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Waiting for the Yankee dollar.

If the once voluble Karl Marx were alive and could peer across America's southern border, he would stare in speechless horror. For there is a specter haunting Latin America, the specter of capitalism.

Countries plagued for decades by central planners and protectionists are reallying behind the banner of open markets and free trade. Paraguay, Uruguay, Brazil, and Argentina recently signed an agreement to remove all internal tariffs and barriers by 1994. The Central American countries are edging toward a trade pact with Mexico; the Andean countries are forming their own free-trade area; and the U.S. and Mexico are hammering out details of a free-trade agreement.

"When the United States finishes with Mexico, we're going to be knocking at the door saying, |Here we are, we're next,'" said Argentine Foreign Minister Guido di Tella.

Nearly the entire region is in the midst of domestic economic reforms that are nothing short of revolutionary. Argentina has sold its state airline and telephone companies to private firms. Jamaica has opened its largest export industry--tourism--to private investment. Venezuela, which 16 years ago nationalized its oil industry and kicked out Exxon, is luring back private investors. And Chile has privatized hundreds of large state companies, including banks, steel, and telephone monopolies.

"Wise investors will take not," writes Malcolm Forbes Jr. in a recent issue of Forbes. "This region is where the Pacific Rim was 30 years ago."

Indeed, prospects for economic growth in Latin America, and for the creation of a U.S.-Latin American partnership to rival European and Asian countries, have never looked better.


The catalyst for that partnership is the Enterprise for the Americas Initiative (EAI), designed to expand trade and investment ties between the U.S. and its neighbors in Latin America and the Caribbean. First announced in June 1990, the initiative offers a vision of free trade throughout the Americas.

The plan rests on three pillars: trade, investment, and debt reduction. Regarding trade, the long-term goal is to establish free trade agreements (FTAs) throughout the hemisphere. The free trade agreement with Canada, and the one now being negotiated with Mexico, are the first steps in this direction.

For some of the relatively small Latin American economies to open themselves to imports is no small potatoes issue. It means allowing prices to be determined by market forces, not government fiat. Some of the countries have been stubbornly protectionist. Brazil, for example, has a long history of blocking imports of personal computers to protect its own computer industry. Argentina has maintained tariffs and taxes of 66 percent, 100 percent, or more on some imports.

But the free exchange of goods and services across borders will make it increasingly difficult for governments to subsidize money-losing state enterprises, protect industries by limiting competition, or set prices by decree.

For years we have urged our Latin American neighbors to eliminate barriers to trade--barriers that have hindered their own economic development. The Enterprise for the Americas Initiative offers them a fair deal: They agree to market-oriented policies, and we negotiate free trade areas to bring down trade barriers on both ends.

Signing onto such a pact presents no great problems for the U.S. Our average tariff is less than half that of any Latin country; our investment climate is much more open; and we have minimal restrictions on trade in the service sector.

The less-developed countries of the Americas, victims of their own state-managed economies, will need to be encouraged in their efforts to liberalize them.

On our end, that means removing remaining tariffs and quotas on goods. This was one of the drawbacks of the U.S. Caribbean Basin Initiative, originally aimed at strengthening democracies through trade preferences. Because President Reagan was denied "fast track" negotiating authority, Congress was able to amend the bill and exclude exports dear to special-interest groups. The final treaty allowed duty-free treatment of only 10 percent of the total exports involved. Not much of an incentive to trade.

The lesson of CBI is that the president must have the authority to negotiate free-trade agreements without the possibility of Congress micromanaging and amending the final version. Indeed, the U.S.-Mexico talks would have collapsed without the "fast-track" provision. And other potential free-trade partners, such as Chile, won't dare negotiate the bottom line of any trade pact if they believe that it can be picked apart by Congress.


Another way the U.S. can coax nations into trade agreements is to help increase the flow of investment dollars into the region. This is the second pillar: Without capital to finance growth, economic reforms will stall.

"The need to attract capital in order to build upon reforms already underway is at the heart of every country's development challenge," says David Mulford, the Treasury Department's undersecretary for international affairs.

The Treasury Department has proposed that the Inter-American Development Bank (IDB) establish a new investment sector lending program. But more debt for Latin America is not the answer; more private investment is. Millions of potential investment dollars are now deposited in foreign banks, because many wealthy Latin Americans don't trust their home countries' lending institutions. The Latin American nations must, through domestic reforms, create a financial climate that will attract private investors.

The third pillar, debt reduction, stands amid conflicting plans for reform. One is debt forgiveness, being touted by some in the Bush administration as a means to spur investment. It would be a misguided step, for it would do nothing to encourage free-market changes among our Latin neighbors.

Instead, the administration should encourage the growth of debt-for-equity programs. Chile, the first Latin country to aggressively pursue such policies, could serve as a model for debt reduction. Under Chile's debt-for-equity plan, investors buy part of the country's debt from a creditor bank at a substantial discount; the investors then exchange the debt for local currency, bond, or state-owned equity shares from our government. The effect is to restore the confidence of investors and further stimulate growth.

If economic relations with Mexico, Chile, and other Latin American nations are properly cultivated through open-trade agreements, the U.S. could help forge a free-trade area stretching from Alaska to the southern tip of South America. Meanwhile, we should look east and west, to Asia and to Europe.


Like the advancing tide of democracy, the principles of free and open trade are infectious. In June, for example, members of the European Community and European Free Trade Association officials met in Austria to work out details of an agreement to create a 19-nation European "economic area" of 380 million consumers.

It's no wonder: Successful trade accords lead to vibrant markets, economic prosperity, and political stability. "It's a powerful trend that won't be stopped," says Amoco's manager for foreign affairs. America--with its resources, initiative, and vision--can give the direction and impetus this global trend requires.

Edwin J. Feulner, Ph.D., is president of The Heritage Foundation, a Washington, D.C.-based public policy research institution. He also serves on the board of several other foundations and research institutes. Dr. Feulner is the author of Conservatives Stalk The House.
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Copyright 1991, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:Above the Beltway; open markets and free trade in Latin America
Author:Feulner, Edwin J.
Publication:Chief Executive (U.S.)
Article Type:Column
Date:Nov 1, 1991
Previous Article:When not to change.
Next Article:To Russia, with love.

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