Category Archives: Foreign investment

LESSONS FROM MEXICAN ECONOMIC REFORMS.

John Kehoe, from the Australian Financial Review, published today an op-ed on the economic reforms undertaken by Mexican President Peña Nieto.  Kehoe highlights the political agreement reached among the three major parties (PRI, PAN, PRD) that have enable the current administration to pass the much needed reforms (previous post). Despite outstanding challenges to overcome, such as violence and corruption, Mexico earned ‘A’ grade sovereign rate from Moody’s credit rating agency as a result of such reforms.

 

Kehoe further notes Australian Treasurer Joe Hockey comments, on Mexico’s efforts to undertake domestic reforms to cope with global volatility. Last weekend in Sydney, G20 Finance Ministers and Central Bank Governors committed to promote a resilient financial system and to foster a conducive investment environment. The author concludes that Mexico, along with other developing countries, is in a much better position to fulfill the G20 commitments.

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Filed under Foreign investment, Global Governance, Macroeconomics, Mexico, News brief, Uncategorized

Peña Nieto on the front cover of TIME magazine

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Last 16 February, Mexican President Enrique Peña Nieto made the front cover of TIME magazine. This issue spark off a heated debated in social media in Mexico, criticising Michael Crowley, the author, and TIME for allegedly “selling out” themselves to the Peña Nieto government.

As Crowley rightly points out, Peña Nieto only won the presidential election with 38% of the votes and therefore it is evident that his detractors react this way. I agree that perhaps the title of the story would have been better with an interrogation mark at the end: “SAVING MEXICO?”, but I must concede that the author presents both sides of the same coin. He highlights achievements and strengths of the country, but also points out the numerous challenges that the current government still has to overcome.

At the same time, I must recognise the sharp Mexican humor to transform the cover into this one.

In any case, I strongly invite you to read the article (or Spanish version) and make your own judgement.

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Filed under Corruption, Democracy, Development, Foreign investment, Macroeconomics, Mexico, News brief, Security, Uncategorized

Aztec tiger begins to sharpen its claws

The Financial Times published an interesting article on Mexico’s economic environment. It highlights the prudent fiscal and monetary policies that the country has implemented recently, creating a sound macroeconomic environment.

Furthermore, the journalist underlines the structural reforms that President Peña Nieto was able to promote, as a result of the pact established with the main political forces of the country. Mexico is in the track of industrialisation, but still has a long way to go. Peña Nieto’s government needs to capitalize the momentum and continue further with other important reforms, such as the energy sector and tax schemes.

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Filed under Foreign investment, Macroeconomics, Mexico, News brief, Trade, Uncategorized

‘RELAUNCHING’ CHINA-MEXICO RELATIONS: President Xi Jinping visit to Mexico

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Last week, Chinese President Xi Jinping visited Mexico, as part of his first trip to the Americas. Earlier this year, during a trip to China to participate in the Boao Forum for Asia, President Peña Nieto extended an invitation to the Chinese President to visit Mexico. China and Mexico established diplomatic relations in 1972, but bilateral contacts are much older than that. In the XVIth Century, during the Spanish colony ships sailed the Pacific loaded with precious metals, cacao grains, avocados, tomatoes and other articles from the Americas that were exchanged for Asian spices, Chinese tea, porcelain and fabrics, especially silk.

For most of the last 40 years, the relations between the countries were quite cordial, during the last ten years. However, diplomatic mishaps and a policy that sought to bring Mexico closer to the US, during the Fox and Calderon administrations, provoked the Mexican neglect of strategic partners in other parts of the world, and in particular in Asia. Despite regular high-level encounters in international fora, such as APEC or G20, and the signing of cooperation agreements in numerous sectors, trade rivalry overshadowed  Sino-Mexican bilateral relations.

