conservatives       Political violence and        a safe haven the size     from the US to fight       committing both to           to crack down on rebel
   and liberals. In 1958,      assassinations are            of Switzerland in the     drug-trafficking and       negotiate ceasefire.         groups. As Uribe is
   both sides agree to         prevalent. Efforts to         south-east as part of     rebels who profit and                                   sworn in, explosions
   form the National           integrate FARC into           peace talks. The zone is  protect the trade.                                      rock Bogota.
   Front and ban all           politics are ineffective.     off-limits to the army.   Peace talks deteriorate.
   other parties.

     Uribe’s first term: 2002 - 2006                         Uribe’s second term: 2006 - 2010                         Santos’ first term: 2010 - present
 • Uribe carries out aggressive military campaign         • Uribistas win overwhelming electoral victories.         • Juan Manuel Santos, Uribe’s former Defense
   against FARC, pushing guerrillas out of towns           • Uribe continues heavy-handed campaign,                   Minister, elected president.
   and back into rural areas.                                including a cross-border strike in Ecuador that         • FARC unlitaterally releases several hostages.
 • New law offers reduced punishment for                    sparks diplomatic crises with Ecuador and               • Santos opens exploratory talks with FARC
   paramilitaries who turn in their arms. Rights             Venezuela.                                                guerrillas.
   groups say the legislation is too lenient.              • Colombia extradites 14 paramilitary warlords to        • Uribe accuses Santos of “giving impunity to
                                                             the United States.                                        terrorists”.
       November 2012 - May 2013                                  May 2013 - November 2013                                     November 28 - Present
 • Havana discussions begin.                               • Parties open discussions on political participation.   • Seventeenth round begins. Both parties agree
 • Early topics include land access, rural                • Topics include improved access to media, regional        to postpone the contentious topics (ending
    development, infrastructure, poverty reduction,           “Councils for Reconciliation and Coexistence”,           the conflict/demobilization and transnational
    and agrarian stimulus.                                    changes to ease the formation of political parties.      justice) and move to addressing international
 • Agreement on these topics reached in                   • Parties reach agreements on these topics in              drugs.
    May 2013.                                                 November 2013.

                                                                Source: BBC America, ColombiaPeace.org

                                                                                                                         The Pacific Pumas | Democratic Maturation      17
outright—an approach that would                 address the flawed high school model).             Finally, Bachelet’s incorporation of
     have likely interrupted the country’s           She would pay for this by increasing               former student leaders and more
     steady economic growth. Rather,                 corporate tax rates from 20 to 25 percent,         leftist factions into her Nueva Mayoría
     iterations of the center-left Concertación      still far below the weighted OECD average          coalition is an important step forward
     government (1990–2010) methodically             of just roughly 35 percent.19                      for Chile. While some22 view this as a
     reformed the document, often in close                                                              concerning leftward veer, it is far better
     consultation with the private sector and        Bachelet’s efforts to improve democratic           to incorporate these elements into the
     the political opposition. All told, the         inclusiveness are equally important.               formal political dialogue than to exclude
     original constitution has undergone             Following the Pinochet years, Chile’s              them from it. A century of repression has
     131 amendments, affecting 79 of its             vulnerable and nascent democracy took              not eliminated the Chilean left. Far better
     120 articles.17                                 a cautious, centrist approach. Twenty-             to have leftists participate in Chile’s
                                                     five years later, this method threatens to         democracia de los acuerdos (democracy based
     The current Bachelet government                 ossify the political process. The country’s        on agreement), rather than to have them
     appears poised to address the remaining         curious binomial election system                   battling against it.
     deficiencies instilled by the Pinochet          stipulates that each congressional
     government as well as the growing               district must split its two seats between          PERU: THE MATURATION OF
     pains of a country transitioning to             the first and second-place parties, unless         A PUMA CUB
     the developed world while still facing          one of the two can garner two-thirds of            Peru earns its stripes based on economic
     persistent inequality. If these changes         the vote—a relative rarity.                        performance and an openness to trade
     can promote upward mobility and a more                                                             that has positioned it to capitalize
     inclusive democracy, they will bolster the      This system disincentivizes participation          on Asia’s rise. In terms of democracy,
     country’s economic rise.                        because split districts are the most likely        however, this Pacific Puma still has some
                                                     outcome—one reason more and more                   growing up to do.23
     But Chile must come to terms with               Chileans are not bothering to go to the
     student protesters, whose strikes have          polls. If it’s a foregone conclusion that          The country has taken important
     intermittently shut down schools and            one liberal and one conservative will              strides. Peru has held three successful
     immobilized streets since 2006. The             win, why vote? In fact, only 50 percent of         presidential elections since the ousting
     students balk at Pinochet-era education         eligible Chileans voted in last November’s         of the semi-authoritarian Alberto
     laws that favor affluent pupils18 and           general election.20 Bachelet will seek             Fujimori (1990 - 2000), and the winners of
     university fees that reach US$1000              to reform the binomial system, though              those elections have generally followed
     monthly. Bachelet’s platform proposes           this will require politicking because her          the rules of the game. Peru has executed
     full subsidization of public universities       coalition lacks the congressional 3/5              party transitions: Three different political
     within six years (though this would not         quorum required to change it.21                    coalitions have led 21st century Peru.

