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U.S. Democracy Shortcomings The U.S.

Supreme Court ruled 5 to 4 in January this year that the government could not limit spending by U.S. corporations and labor unions that favored particular candidates in upcoming elections. This reversed many earlier decisions. The reasoning of the majority was that the government could not regulate political speech. The concern of Democrats is that large corporations would generally favor Republican candidates and be able to exert great influence over electoral outcomes because of their deep pockets, while the pockets of labor unions that would favor Democrats are far shallower. These concerns will be tested for the first time in the November elections. There are other limitations on democracy in the United States. The U.S. Senate is itself a deliberate contradiction of democracy in that each state, regardless of size, has two senators; each California senator represents 18.5 million people, and each senator from Wyoming represents fewer than 300,000 people. The very fact that 60 votes and not a simple majority of 51 are needed to open debate in the Senate is undemocratic. Much has been written over the years about the U.S. Senate being one of the worlds most important debating institutionsand, indeed, there have been great debates in the Senate over the yearsbut this cannot be stated with a straight face today. One can ask a different question about U.S. elections: Is it the state of the economy, stupid, that determines outcomes? Or, if not the actual state, the trend of the economy? The U.S. economy has its points of strength and weaknessit has recovered from the great recession in 2009, but it is not clear how steady this recovery will be about September 2010. If the state of the economy is the central explanation of why incumbents do well or badly, this implies that the tactical techniques used to influence electoral outcomes are marginal. If one accepts this viewpoint, the anti-Washington sentiment that attracts so much current attention is more noise than bedrock opinion. The noise may become deafening if the economy looks weak around mid-September or may dissipate in the unlikely situation that the economic data will look stronger at that time. Democracy manifests itself not only in electoral contests, but even more importantly in the daily lives of Americans. Free speech is one such right, but even this is limited under certain conditions. Protection of the civil rights of Americans is another example, and the reason that institutions such as the American Civil Liberties Union exist is that limits on civil rights are often imposed. The United States clearly is a republic (citizens pledge allegiance to the flag of the United States and to the republic for which it stands), but much has been written over the years about the combination of republic and democracy. The strength of democracy has been demonstrated many times in U.S. history, but it is also evident that severe limits have been placed from time to time on the fullness of this democracy. There are many reasons for these limits; they include the power of tradition (womens suffrage is an example of this), the desire of incumbent office holders to perpetuate their incumbency (gerrymandering), the seeking of advantage by political parties over opponents (spending limits placed on electoral candidates), and concerns that arise in times of turbulence (out of fear of undermining governmental powers). There is much validity in the warning that eternal vigilance is needed to protect liberty.