Unlike the rest of Latin-America, the economic relationship with Mexico has not been based on Chinese investment to ensure the flow of raw materials to fuel China’s industry. In fact, cheap Chinese labour made Mexico and China direct competitors in the US market;  in some cases, Chinese manufactures displaced national production in the Mexican domestic market. Furthermore, the bilateral trade deficit is heavily favorable to China; in 2012 Chinese exports to Mexico accounted for USD$57 billion, while Mexican exports to China were USD$5.7  billion (according to the Mexican Ministry of Trade, www.economia.gob.mx).

The occasion to relaunch the bilateral relationship could not be better. Each President has recently taken office and both countries seek to reaffirm their positions as global actors. On the domestic side, President Peña Nieto’s administration started a series of structural reforms to increase economic productivity, while China seeks to maintain its economic momentum. The increase of Chinese wages and international oil prices has narrowed down the productivity gap between Chinese and Mexican products. China’s products are not as cheap as they used to, in some cases, it is cheaper and certainly quicker to import from Mexico than from China for US companies. These elements helped Mexico to leave aside fears and realise the economic potential of complementing, rather than competing with, Chinese partners.

With the aims to enhance mutual trust, expand cooperation and deepen friendship, Peña Nieto and Xi Jinping announced the Comprehensive Strategic Partnership. This agreement aims to push for comprehensive, in-depth and mutual cooperation between the two countries and to make positive contributions to world peace, stability and prosperity. A permanent bilateral commission and working groups will follow the commitments established in the Partnership by the leaders.

Likewise, the two Presidents agreed to move forward, solving the long standing conflicts on pork, tequila and textiles trade. They committed to increase trade and investment and established a high-level business forum. Mexico and China also signed memoranda of understanding to improve cooperation in energy, biotechnology, mining, financial services and sport.

Additionally, President Peña Nieto and President Xi Jinping will encourage deeper people-to-people links. To start, the Chinese government will increase the number of scholarships offered to Mexican students from 40 to 300 per year. To increase cultural and academic exchanges, a Mexican cultural centre in Beijing and a centre specialising on Chinese studies in the National Autonomous University of Mexico (UNAM) will be opened. Finally, as symbol of the two countries’ endeavours to boost tourism flows, during the last day of the visit, President Xi Jinping and his wife visited the archaeological site of Chichen-Itza.

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Some specialists point out that the Chinese visit to Latin America is a sign to the US. China is pointing out that it has interests in other parts of the world, and is not afraid to contest US hegemony, even in the its back yard. Similarly, the US could interpret the visit as a payback for the recent increase in US engagement in Asia, China’s back yard. In any case, this is a perfect environment for Mexico’s diversification, since it could help to break the Mexican trade dependency on the US and to reaffirm itself as a key global player.

As said by President Xi Jiping in his address to the Mexican Senate*, China has a population of 1,300 million, is the second largest importer, expects to invest overseas more than USD$500, and more than 400 million of Chinese tourists will travel around the world in the next few years. This is an incredible opportunity for countries in Latin America, and of course for Mexico. The Comprehensive Strategic Partnership has opened the path for a promising future for Sino-Mexican relations.

 Mexico cannot waste this opportunity…


* I do encourage you to read President Xi Jinping’s speech to the Mexican Senate.

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Filed under BRICS, Development, Foreign investment, Mexico, News brief, Trade, Uncategorized

Two OpEds on Brazil-China with Australian implications

ANCLAS Senior Associate Dr Sean Burges has had two OpEds published this week dealing with Brazil-China relations and ideas for balancing the relationship through cooperation with Australia and Canada. The English-language version, structured around some of the challenges that could arise from Australia’s focus on Asia was published on December 5th in The Australian. A separate piece addressing how Brazil might get past its current challenges with China was published in the major Brazilian daily O Estado de São Paulothe English language text is appended below.

