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
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 1The 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.
2Executive 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 34
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 5I. The Pacific Pumas
1. The Pacific Pumas
2. Pumanomics
3. Improved Governance
4. Puma Integration
61 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 7The 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)
8economic 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 92 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.
10Puma 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.
12Poverty 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 133 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
14remaining 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 15Paseo 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
16undermine 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 17outright—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
18The 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 194 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
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