Problems Facing Latin American Countries at Year-end 2006 Latin America has caught the attention of news media that normally pay little heed to the region because of what is seen as a leftward trend in presidential election outcomes. Three recent examples are the victories of Rafael Correa Delgado in Ecuador on November 26, Hugo Chvez Fras in Venezuela on December 3, and Daniel Ortega Saavedra in Nicaragua on November 5. Lula was reelected president of Brazil on October 29. Andrs Manuel Lpez Obrador came within half a percentage point of being elected president of Mexico on July 2. In Peru, the election barely went against the populist-leftist candidate Ollanta Humala and, instead, Alan Garca Prez was chosen as president on June 4. Earlier, on October 31, 2004, Tabar Vzquez Rosas was chosen president of Uruguay; Evo Morales Ayma won an unprecedented majority to become president of Bolivia on December 18, 2005; and Michelle Bachelet Jeria, a socialist, was elected president of Chile on January 15, 2006. Many analysts use the word populist rather than leftist in the foregoing characterizations. A populist in my mind refers to a leader who spends money the government does not have, and that is not true for Chvez and the others. The high price of oil has provided the money that Chvez spends to win support at home and to attract allies elsewhere in Latin America and the Caribbean; and the other left-leaning presidential winners, where a record in office exists, have pursued prudent fiscal policies. That was the pattern established by Lula when he first assumed the office of president of Brazil in 2003. These three socioeconomic realitiesnot creating enough jobs, high income inequality, and great povertyare the main problems faced by governments in Latin America. Steady and significant economic growth is essential to create jobs for all those seeking work and to lower poverty levels, but economic growth may simultaneously increase income inequality. Most Latin American countries, unfortunately, have not had steady and sufficient economic growth to deal with two of the three problems that I believe are at the heart of the regions recent political outcomes. Looking at the region as a whole (Latin America plus the Caribbean), recent growth in gross domestic product has been poor to middlingranging from close to 0 to minus 1 percent in 2001 and 2002, and averaging about 4 percent a year for the remainder of the period since 1996. On a per capita basis, GDP growth was about 1 percentage points lower. GDP growth was low in the 1980s, in fact negative on a per capita basis for much of that decade. One must therefore ask why Latin American economic performance has been poor; and there is no simple answer. The region has gone through some unfortunate experiments, including fiscal laxity (or populism, if that term is preferred), retention of import substitution and pessimism about sustaining export competitiveness for much too long, and protectionism cloaked in the guise of economic integration. After the debt crisis of the 1980s exposed the frailty of these policies, most countries altered their economic policies by reducing import protection and espousing export promotion as the engine of growth. The inflation caused by fiscal profligacy was replaced by greater fiscal discipline, and modest rates of inflation now are the norm in the region. However, there is no consensus on what economic policies should be in the years ahead. Politicians in country after country excoriate the pressures put on them during the past 15 or so years, presumably by the United States, to adhere to the Washington Consensus, which laid out a set of mainstream economic policies, but these politicians have not clarified what the alternative policies should be. A return to import substitution is not feasible. Blaming the Washington Consensus for their problems Latin American elites allowed deep inequalities to take hold early in their national development programs, and these are proving hard to correct. Indigenous people were not

brought into the social mainstream through education and training and remain alienated to this day in many countries; this complicates achieving economic growth. On the other hand, Latin American countries have well-educated and talented people who can provide leadership for economic development. Yet, if one compares economic advancement in Latin America and East Asia since World War II, the Latin Americans come off poorly. Part of the explanation for this is the intransigence of political positions and the inability to reach political compromises to stimulate economic growth. This intransigence is evident in Mexico today and played a large role in the Argentine economic crisis five years ago. Earlier, I said that political elections are an outcome, whereas economic and social issues are the basic inputs in understanding recent election outcomes in Latin America. The reality is more complex: political stubbornness is also a basic input to economic outcomes.

