Latin America's New Consensus

by Greg Grandin

The Nation magazine, May 1, 2006

Even as the United States wages a war in the Persian Gulf that Secretary of State Condoleezza Rice describes as a central front in an epic "generational struggle" in defense of Western values and freedoms, another geopolitical threat has been massing on its southern flank. Over the course of the past seven years, Latin America has seen the rebirth of nationalist and socialist political movements, movements that were long thought to have been dispatched by cold war death squads. Following Hugo Chávez's 1998 landslide victory in Venezuela, one country after another has turned left. Today, roughly 300 million of Latin America's 520 million citizens live under governments that either want to reform the Washington Consensus--a euphemism for the mix of punishing fiscal austerity, privatization and market liberalization that has produced staggering levels of poverty and inequality over the past three decades--or abolish it altogether and create a new, more equitable global economy.

This year, that number is likely to grow. Latin America is in the middle of an election cycle that has already seen Evo Morales win in Bolivia and Michelle Bachelet, a single mother and socialist, win a third term for Chile's center-left Concertación Coalition. On April 9 in Peru, Ollanta Humala, a nationalist former military officer backed by Chávez and Morales, came from behind to force a runoff. In the months ahead, Colombia, Mexico, Brazil, Ecuador, Nicaragua and Venezuela will hold presidential elections. And with center-leftist Manuel López Obrador ahead in Mexico, the Sandinistas poised to make a comeback in Nicaragua and Chávez's re-election all but certain, the Bush Administration is nervous. It has responded by trying to drive a wedge between what Rice describes as the "false populism" that is spreading throughout the Andes and the pragmatic reformism of Chile, Uruguay and Brazil--in other words, between the "statesmen" and the "madmen," as Chávez recently put it.

There are, in fact, important differences among Latin American leftists--between, say, Brazil's Luiz Inácio Lula da Silva, who has opted to pursue reform through market-led growth, and Chávez, who is more willing to mobilize the left's social base, allow the state a greater role in the economy and pick fights with international capital. But they are also highly dependent on one another, especially in their dealings with the United States. For Chávez, besieged during the first three years of his administration, the election of sympathetic regional allies, starting with Lula in 2002, came just in time to help him shore up his position and push back his domestic and foreign opponents. In return, the confrontational Chávez provides cover to his more circumspect counterparts, drawing Washington's anger. If it were not for its quarrel with Venezuela, the United States would certainly be less tolerant of what Rice calls its "differences with friends," which include Brazil's opposition to the Free Trade Agreement of the Americas (FTAA) and Chile's refusal to support the invasion of Iraq.

But more than just giving one another room to maneuver, Latin America's new leftists have produced over the last couple of years their own consensus, a common project to use the centrifugal forces of globalization to loosen Washington's unipolar grip. Brazil's Lula has been central to this project, especially insofar as he has helped to awaken international financial institutions to the downsides of free-market orthodoxy. When he was elected, he was hailed as Latin America's great hope, not just by the poor but, once he promised to maintain a high budget surplus, by the officials of institutions like the World Bank and the Inter-American Development Bank. His campaign took place in the shadow of Argentina's financial meltdown, the latest in a series of international financial crises that led globalization's managers to emphasize the importance not only of freeing markets but of strengthening institutions that could stabilize those markets. If a man of the left such as Lula could achieve "growth with equity"--which by Brazil's 2002 vote had become the World Bank's new mantra--in Latin America's largest economy, it would go a long way toward defining the post-Washington Consensus consensus. Lula, said former World Bank president James Wolfensohn in an interview last year, is leading the "most important experiment in Latin America today."

As Lula approaches the end of his first, and possibly only, term, the results of this experiment have been disappointing. Extreme poverty has decreased somewhat, but this has less to do with his showpiece "zero hunger" program than with steady economic growth driven by high commodity prices. Still, after emerging as a spokesperson for developing countries on trade issues and leading the opposition to the FTAA over subsidies and concerns about intellectual property rights, he did begin to represent an alternative, if not to free trade then to Washington's stranglehold over the way free trade was proceeding in the Americas.

Under Lula, Brazil has played a key role in fostering the economic links that have begun to wean the region from its dependence on the United States. Buoyed by Argentina's and Uruguay's turn left, and anchored by Brazil's enormous market and advanced agricultural, pharmaceutical, heavy equipment, steel and aeronautical sectors, the countries of South America have taken a number of steps to diversify the hemisphere's economy. They courted non-US trade and investment, particularly from Asia. Fueled by a consuming thirst for Latin America's raw materials--its oil, ore and soybeans--the Chinese government has negotiated more than 400 investment and trade deals with Latin America over the past few years, investing more than $50 billion in the region. China is both Brazil's and Argentina's fourth-largest trading partner, providing $7 billion for port and railroad modernization and signing $20 billion worth of commercial agreements. South American leaders have also sought to deepen regional economic integration, primarily by expanding the Mercosur--South America's most important commercial alliance--and embarking on an ambitious road-building project. These efforts appear to be working. In December Lula claimed that Brazil's trade with the rest of Latin America grew by nearly 90 percent since the previous year, compared with a 20 percent increase with the United States.

