By kind invitation of John Grogan MP, the Henry Jackson Society was pleased to be able to host a discussion with former President of Peru Dr Alejandro Toledo to examine the current state of affairs in Latin America. Dr Toledo considered how the region can take real strides in reducing poverty, improving development and strengthening democracy, as well as develop its role as an essential part of the global economy.
The leaders of the world today are confronted by many different problems that stretch beyond their countries’ frontiers. Clean water is an issue that concerns humanity. Global security does not belong to a single country. Technology and transport is an issue that demands new thinking. Poverty and inequality are issues that have no nationality. Democracy is an issue that has no borders and no frontiers. Leaders need to focus on strengthening democratic institutions in order to provide stability so economies can grow and capital investment can flow. Democratic institutions should enable us to protect human rights, press freedom, and accountability from those who are elected. These are some of the challenges that confront the world today.
I want to share with you my reading of the challenges and opportunities in Latin America, and specifically the situation in Peru. I put forward today a cautious optimism with regard to Latin America. Never before has Latin America had the opportunity that it holds in its hands today. It is an opportunity to make a qualitative jump to a predominant position in the world economy within the next ten or fifteen years.
Latin America’s Potential
Why do I have this cautious optimism about the region?
The first is economic growth. The Latin American economy is growing at an average rate of 6%, and has been doing so sustainably over the last six years, with some variations from country to country. Peru is growing at 8.5%. We are changing the internal composition of economic growth in Latin America. We are not only exporting things like silver, copper, oil, gas and so on. Now you can buy Peruvian asparagus in London, as well as Peruvian lemons. We are selling grapes and mangoes to China. We are still predominantly exporters of raw materials, but we are changing the nature of our exports.
Peru is using its comparative advantage, which is its range of micro-climates. We have 184 different micro-climates in Peru, so we can grow agricultural products all year round. That activity is labour-intensive and it generates jobs. It is because of this agricultural activity that we are less vulnerable to the fluctuations of commodities in the international markets. By capitalising on this situation by diversifying the internal composition of our market, our economic growth is becoming less restricted.
A second development is the way we have opened up new sources of investments, and new markets for our products. The United States is an important market – 33% of our products go there, and there are many American companies in Peru. However, the US is not our only market, nor is it our main source of foreign investment. The European Union is the main investor in Latin America, and although we are continually told that the United Kingdom is not that interested in Latin America, it is the primary investor in Peru, followed by Spain. We trade a lot with the European countries, and our relationship should now progress to another level where we work together on the global issues that we now face.
We have just had a summit in Peru between leaders from the EU, Caribbean and Latin America. One of the issues was the problem of integrating the communities of Latin America. There were many discussions of whether a free trade agreement should be done by bloc or bilaterally. Personally I think it would be best to do it as a bloc. Part of the challenge for the region is the demanding degree of integration needed. This is not aided by Hugo Chavez and others like him in the region, who are doing all they can to slow down any such integration.
Now some members of the EU have said they are entertaining the possibility of doing something bilaterally. We need to do everything we can to ensure we negotiate as a bloc. Those of us who cannot rely on the proceeds of expensive barrels of oil should not be denied the chance to open up new markets for our products by those who do. We need to generate jobs, and we can’t be deprived of much needed markets. The Hugo Chavez’s of the region are not the causes of the problems, but the symptoms of our failure to converge economic growth with social development. We need to do everything we can to negotiate integration with the EU, but it needs a concerted effort, and it needs to go beyond trade.
The South American Community of Nations, created under Brazilian leadership, gives us a model for integration. We also have the Andean Community. We need to integrate the countries of Latin America and the Caribbean. We are building a highway in Peru that will benefit citizens in the north and south, as well as neighbouring countries. There’s a lot to be learned from the European Union in terms of integration. Yet we don’t have to have a war, or wait for sixty years. We are not going to have the same experiences. We can learn from their strengths and mistakes. We have a common language which the EU does not. We have no major religious differences. We have common backgrounds. And by having a closer relationship with the EU, we can learn from their process.
Finally, Latin America has built a considerable stock of human capital. Unfortunately a lot of it is in Diaspora around the world. However, through strong leadership, we should be able to recoup those the efforts of those people, by encouraging them to play a major role in helping Latin America make the jump from its present status to a predominant position in the world economy.
These are some of the reasons that I have this cautious optimism and believe that Latin America is a very promising region right now. We have an enormous opportunity. But this opportunity is not free of some serious challenges.
Latin America’s Challenges
Peru signed a free trade agreement with the US, which was a very lengthy process, and took a lot of work from officials and entrepreneurs. We owe or thanks to President Garcia for securing the final signing of the agreement. However, a free trade agreement only makes sense if it involves the medium, small and micro companies and entrepreneurs, otherwise it won’ help cut the gap in inequality. I also think the free trade agreement signed so far is complete since Panama and Colombia aren’t involved. I’m trying to use my friends in the United States to support the free trade agreement for panama and Colombia.
I think it is important to have markets for our products. The more diversified they are the better for Peru, as we have products to sell. I went to Columbia School of Business, and they gave me a shirt that had been made in Peru. We can export agricultural products and textiles, but it will depend on our capability to manage an economy that ranges from big investors to small businesses. I would like to see those who produce basic craftwork branch out into other areas. We need to incorporate small businesses and stimulate production, because inequality will widen if we don’t. There are over 300 million people in the US, with a mean income of $37’000, and a market 181 times larger than Peru’s. As long as labour and environmental standards don’t prevent us, we will continue to open up to that market. That’s why we held the recent trade conference. The more trade we have, the less reliant we are on world prices of silver, and other goods.