 

A new approach needed for China
Sean W Burges
Senior Associate, Australian National Centre for Latin American Studies at the Australian National University
Like many other countries, Brazil is struggling with the relentless onslaught of Chinese exports. The Brazil-China Business Council convened its fourth annual conference in São Paulo to try and address this challenge. Some interesting stories were told, but not much new thinking was displayed. More worryingly, there appeared to be little recognition of the subtle warnings that China is maneuvering Brazil into position as a subordinate, vassal state.

China’s ambassador to Brazil, Li Jinzhang, used a mix of oblique messaging and ancient imperial strategies to quietly underline relative power positions and the limits on Brazilian aspirations for the bilateral relationship. Jinzhang deliberately spoke in Mandarin, not the Portuguese that we might expect from an ambassador to an important global player such as Brazil. To be generous, it is possible that his Portuguese, a language reportedly difficult for the Chinese, was not up to a major public address. But if this was so, why not use a common second language such as English, the international language of business and diplomacy? His message was clear: you must come to us and adapt to our ways and priorities.

Quiet reminders that China dominates the bilateral relationship were accompanied by a subtle warning to Brazilian industrialists complaining about Chinese imports and calling on Brasília to engage in further protectionist measures. Jinzhang told the story of a small Chinese village that, like Brazil, was a predominantly agrarian community. Through hard work and innovation this village transformed itself into an industrial powerhouse and now contributes just over two percent of China’s exports from a tiny geographical footprint. While gently delivered, the lesson for the gathered Brazilian business leaders was very simple: we are not going to slow the pace of exports and it is up to you to innovate and compete with us. More chillingly for Brazil’s leading agro-industrial business sector, Jinzhang also noted that a central policy goal of the new administration in Beijing is food security with an ultimate aim of self-sufficiency.

An implicit aspect of CEBC President Ambassador Sergio Amaral’s closing address was a riposte to China’s challenge. Unfortunately, Amaral’s idea of reinvigorating Latin American integration ventures to create a larger internal market and a common set of high tariffs to exclude Chinese products is an old idea that has failed. Moreover, the idea is delusional, completely ignoring that Chile, Peru, Colombia and Mexico have banded together to form the Pacific Alliance precisely with the idea of looking West to China’s Asia and not East to Brazil.

Interestingly, Jinzhang’s story about a Chinese agrarian town transformed by innovation points to a path forward for Brazil, one that would involve a very different direction for Brazilian foreign policy and major, but ultimately productive shifts in thinking by Brazilian business. There are two concrete avenues for action.

First, Brazil must increase its rate of innovation. The Ciência Sem Fronteiras program will help, but it is not enough on its own. Lessons from the Chinese experience should be added to the mix. Industrialization in China was built upon successive waves of FDI, which brought new technology and processes – Chinese firms engaged in an extensive process of international collaboration to drive innovation. Thanks to Ciência Sem Fronteiras Brazilian universities are already beginning to experience this through active engagement by universities in the US, UK, Canada, Europe and even my own home institution, the Australian National University. Business should follow and actively seek dynamic partners with whom new markets, products and processes can be explored and developed. The Brazilian Government could actively assist with creative programming at institutions such as the BNDES or new financing lines through the Banco do Brasil or Caixa Economica.

Second, Brazil needs a new approach to managing China. One option that will not work is the middle power route Australia and Canada have long-used to manage bilateral relations with the US. The commonality of interests is simply not in place to make this viable with BRIC-member China. Instead, attention should be given to a sophisticated ‘balancing’ strategy involving a partnership with Australia and Canada. Why these two countries? Both are relatively small and actively courting Brazil, which makes them manageable. More importantly for the impact on Chinese perceptions, they are the two other major mineral and food exporters to China.

With Australia, Brazil and Canada – a new ABC group of countries – engaging China independently Beijing is able to engage in a divide and conquer strategy. The end result is that Chinese tariffs let in raw materials cheaply, but price value-added products out of the market. This leaves the ABC countries as breadbaskets for Chinese consumers. Collective action might be an avenue for reversing this process and forcing concessions from Beijing.
China is undoubtedly going to one of Brazil’s main economic partners for the rest of this century. The danger is that relying on tired integration models and an excessively autonomist approach to engaging Beijing will quickly shunt Brazil back into a peripheral position as little more than China’s pantry.