One sign that economic diversification is gaining force was the success last year of Argentine President Néstor Kirchner's take-it-or-leave-it offer of 30 cents on every dollar owed on its $100 billion external debt, to be paid in long-term, low-interest bonds. In the past, financial markets would have severely punished such insolence, but with Asian investment pouring in and the economy rebounding at a steady clip, a majority of lenders had no choice but to make the deal. For its part, the IMF, fearing either a complete default or a successful agreement made without its imprimatur, was forced grudgingly to sanction the bid. It was, according to Knight Ridder Business News, the "biggest sovereign debt restructuring in history, with international creditors accepting unprecedented losses." "For the first time in history," a triumphal Kirchner said in a speech to Congress reporting on the transaction, "a restructuring process has culminated in a drastic reduction of the indebtedness of the country."

Asian investment, road building and common markets are not what Fidel Castro had in mind when in the 1960s he rallied third-world youth to take up arms against Yankee imperialism. Yet the rise and maintenance of the United States as a world power has long been predicated on claiming Latin America as its own. On the eve of the cold war, for instance, even as Harry Truman was promoting the United Nations and pushing for open markets elsewhere, his envoys in Latin America were negotiating an alliance that gave preferential treatment to US corporations and allowed Washington to mobilize the region as a bloc in its struggle against the Soviet Union.

In the past few years, however, the region's most consequential nations have refused to be conscripted into Bush's "war on terror." And unlike the way they lined up to quarantine Cuba during the cold war, they have rebuffed Washington's calls to pursue an "inoculation strategy" against Chávez, as Secretary of State Rice put it to Congress in February. Last year, Bush even saw his nominee to head the Organization of American States bested by a candidate backed by Venezuela. If Latin America's new left achieves nothing else, it has at least broken the political bonds of this proprietary relationship.

The FTAA is the US government's gambit to turn things around. It is meant to do for Latin America what the North American Free Trade Agreement did for Mexico: ratify its status as a US province within an increasingly globalized economy. Under NAFTA the United States has come to dominate Mexican trade, muscling out other Latin American countries. The same is expected to occur when the Chilean and Central American free-trade pacts are fully implemented. Call it "market polygamy," whereby the United States can have multiple partners but each of those partners must remain faithful to it alone.

Hopes that Brazil could counter the gravitational pull of the United States have been diminished by the corruption scandals that in the past ten months have rocked Lula's Partido dos Trabalhadores (PT) and shattered its Congressional coalition. While Lula has not yet announced whether he will stand for re-election in October, recent polls indicate that if he does, he will most likely face a tough fight. There is still time for him to pull through. He has recently raised the minimum wage, increased social spending and cut interest rates, all in the hopes of boosting the economy in the run-up to the election. But even if he does win a second term, he will govern from a greatly weakened position.

As Lula recedes, Chávez proceeds. Until his victory in the August 2004 recall, it was easy to dismiss the Venezuelan president as the latest in a long line of Latin American Bonapartists, a strongman who emerged to restore order after Venezuela's two-party system collapsed under the weight of its own venal incompetence. During Chávez's first six years in office, his fiery rhetoric did little to diminish economic inequality or challenge the generous contracts his predecessors gave to petroleum multinationals. But whereas Lula started with high expectations only to disappoint, Chávez has moved in the opposite direction. He has rebounded from the recall fight to quicken the pace of reform. With the economy booming, unemployment falling, the opposition in disarray and his Fifth Republic Movement in control of Congress and regional posts, he has accelerated the distribution of expropriated land, nationalizing industries and diverting Central Bank reserves to diversify the economy.

For Washington, the most immediate threat posed by Venezuela is not the spread of "false populism" in Latin America but Chávez's emergence as the motor behind the left's attempt to advance economic and political multilateralism. He has turned out to be a skilled rope-a-dope artist, making at times preposterous political pronouncements--in March Chávez requested that the legislature have the white horse on Venezuela's flag face left instead of right, so that it would no longer be an "imperialist horse"--while playing a nimble Great Game of geopolitics. He has capitalized on the rise of China and India as alternative sources of investment and trade--Venezuelan exports to India tripled over the past year, while oil sales to China are expected to double this year and increase fivefold by 2010--and parlayed the 2004 election of Spanish Prime Minister José Luis Rodríguez Zapatero into a strategic victory. Under Zapatero's predecessor, José Aznar, Madrid not only backed Bush's "war on terror" but helped enforce neoliberalism in Latin America through Spain's powerful banking sector. That has changed as Zapatero and Chávez have joined their respective countries into a corridor linking South America and the European Union. Although Washington may yet scuttle the deal, Spain recently agreed to sell Venezuela $2 billion worth of transport planes and patrol boats, while Caracas has offered a long-term agreement to supply Spain with gas and oil.