                    The Road to Redemption: Chilean Constitutional Reforms Since 1989
              Year                   Reformer (Party)                                                Reforms

                                                                      • Limited penalization of groups previously viewed as subversive
                                                                      • Increased number of elected senators and added civilian member to
                               Military government & Concertación
              1989                                                      National Security Council
                                  de Partidos por la Democracia
                                                                      • Modified constitutional amendment mechanism
                                                                      • Removed president’s ability to dissolve lower house

                                                                      • Cut presidential term from six years to four years
                                    President Ricardo Lagos           • Eliminated ten unelected senate seats reserved for military-
              2005                (Concertación); Supported by          affiliated personnel
                                     Conservative Senators            • Eliminated several prerogatives of the armed forces and police chief
                                                                      • Increased power of congress

                                                                      • Revise binomial electoral system
              2014                 President Michelle Bachelet        • Address high-majority requirement for educational reforms
            (potential)                  (Nueva Mayoría)              • Inclusion of rights for women and indigenous groups
                                                                      • Extend presidential term limit from four years or allow consecutive terms

18
The first two presidents respected             is more institutional stability, Peruvian       Improved Puma governance may not
a constitutional ban on immediate              politics remain something of a crapshoot,       appear in any given year’s growth charts,
reelection, and current President              threatening to turn the current economic        but over time it will create conditions
Ollanta Humala, who took office in 2011,       winning streak into a bust.                     that could allow strong performance to
has promised to do the same.24 Two                                                             be sustained in the future.
successive presidents have run on left-        MOVING FORWARD
leaning platforms without subsequently         Puma democratic gains are not
dismantling Peru’s free-market economy,        irreversible. The December 9, 2013 sacking
suggesting an important modicum of             of Bogota’s left-leaning Mayor Gustavo
stability in Lima.                             Petro by a right-leaning inspector general
                                               on rather flimsy grounds underscores
Nevertheless, the country’s political          the tenuousness of Puma institutional
system remains rudimentary. In contrast        stability. We have yet to see if an elected,
to Mexico, Colombia and Chile, political       left-leaning Colombian or Mexican
volatility has been a norm in Peru. The        executive would adhere to existing
country suffered eight coups in the 20th       frameworks. But all democratic systems
century, while presidents averaged less        in the world suffer from significant
than three and a half years in office.         flaws. Deficiencies notwithstanding,
A more recent consequence of this              the democratic conditions in Mexico,
instability has been the diminished            Colombia, Peru and Chile have become
importance of political parties. Beginning     increasingly stable, and the rules of the
with Fujimori’s “anti-political” campaign      game increasingly clear and reliable.
in 1990, Peruvian presidents have built
political parties as short-term vehicles       These improvements have helped
they could ride to power.25 These rickety      position the Pumas to become regional
coalitions that lack philosophical             leaders. Most of Latin America may
underpinnings are subsequently held            be growing, but it is the Pumas, along
together by the meting out of sinecures        with Pumitas such as Uruguay and Costa
and favors.                                    Rica, that are simultaneously maturing
                                               politically. Mexico may have similar 2013
Operating without a strong party               growth figures to those of Venezuela, but
foundation, Peruvian presidents have           if the Mexican reforms are successful,
struggled to pursue a coherent direction.      it will be well positioned for consistent
For example, President Humala governs          future growth, while Venezuela will be
to the right of how he campaigned.             but one day closer to its reckoning.
Business may breathe a sigh of relief,
but voters who backed the president            Brazil’s market size swamps that of
based on his left-leaning platform feel        Colombia or Peru, but investors may tire
duped.26 Without any defined governing         of the Custo Brasil, the implicit operational
philosophy,       Peruvian       presidents’   cost of trying to do business in that
personal exploits (and foibles) attract        country, and they will be enticed by the
more attention than reform packages.           Pumas’ business-friendly governance.
These factors have inhibited the               Argentina maintains its perennial growth
country’s ability to fully translate growth    potential, but unpredictable rules of the
into tangible improvements—one reason          game hinder firms’ and families’ ability to
why the approval ratings of the last four      plan for the future—something that can
presidents have deteriorated through the       be done with relative confidence across
course of their presidencies.                  the Andes in Chile.

