A Mixed Blessing

Despite the gloomy picture which the economic downturn in the US has spread across Latin America, many countries in the region are warming to the US dollar.   Panama, as I have mentioned previously, adopted the US dollar after it gained its independence from Colombia at the turn of the last century and since then has derived considerable benefit from doing so.  Now countries in Central America and some south of the isthmus are considering their options.  In Ecuador, where adopting the dollar initially led to political upheaval and violence, there is now an admission that the economy has stabilized, following a year of economic distress which had put the country on the brink of anarchy.  Argentina, as its economy continues to be depressed, has looked at dollarisation as a possibility following external pressures which threaten the sustainability of its existing currency regime.  Earlier this year El Salvador also changed to the dollar and in Guatemala legislation has been passed which allows foreign currency-denominated salaries, bank accounts and monetary instruments.  The Costa Rican central bank feels that in the medium term it ought to study ways in which the country can link itself to the strongest currency in the Americas.  However, even if dollarisation, overall, brings positive economic benefits, these must be in tandem with structural reforms implemented by governments that make the respective economies attractive to foreign investors.

One practical downside to dollars has been the circulation of counterfeited notes, some of which are manufactured in Colombia.  In countries such as Panama, this has resulted in many suppliers of goods and services being reluctant to accept denominations of more than $20.  Enthusiasm for the dollar is mixed and detractors feel that whilst dollars open the door wider to global integration, they reduce the ability of governments to protect themselves from external shocks which may affect the price of exports.   A former economy minister of El Salvador, for instance, argues that dollarisation undermines the competitiveness of the country’s manufacturing base and he fears that El Salvador will become an expensive country by virtue of the dollar’s strength. 

Time will tell whether or not the dollar is an economic palliative for parts of the region.  Certainly, for Panama, the evidence is clear that it has been a success.

Politics and Progress

Brazil alone controls approximately one-third of global iron ore exports.  And according to data from the Metals Economic Group the continent is the most popular for new mining projects.  There are political, economic and social hindrances, but Latin America is generally not hampered by the kind of land rights issues that have created problems for mining projects in places such as British Columbia and Australia.  The continent’s deposits include gold, bauxite, nickel and manganese, but it is copper which is king; over 40 per cent of the world’s copper is mined in Latin America and the biggest single attraction is the porphyry copper belt which traverses northern Chile and southern Peru.  Whilst Chile has a long mining history and an attractive tax regime, Peru is less tax-friendly and more politically risky.  These extremes are illustrative of the varying degrees of success which foreign mining companies have had throughout Latin America.  It should, nonetheless, be noted that in recent years exploration has been more successful in Peru than anywhere else in South America.

Development bankers and not just miners are discovering wealth in Latin America.   Previously, the complex world of Latin American politics kept them away, but more than 10 years of economic reform coupled with political stability (it is almost 25 years since the last coup d’état in a large South American country – Argentina) have brought a new perspective.  Democratic politics and constitutional rule have worked their magic as the arrival of Vicente Fox in Mexico and the departure of Alberto Fujimori in Peru so clearly illustrates.  Even so, according to a 2000 report by the Inter-American Development Bank (IADB), “political gridlock” – caused by disputes between the executive and legislative branches of government – is a major difficulty yet to be overcome.  It has become obvious, according to the President of the IADB, that politics in Latin America really do count.  Although market economies are now mostly in place (even President Hugo Chávez in Venezuela with his unique political agenda has not attacked his country’s mainly orthodox economic policies) there are uncomfortable contradictions between democracy and the market, such that choices between autocracy and democracy can become difficult. 

Panama has, in relative terms, fared favourably on both the economic and political fronts during a decade of significant changes for the country.  And whilst Panama cannot boast significant mineral deposits, it has taken measures to improve the size of its bank deposits.  Panama’s Financial Intelligence Unit, which is similar to the Financial Intelligence Centre being established in South Africa, has been operational for several years.  Panama, in fact, is the first country in Latin America to have such a money laundering monitoring system in place.  At the end of June it enhanced its stature significantly as a Latin American banking centre by being removed from an Organisation for Economic Co-operation and Development (OECD) money laundering black list.  After the review was made, Panama was only 1 of 4 jurisdictions out of 15 (some 25 per cent of those on the list) which were removed.  Additional countries have now been added, including Guatemala and Nigeria.  By being removed from the black list, Panama has demonstrated that it has made substantial efforts to conform with the code of good practice set down by the Financial Action Task Force (an OECD body) which advocates the criminalisation of money-laundering, activation of a suspicious transaction reporting regime, an effective customer identification policy, elimination of excessive bank secrecy and international co-operation in criminal financial matters.

A leading international investment bank’s Latin America economist has recently described Panama as “a safe port for foreign investment”.  The same safe anchorage awaits international bankers and their clients.