Article: Latin America's Response

Analysis

As Washington wages war against terrorism, U.S. President George W. Bush's economic and political agenda for Latin America will take a back seat. As a result, many Latin Americans now fear the region could once again become the backwater it was during the Cold War.

As the Bush administration formulates a response to terrorist attacks, plans to seek congressional trade-promotion authority in Latin America will be derailed for the foreseeable future. Technical discussions on creating a Free Trade Area of the Americas by 2005 probably will continue, but politically the FTAA is dead in the water, with little chance of revival until 2003 or later.

Efforts to secure congressional support for an immigration deal benefiting Mexicans residing illegally in the United States also have fallen by the wayside. Instead Washington likely will impose tough border controls that could increase the costs of moving merchandise between Mexico and the United States. Such controls likely will undercut growth in trade volumes as well, aggravating Mexico's economic slowdown. In fact, Mexico likely will report negative economic growth for 2001.

Mexico and American companies undoubtedly will protest tougher border controls. Corporate efforts in the United States to relax the measures, however, likely would be more than offset by American voters' support for actions aimed at preventing more terrorist incidents on U.S. soil. And with mid-term congressional elections only a year away, political leaders in Washington can be expected to pander to popular sentiments in their congressional districts.

But the economic impact of this week's suicide attacks will not be confined to Mexico, which ships about 80 percent of its exports to the United States. If the U.S. economy falls into recession, as is likely, Latin American exports to the United States will decline. Additionally, U.S. foreign direct investment in Latin America also will drop significantly in coming months.

Those factors will hurt the region's economic performance for the coming year. With Europe and Japan also slumping, Latin American producers will have no alternative markets to absorb their exports. That means production will fall off in many countries, and layoffs will increase across a region that already suffers the highest unemployment levels in 20 years.

Recently, the U.N. Economic Commission for Latin America and the Caribbean forecast the region would grow about 2 percent in 2001. Those estimates likely will be scaled down in coming weeks, however. Economists in the United States, Mexico, Brazil and Argentina already predict negative growth in 2001 and zero growth in 2002 if the U.S. economy dips into recession.

In fact, Latin America's mounting economic woes will be compounded significantly if Argentina implodes financially. The International Monetary Fund recently gave Argentina a financial aid package worth $8 billion, raising to more than $22 billion the amount it has received from the IMF since December 2000. Also, the IMF granted Brazil a $15 billion package to help insulate its economy in the event Argentina defaults on about $130 billion of foreign debt.

But in the wake of the Sept. 11 terrorist attacks, billions more may be needed to stem the hemorrhage of investor confidence in Argentina. But additional aid may not be forthcoming as central banks around the world concentrate on preventing the outbreak of a greater global financial panic.

With trade expansion off of Bush's Latin American agenda, security issues -- like the drug-fueled civil war in Colombia -- will assume even greater priority in Washington. The United States likely will intensify its surveillance of insurgent groups such as the Revolutionary Armed Forces of Colombia, which last month was linked for the first time to the Irish Republican Army.

Washington also may adopt a tougher line with controversial leaders such as Venezuelan President Hugo Chavez, who since 1999 has been one of the United States' loudest and most vitriolic critics in Latin America. Although Venezuela is America's third-largest foreign supplier of oil, relations between the two countries will chill significantly if investigators turn up any links between Iraqi President Saddam Hussein and the Sept. 11 attacks.

Also, a regional economic slump and rising unemployment levels will fuel social turmoil in many countries. The result will be major domestic headaches for leaders from Mexico to Argentina as populists opposed to globalization, free market policies and closer relations with the United States redouble their efforts to unseat pro-market governments now in power.

The countries at greatest risk of shifting away from free-market economic policies include Nicaragua, where Marxist leader Daniel Ortega could win presidential elections Nov.4. Left-leaning populist candidates also could score major electoral gains in Brazil next year.

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