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Filed under Brazil, Foreign investment, Foreign Policy / Diplomacy, Trade

Industrial policy, Bolivian style

Bolivia has a long history of producing the commodities that the world wants, but not gaining much from their export. (For a sense of the problem, take a look at the book “From Silver to Cocaine. Latin American Commodity Chains and the Building of the World Economy, 1500-2000“). The latest twist in this pattern is the Bolivian government’s decision to not so much nationalize vast swathes of the country’s resource extraction industry as change the contract terms so that Bolivia becomes a more important partner and more processing of the resources takes place in Bolivia. Is it working? To some extent, according to an interesting blog entry from the Financial Times. Bolivia is growing well and investment is still flowing in. It is a very interesting new public policy experiment that seems to have antecedents in Brazil’s (non)privatized major resource companies.

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Filed under Bolivia, Development, Foreign investment, News brief

Franco reportedly governing Paraguay well; election set for April 2013

Irrespective of your personal take on what happened in Paraguay to oust Fernando Lugo from the Palacio de López, it does appear that his successor Federico Franco is taking the job of president very seriously. Boston.com is reporting that Franco has succeeded in pushing through a number of key policy items that have alluded previous presidents.

  • Paraguayans earning more than US$4,000 a month are now going to have to pay income tax, which is a major change for a country that previously had no personal income tax in place.
  • Vague suggestions of progress on land reform and security provision in the north are mentioned.
  • Franco is also pushing talks with Rio Tinto/Alcan to build an aluminum smelter.

While Yves Engler has deplored the aluminum project as an example of something akin to Canadian imperialism, these sort of reactionary ideological readings fail to account for Paraguay’s abject failure to use its hydroelectric potential for national development. The $3.5 billion project represents the first serious attempt to use Paraguay’s massive electricity surplus from the Itaipu dam as a boon to national development rather than as a de facto gift to Brazil. Fox News (yes… a right wing ideological network as a counter to Engler is possibly not good form, but look at the data points in the link, not the invective, or try UPI for something similar) is reminding us that under the Itaipu treaty Paraguay has to sell from the dam that it does not use to Brazil at the very low rate of $25/MWh. Paraguay gets 50% of the binational project’s output, but only uses a scant 14%. Although Engler is right that the price being floated to Rio Tinto / Alcan is still low, but at $43/MWh is nearly twice what Paraguay is earning now. More to the point, the smelter project offers a possibility of industrial development and economic expansion that has simply failed to appear after two decades in the trade bloc Mercosur. This is the same bloc which suspended Paraguay’s political rights after Lugo’s impeachment, but left trade (and presumably energy trade) rights in place.

What Franco is doing is an important step for Paraguay. The aluminum project is a Major deal for Paraguay and a significant headache for Brazil, which relies on cheap Itaipu surplus electricity to keep the lights on in São Paulo. Even so, Brasília will likely happily deal with this headache if it will help bring further stability to Paraguay.

The stability and democratic consolidation question remains the big one in Paraguay. A presidential election date of 21 April 2013 has now been announced. More importantly, Franco has been crystal clear that he will honour the constitution, which precludes a president from ever running for reelection. So far there are no indications that Franco will follow some other regional leaders and look for favourable readings of the constitution or new magna cartas to allow a reelection bid. This leaves the question of whether or not Franco will use his position to ensure that the 2013 vote takes place without any of the explicit and implicit spending sprees and manipulations that have formed the backdrop to ballots since Andrés Rodriguez was quickly elected in 1989. We will be watching.

–Sean Burges

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Filed under Analysis, Brazil, Democracy, Development, Foreign investment, MERCOSUR, News brief, Paraguay