Chávez has cultivated alliances across the ideological spectrum, buying arms from Russia and negotiating a deal with Colombia's conservative President Alvaro Uribe to build a natural gas pipeline connecting the two countries--the first step in what observers believe will give Venezuela access to the Pacific and lower export costs to China. Venezuela has also managed to secure the tacit endorsement of Chile's just inaugurated Bachelet for its bid to become a nonpermanent member of the UN Security Council, which surely will contribute to John Bolton's anger issues.

Last December Venezuela scored another diplomatic coup, joining Argentina, Brazil, Uruguay and Paraguay as a full member in Mercosur. When Mercosur was founded in 1991, it was to be little more than a tool to groom individual countries for eventual absorption into the US market. But reformers in recent years have worked to transform it into a real alternative to Washington's FTAA. The entrance of Venezuela, South America's third-largest economy, comes just at the moment when Lula's troubles are threatening to derail this project. Serious obstacles to trade and tariff standardization remain, yet at the same meeting where it approved Venezuela's petition for admission, Mercosur established a Parliament modeled on the European Union, agreeing to cooperate on a range of issues, including multilateral trade agreements with countries like China. Caracas has promised billions of dollars to develop northern South America's transportation and commercial infrastructure and has even floated the idea of a "Bank of the South," along with a common Latin American currency, which would provide an alternative to US-controlled financial institutions like the IMF and dollar-denominated financial and commodity transactions. Venezuela has already become an important regional creditor, purchasing more than $1 billion of Argentine debt last year, which allowed Buenos Aires to pay off its IMF tab in full.

Venezuela is making cheap oil available to a majority of its neighbors, including a quid pro quo with Paraguay for support of its bid to join Mercosur. But oil does more than grease Chávez's diplomatic wheels: Energy integration, he insists, will lay the foundation of Latin American unity. Kirchner, Chávez and Lula have announced plans to build a 5,000-mile pipeline that will transport Venezuelan natural gas through Brazil to Argentina; Buenos Aires and Brasilia just signed a deal whereby Argentina will ship 1.5 million cubic meters of gas to Brazil in the summer and Brazil will provide Argentina with 700 megawatts of electricity in the winter. In March the government-owned Petróleos de Venezuela (PDVSA) announced that it would spend $3 billion to buy thirty-six oil tankers from a Brazilian shipbuilder. The deal, which is the largest foreign order of Brazilian vessels to date, is expected not only to create 10,000 new jobs but, as a prime example of Chávez's realpolitik, to help Lula's re-election prospects. In addition, over the last year Venezuela and Brazil have signed a number of energy deals and have begun the construction of a joint oil refinery in the Brazilian state of Pernambuco. And while US pundits have dismissed Chávez's provision of cheap oil to poor urban neighborhoods in New England and Chicago as a public relations stunt, this innovative form of diplomacy lets him bypass unsympathetic national governments and build alliances directly with local political movements. In March he reached an agreement with a group of FMLN mayors in El Salvador, including the mayor of San Salvador, to supply them with petroleum under preferential terms, allowing Chávez to strike into a region firmly under US control and giving the leftist mayors access to an important resource independent of the national government, which is headed by the FMLN's main rival, the ultraconservative ARENA Party.

Much of this activity is taking place under the umbrella of three Chávez-brokered oil alliances--PetroAndina, PetroCaribe and PetroSur--through which Venezuela is not only offering a reliable stream of petroleum at a set price but cheap credit, processing capabilities and financing to expand gas and oil production in the respective regions. Caracas has allowed fifteen Caribbean countries to pay part of their oil bills up front, spreading the balance out over twenty-five years at low interest rates, and has even let some nations pay their debt in kind, with bananas, sugar or, in the case of Cuba, doctors. This past September, twelve Latin American energy ministers met in Venezuela and voted to pursue the unification of the three oil alliances into one PetroAmerica, which if it comes into being would allow petroleum exporting countries to negotiate collectively with the United States, generate price competition through the creation of new regional markets, and help buffer economies from energy price spikes.