We also need to confront the issue of poverty in Latin America head on. When one looks at the world, one finds that 2.6 billion men and women at this very moment are trying to survive on less than two dollars a day. 1.1 billion are trying to survive on one dollar today. You will find that the poverty is concentrated mainly in Africa, in south-east Asia, and in the west of Latin America. 40% of the Latin American population live under the poverty line, which is defined as living on two dollars a day or less. This means that 120 million people live on less than a dollar a day.
Even though we in Peru have made some progress in reducing poverty over the last seven years, the numbers are still pretty high. We have tripled exports, fostered growth of 8.5%, left the fiscal deficit at only 1.5%, and brought about low inflation. Yet the challenges of poverty, inequality and exclusion are causing a lot of unrest. If we are not able to deal with this challenge, the region could lose a unique opportunity to take its place in the world economy. Economic growth is an indispensible component of poverty reduction, but it alone is insufficient. We need to able to redistribute the benefits of economic growth, and be able to sustain that growth. If we are unable to reduce the existing levels of poverty and inequality, they could ultimately undermine the economic growth that has been achieved. When there is clear unhappiness in the main streets of the region, those streets do not look attractive venues for capital investment. If we are not able to reduce poverty and inequality, poverty and inequality could conspire to undermine democratic governance.
If we are not able to tackle poverty and inequality, not only will we miss an enormous opportunity to do so, but we will provide the fertiliser for the emergence of cheap, empty and irresponsible populism in the region. When you have these levels of poverty, it is easy for somebody with a wallet thick from money due to the high price of oil, to appear to confront poverty in a populist way. Simply giving away fish for free insults the dignity of the poor, instead of giving the poor the right to learn how to fish. It is crucial that we put a stop to this irresponsible populism being practiced by some governments. Irresponsible populism creates instability and problems at the very moment when the region is poised to take off.
If we are not able to reduce poverty and inequality in Latin America, cheap populism will increase. That populism is associated with the price of oil on the world market. And that price ties Venezuela and Iran They aren’t the only players, but they are key ones. I don’t know what the relationship between Venezuela and Iran is. I think there are stronger connections. Oil has become one of the most dangerous political weapons in the world. Unless sufficient research is undertaken into finding alternative sources of energy, the world will continue to be held hostage by the nations that produce it. We need to generate alternative sources of energy that cost less, keep us free, and don’t contaminate the world.
Latin America’s Future
I was pleased to see that that the National Institute of Statistics reported a five point drop in poverty, not five percent, five points. I came into office with poverty at 54% in 2001, and left with it down to 44.5%. Now it is at 39.3%. We need to be careful, because at this rate were going to break a Guinness Record! Neither China nor India has reduced poverty so quickly. It would be a mistake to create false expectations by massaging the numbers. I’d be very enthusiastic if the numbers are accurate, because this is the cause of my life, and it would suggest that poverty is heading towards 10% and the UN millennium goal. However we shouldn’t rush to judgement. I’m planning on looking at the numbers in more detail.
If I had my time again, I would do more to target poverty and inequality, through greater use of small entrepreneurs and effective investment in clean water, nutrition, and rural electricity. We also need to take the bull by the horns and restructure the judicial system. In order to maintain our economic growth we need not only social political and economic stability, but also legal stability. We need clear rules of the game, and a judicial system that enforces them. That would send a message to individuals that there is justice for everyone, and notify investors that they can protect their investment, but that they also have to adopt corporate responsibility. We need to have structures that help us demand accountability of those who work at the different levels of government. This requires a judicial system that works. Corruption is real problem. To solve it, we need leaders, not just politicians. However, corruption is not just the domain of Latin America.
These are the opportunities and the challenges we face. Our future is in our hands if we are smart, since we have the money on the table and the prices of our products on the international market are high. We must now invest in things like health care, education, and inclusive social policies. I tell my entrepreneurial friends around the world that the practice of inclusion is good for business. The business of inclusion is profitable and good for democracy. If you don’t include the 40% of the poor, the unrest on the streets will increase, and capital investment will not come. We have to include that 40%.
It is important to move past the moral and ethical view of poverty and inequality, and look at it strictly from the business perspective. What kind of businessmen are we? If you have 220 million Latin Americans that are excluded, a huge potential market is wasted. 220 million Latin Americans have no job, and no income. If they became part of the productive process, and had an income, they could purchase milk, socks, bread. They have the potential to be part of a market, and to make that market bigger. At the moment, we are fighting for a very small market. The real question is how big can the market be? There are 220 million people who are not in the market right now. Strictly from the business perspective, that is a waste.
There are a many Peruvians and other Latin Americans here in Europe who left my country looking for a better life. They used to leave the region because of high prices, because there were no jobs, because they were looking for greater opportunities. Now I see people at Harvard, at Stanford, at the University of Pennsylvania, at Columbia, young people who are training themselves to go back to Peru to take advantage of the opportunities there. I would like to tell Latin Americans here in the UK and Europe not to be tempted by the Wall Streets of the developed world, but to go back and take advantage of the opportunities at home. It is vital that we have the human capital necessary to make the jump. It’s great that you can take advantage of a good education at the London School of Business, at Oxford, at Cambridge, in the United States. However, you must not forget that your country is waiting for you, or that your region is waiting for you. You could be an important factor in seizing the opportunity we have before us. I don’t know of any society that can develop without investing in the minds of their people – and that is what we need to do. The world is not Just Europe, Russia, China India and the United States. Latin America has a real role to play, if it does what is necessary to engage in trade, promote free markets, and address the challenges I have outlined here today.