Peru’s economy has benefited from              Puma democratic maturity can compare
buoyant Asian commodity demand. To             favorably to governance in emerging
manage this windfall—and, ultimately, to       Asian countries as well, where the heavy
manage after the windfall—the country’s        hand of the state in countries such as
democracy must improve. Successful             China or Vietnam could face increased
elections and transitions represent an         social backlash in coming years.
important step forward. But until there

                                                                                                The Pacific Pumas | Democratic Maturation   19
4                Puma Integration:
                      Running with the Tigers

     If geography is destiny, Pacific Latin          partners. The statistics suggest the effort              and Chilean case studies. The chapter
     America is not a bad place to be in the         has been successful: The Pumas have                      concludes by considering the challenges
     early 21st century. East Asia has emerged       averaged 4.7 percent annual growth in                    the Pumas face in their pursuit
     as a cauldron of global growth and              exports since 2001, and the IMF forecasts                of integration.
     trade, while the US and Canada remain           Puma exports to grow six percent
     economic powerhouses and hubs of                annually through 2017.1                                  PUMA TRADE IN A
     innovation. Colombia, Peru, Chile and                                                                    GLOBALIZED WORLD
     Mexico have the good fortune of both            But trade liberalization, itself, is no                  The Pumas’ embrace of trade began
     having direct access to the Pacific’s           panacea, and export-led growth raises a                  mostly in the 1980s and 1990s, when
     intricate web of supply chains and of           host of challenges. The Andean Pumas,                    many Latin American countries lifted
     possessing the raw inputs—the copper,           with resource-heavy export portfolios,                   tariff and regulatory barriers that had
     iron ore, and hydrocarbons—that are so          must avoid the looming pitfalls of                       been designed to protect domestic
     valuable to emerging East Asia.                 commodity reliance. Mexico, on the                       industries.2 Unilateral reforms eventually
                                                     other hand, must encourage the rise of its               led to a “surge” in trade, especially with
     Much of Latin America has benefited             manufacturing sector while addressing                    non-traditional partners in East Asia.3
     from strong commodity prices over the           the gap between winners and losers                       More recently, the Pumas have been
     last ten years. What differentiates the         of trade.                                                active participants in bilateral and
     Pumas is their effort to create deeper                                                                   multilateral free trade agreements. They
     linkages, with both traditional trans-          This chapter begins with an overview                     have aligned with those countries seeking
     Atlantic partners and emerging Asian            of Puma integration, featuring Mexican                   to accomplish bilaterally and regionally

                              Puma Free Trade Agreements with Major Economies
                                          Chile                       Colombia                           Mexico                        Peru
                                                                                                  FTA (under negotiation       FTA (under negotiation
             Australia                  FTA (2009)                    FTA (proposed)
                                                                                                       through TPP)                 through TPP)

              Canada                    FTA (1997)                      FTA (2011)                  FTA (1994 - NAFTA)               FTA (2009)

               China                    FTA (2006)                                                                                   FTA (2010)

                 EU                     FTA (2003)                      FTA (2013)                       FTA (2000)                  FTA (2013)

               India                    PTA (2007)                    PTA (proposed)

               Japan                    EPA (2007)                    FTA (proposed)                     EPA (2005)                  FTA (2012)
                                                                 FTA (signed in 2013, not
           South Korea                  FTA (2004)                                               SECA (under negotiation)            FTA (2011)
                                                                         in force)
                                    FTA (signed in 2013,
             Thailand                                                                                                                FTA (2011)
                                      but not in force)

                 US                     FTA (2004)                      FTA (2012)                  FTA (1994 - NAFTA)               FTA (2009)
                                     FTA (signed 2011,                                            FTA (under negotiation       FTA (under negotiation
             Vietnam
                                      but not in force)                                                through TPP)                 through TPP
                                            Assisting Sources: Inter-American Development Bank, Barbara Kotschwar

20
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