Free Trade Area of the Americas: How to Screw Up a Perfectly Good Proposal
When President George H.W. Bush first proposed a hemispheric free trade area from Alaska to Tierra del Fuego in June 1990, the idea was greeted with considerable enthusiasm in Latin America and the Caribbean (LAC). The hemispheric countries that had reservations kept them mostly to themselves. Now, 14 years later, the Free Trade Area of the Americas (FTAA) is on life supportnot dead, but its survival uncertain. It is worth asking why this change took place. First, some background. When the proposal was made, most LAC countries had only recently shifted away from an import-substitution trade model, which downplayed the importance of exports, to a policy of export-led growth.Alongside this export pessimism, most LAC countries did not encourage inward foreign direct investment (FDI) based on concern that such investment would limit their control of economic policy. This unease over FDI was discarded after 1982 when Mexico came hat in hand to Washington seeking debt restructuring. LAC countries learned that the need to obtain creditor concessions on debt servicing truly frustrated their development, and the lost decade of the 1980s ensued. The timing of the Bush proposal was thus ideal. Myjudgment at that time was that hemispheric free trade would come into existence. The expectation was fortified when the Clinton administration renewed the idea at the Miami summit of 1994. A schedule for amassing the factual base of country trade programs was established using three hemispheric organizations as the virtual secretariatthe trade unit of the Organization of American States, the Inter-American Development Bank (IDB), and the Economic Commission for Latin America and the Caribbean. The information gathered in that process was more complete about hemispheric practices than had ever existed before. All of the data were made available on accessible Web sites. The procedure set up following the Santiago, Chile, summit of 1998 led to scores of meetings of ministers, vice ministers, and negotiators in the various functional areas that were to be part of the FTAA. A deadline of end 1994 was put in place for completing the negotiations. The process seemed to be on track. The countries themselves, and the IDB on its own initiative, even considered what the administrative structure of the FTAA would look like. All of us, it seems, were a bitnave. Some negative aspects of the FTAA process were not fully understoodcertainly by me, but I was not alone. One was the weak leadership shown by the United States for many years, and this led many LAC countries to wonder just how serious the U.S. initiative was. Much of this skepticism remains to this day. Brazils tenacity in seeking to limit the extent of any hemispheric free trade agreement was not immediately apparent. Lula, before he formally became president, openly stated his belief that the United States was pushing the FTAA in order to gain dominance over the hemisphere, but his governments position became subtleronce he was in office. However, most tariffs will not go to zero after Doha. About two score preferential trade agreements exist just among hemispheric countries, including those in existence and contemplated by the United States; the current complex system of overlapping discrimination and restrictive rules of origin will not automatically disappear. The most salient argument for the

FTAA is that it would create a single structure of preferences and rules of origin for the 34 countries negotiating the FTAA, or for as many who wish to join in the agreement. Getting rid of the spaghetti that now exists would be a most welcome accomplishment. The task of negotiating the FTAA has been made abominably difficult by the framework agreed to in a ministerial meeting in Miami in November 2003. This calls for a common set of undertakings by all the negotiating countries and then discretionary adherence to obligations for all the rest. The Brazilian stress has been on market access (especially lowering of tariffs) for the bulk of the common set commitments and less adherence by it on other areas, especially trade in services. This has been called FTAA lite or FTAA la carte. The failure to obtain meaningful concessions in trade in services would greatly reduce the attractiveness of the FTAA for the United States. The Miami framework also would allow plurilateral agreements under which less than the 34 negotiating countries could conclude their own full-fledged (not lite) agreements. Other considerations should be noted. The United States has negotiated or is in the process of concluding free trade agreements (FTAs) with just about all Latin American countries other than Venezuela and the four Mercosur countries (Argentina, Brazil, Paraguay, and Uruguay). Mercosur and the EU may conclude their own FTA before the end of 2004. If all these deals go forward, this will set up a situation in which the four Mercosur countries have a preferential trade relationship with the EU, while most other hemispheric countries will have preferential trade relationships with the United States. In addition, individual hemispheric countries will continue to have separate bilateral preferences with each other. Instead of a unified hemisphere, we will have a divided hemisphere replete with spaghetti. If this comes about it will be because Brazil did not want a full-fledged FTAA, and the United States opted for a raft of bilateral FTAs. An FTAA lite could complicate this situation further in that the reciprocal rights and obligations of its adherents would be less comprehensive than in their separate bilateral FTAs with the United Statesalthough this may be mitigated depending on how many countries join in a comprehensive plurilateral agreement under the Miami framework. The foregoing description may be unfathomable to the reader. I had trouble getting it straight. But that is what is happening. This, in essence, is my main conclusion. All the machinations and maneuvering are really complicating the trade structure in the hemisphere. I doubt that there is any basis for supporting an FTAA if the current process adds to rather than eliminates this complex web of cross discrimination and heaven only knows how many separate rules of origin. Traders will need experts to figure out the best country from which to ship goods to other countries in order to get the best tariff deal at the destination. The total structure that now seems to be playing out is likely to be unstable. If that is correct, this will at least provide work for another generation of trade negotiators to straighten out the mess.