TCS Daily

Job Summit of the Americas

By Martin Krause - November 4, 2005 12:00 AM

When the host country Argentina proposed as the subject for the IV Summit of the Americas "Creating Jobs to fight poverty and Strengthen Democratic Governance" it probably thought that this was the way to avoid discussing the Latin American Free Trade Agreement altogether and to bring the U.S. government into this populist territory where Latin American presidents are full of rhetoric, but low on substance.

As a result, there will most likely be no significant agreement reached at the summit, and one of the main points of discussion at this time being whether there will be any mention of the LAFTA whatsoever in the final document. Of course, there will be the usual speeches from Latin American leaders all competing for the right to say they care the most for the poor, but nothing will come out of it that will change the prospects of one single poor family in the region. But if the populist Latin American leaders think that they are comfortable with this subject, then they are fooling themselves.

First of all, the very fact that there is no mention of free trade shows they believe, and Venezuela's Hugo Chavez takes this to the limit, that any trade agreement in the region, and more specifically any trade agreement between the region and the U.S. will not lead to job creation but "job destruction". That is why, for them, "creating jobs" as a subject for the meeting is code word for "anti free-trade". No one says it more clearly than Ricardo Alfonsín, the former president of Argentina, and a leader of the populist social democrats in the region. He commented in the Buenos Aires newspaper Clarin (11/1/05): "The goal of the U.S. with LAFTA is to extend its markets in order to reduce its extraordinary deficit".

They wrongly believe that any relaxation of trade and investment barriers will mean an increase in trade in one only direction, from North to South, which they argue is only further confirmed by the enthusiasm of the U.S., Canada and Mexico to move ahead with opening these barriers.

Populist Latin American leaders believe that if our countries open up to the "north" our businessmen will not be able to compete, and local companies will end up being swallowed up by multinationals and will lose control of the economy. In a way, they are right. It will be difficult to compete and create jobs in these countries, but they completely misunderstand the cause of such a problem. If they want to find the root of the problem, they need to look in a mirror.

Job creation comes from investment and investments only flow to where prospects for making a profit outweigh the costs and risks associated with making the investment. Without capital, productivity is low and while salaries in Latin America may also be low, it does not necessarily follow that costs also are, due to the heavy burden of taxes and regulations that local producers are forced to comply with. And without a proper rule of law, the risk is even greater. In this environment only production for local consumption flourishes, and this is threatened by the opening of trade barriers.

In one sense the position of Latin America is correct: agricultural subsidies and protections are wrong and inflict damage on consumers in industrialized countries as well as producers in developing countries. Free trade in agriculture is needed. If this issue cannot be resolved at the Summit of the Americas, then free trade in the region may probably have to wait until the WTO's Doha Round is resolved. Although impossible at this point, if Latin American leaders were to come out from the Summit with a unified position against agricultural subsidies and protectionism this would be a huge step in the run up to Hong Kong, where the WTO Doha negotiations are taking place.

The Latin American populist and mercantilist dogma is, therefore, one that wants industrialized countries to open their markets for agriculture, together with import substitution to "protect" jobs in smokestack industries and services and weak or non-existent intellectual property rights.

The rest of the world, and particularly Asia, is taking a different route, following innovation and high technologies, focusing on developing clusters of creativity and innovation, making partners of business and academia, sustaining the rule of law, protecting contracts and intellectual property rights. And as they surge ahead economically, they look at Latin America through the rearview mirror.

Martin Krause is the Dean and Professor of economics at ESEADE Graduate Business School in Buenos Aires, Argentina.


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