Chávez's oil diplomacy extends beyond Latin America. Perhaps his most consequential initiative upon taking office in early 1999 was to end Venezuela's role as a rate-busting OPEC member and to work with Iran and other petroleum-exporting countries to enforce production quotas, which, well before Bush's invasion of Iraq and the current troubles in the Middle East, began a steady rise in world oil prices. Last year, taking advantage of increased global demand, Chávez forced seventeen foreign companies to increase royalty payments and convert their operating contracts into joint ventures with PDVSA, which not only means that the state now owns at least 51 percent of all oil production but that the multinationals will be picking up the bill for modernizing the country's drilling and refining capacities. When ExxonMobil balked at Chávez's New Year's deadline to become PDVSA's junior partner, Spain's Repsol-YPF stepped in and bought out its holdings under Venezuela's terms. A similar diversification of demand may help Morales renegotiate Bolivia's existing contracts with foreign natural gas companies, if not to nationalize production then perhaps to set up something similar to Venezuela's joint ventures. With Malaysian, Indian and Chinese gas companies eager to get in, firms already operating in Bolivia, including Repsol, will have to consider seriously whatever offer Morales puts on the table. Just recently, Russia's Gazprom struck a preliminary deal with the Morales government to invest in joint exploration, production and refining operations--which would give one of the world's largest energy companies its first significant toehold in Latin America--while Brazil's state-owned Petrobras has signaled its willingness to renegotiate existing contracts, backed up by an announcement that it would help jumpstart Bolivia's moribund state energy company.

the Bush Administration may well face the following scenario by the end of the year, starting closest to home and working downward: A likely López Obrador win in Mexico in July, possibly supplemented by a Sandinista victory in Nicaragua, would bring Latin America's left renaissance to the United States's doorstep. Since signing NAFTA, Mexico has been one of Washington's few sure regional allies, countering Chávez's oil diplomacy by spearheading its own effort to integrate Mesoamerican and Colombian energy production and consumption. Markets are betting that López Obrador will speak like Chávez but govern like Lula. Yet Lula has demonstrated that being "fiscally responsible" in the eyes of the global financial community no longer means complete submission to Washington's will. López Obrador has not yet taken a stand on PetroAmerica, but he has invoked Mexico's long tradition of petro-nationalism, pledging not to privatize the state-owned industry and to reduce foreign influence in its operations. He has also promised to renegotiate NAFTA--particularly a provision scheduled to go into effect in 2008 that completely opens the Mexican market to US corn--and allying with Venezuela could strengthen his hand at the bargaining table. And while few welcome the possible return of the now corrupt Daniel Ortega, there are still worthy grassroots social movements within the Sandinista coalition, and a victory might begin to thaw Washington's icy grip on Central America.

Further south, with Morales in Bolivia and Chávez-style candidates on the march in Peru and Ecuador, the United States could confront a mobilized Andean rim, which could put access to cheap natural resources in danger and leave Colombia, its one trusted lieutenant in the region, isolated. Chávez's re-election, which seems assured, would give him at least another six years to consolidate Venezuela's position as a strategic hub, connecting the Andes, the Caribbean and southern South America to Spain and the EU, Russia, the Middle East, India and China. And PT militants in Brazil may look to the success of Chávez's Fifth Republic Movement to renovate their party. But Latin American solidarity historically has been honored more in the breach than in the observance. Entrenched political and economic rivalries will probably slow, if not stall, Mercosur and PetroAmerica integration. If the dollar declines and shrinks demand for imports, if global interest rates go up and swell Latin American debt, or if China slumps, leading to a fall in commodity prices and Asian investment, the economic growth that has underwritten regional cooperation over the past few years could end abruptly. Yet even if a pro-FTAA candidate wins in Brazil in October, and Peru and Ecuador remain firmly in Washington's camp, the United States would still confront opposition from Argentina, open defiance from Venezuela and, most likely, skepticism from Mexico--three of Latin America's four largest economies and critical to any successful free-trade deal.

As its political and economic influence in the region wanes, Washington has given up trying to convince Latin America to join the "war on terror," while its trade envoys are now reduced to signing bilateral deals with negligible economies like Paraguay and Ecuador to dilute opposition to the FTAA. The White House, under the sway of neocon ultras, has further backed itself into a corner by encouraging Chávez's adversaries to go for broke. Rather than patiently broadening a base of opposition and accumulating grievances, they have pursued an increasingly desperate series of actions--a coup attempt, an oil strike, the recall and, most recently, a boycott of legislative elections--that have left their nemesis strengthened and themselves discredited. Washington may be laying the groundwork for the same all-or-nothing strategy against Morales, having just announced that it is cutting off 96 percent of its military aid to Bolivia, a move that seems calculated to provoke the armed forces to act. The Bush Administration now promises to wage a battle for the "future of Latin America," but with few options left--except, of course, the military one--it is unclear if it will have any more success in what used to be the United States's backyard than it is having now in the Middle East.

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