SUBJECT: The Latin American strategy at the April 2 G20 Leaders' Summit in London.
SIGNIFICANCE: Unlike the G8, where Latin America is not represented, the region accounts for three members of the G20. Although all three are likely to favour IMF reform, there is little coordinated strategy on key issues.Go to conclusion.
ANALYSIS: Mexico, Brazil and Argentina will be represented by their presidents at the April 2 G20 heads of state meeting in London. However, there is little evidence of a coordinated approach to the Summit:
1.Mexico. Mexico should be expected to play an active role:
The global financial crisis is having a severe impact -- GDP is likely to contract by some 2-3% this year, due largely to the effect of the US recession on exports, remittances and tourism.
Mexico also has significant recent experience with problems with the banking sector.
The government is already implementing a counter-cyclical fiscal policy that will push public finances into deficit (of 1-2% of GDP), following the lead of several developed countries.
President Felipe Calderon will probably seek to use the Summit to boost his prestige at home (already high, with an approval rating of around 66%), with an eye to crucial mid-term congressional elections in early July. However, the specific Mexican contributions to the G20 should emerge from the Ministry of Finance and Public Credit:
Finance Minister Agustin Carstens has spent his professional life at the Ministry, the Bank of Mexico and the IMF, where he was executive director (1990-2000) and deputy managing director (2003-06).
He was a senior official during the 1994-95 Tequila crisis, which saw most commercial banks pushed close to bankruptcy, with the government forced to nationalise them at an estimated cost of around 20% of GDP. The sector emerged from crisis only in the late 1990s and was re-privatised, sold primarily to global banks.
While the IMF recently stated that the banking sector is highly profitable and well capitalised, credit growth is expected to slow sharply due to the problems faced by international banks and their influence on the balance sheets of their Mexican subsidiaries. Therefore, Mexico will likely urge the G20 to push for tough regulatory frameworks for global banks. It will also play a significant role in any blueprints that the G20 endorses for reform of the IMF and the World Bank (since 2007 Carstens has been chairman of the Development Committee of the IMF and the World Bank). In particular, Mexico may seek to overhaul further IMF lending facilities, mainly those for emerging economies that have followed strong economic policies in recent years (such as Mexico, Brazil and Chile). However, it is unlikely to support lending without conditionality, as espoused by Argentina.
2.Brazil. The IMF will also be a focus for Brazil, which intends to propose a greater Fund role in regulating and monitoring international financial flows and redistributing resources in times of crisis, especially from rich developed countries to the volatile emerging economies. Brazil will also seek ways to increase the supply of global credit, although it will not support advanced economy calls for a coordinated response to falling demand if any proposals that emerge might affect its control of the domestic economy. It will also propose that a greater share of IMF voting rights be assigned to emerging economies, especially the larger ones, to reflect their growing importance in the global economy, and will support calls for increased capitalisation of multilateral institutions. Other key issues include:
Global financial regulation. Brazil has been accused of heavy-handed regulation of its financial institutions, but feels that the international credit crisis vindicates its approach. Like Mexico, Brazil will press for greater regulation of investment banks and other financial institutions, greater global coordination of regulatory oversight, conservative capital requirements, and a crackdown on tax havens and hedge funds. It will also press for greater coordination and data sharing by financial regulators and central banks. However, Brazil does not wish to see fiscally prudent countries, such as itself, forced to bail out less prudent countries -- at least not without a guarantee of greater influence in the global decision-making process.
Protectionism. This is the issue that Brazil takes most seriously, and one that President Luiz Inacio Lula da Silva raised in his meeting with US President Barack Obama in Washington on March 14. It is Brazil's view that protectionism offers token short-term relief and serious long-term costs. Brazil is also against trade quotas, especially involuntary ones. Brazil will also press for a resumption of substantive trade talks within the WTO during the G20 meeting.
Climate change. Brazil will steer a very conservative course on climate change -- wary that the issue might be used as pretext for protectionist measures -- and will limit itself to the promotion of alternative and renewable energy.
3.Argentina. The issue of protectionism is a contentious one between Brazil and Argentina, with Brazil recently forced to deny rumours that it would take disputes over Argentine import barriers to the WTO. Although Lula and his Argentine counterpart, President Cristina Fernandez de Kirchner, were at pains to smooth over this issue publicly in her visit to Brazil on March 20, there was no agreement between the two governments on a common approach to the G20.
On the question of IMF reform, Fernandez de Kirchner has made clear that Argentina will press for a reduction in (or elimination of) the conditionality applied to IMF and World Bank lending to poor countries. This position responds to domestic necessities:
Argentina paid off its debts to the IMF in early 2006 and the government has sought to make political capital out of having 'freed' itself from IMF oversight, despite questions over the economic costs of the exercise. It would be politically impracticable for the present administration to seek to return to the Fund.
However, with a falling primary deficit, declining revenues and concerns over the weight of short-term debt maturities, the possibility of being able to seek new IMF lending is becoming increasingly attractive, if it could do so without appearing to accept Fund oversight of the economic programme.
In practice, although IMF lending conditions may be eased, conditionality is unlikely to be eliminated. In any case, the IMF has recently specifically excluded Argentina from access to emergency lending on the grounds of erratic policy-making and the failure to complete an Article IV review.
The G20 will offer Fernandez de Kirchner's first opportunity to meet Obama -- Lula and Calderon have both had previous meetings, and Obama will visit Mexico next month. However, Argentina's pallid performance at the November G20 meeting is likely to be repeated, with room for political manoeuvre limited by recent foreign policy strategies, the recent renationalisation of several foreign-owned companies and the president's own low approval ratings coming into the mid-term legislative elections.
CONCLUSION: There will be no coordinated approach to the Summit by the three Latin American members. Their political and economic weight, together with a reputation for prudent policy-making, will allow Mexico and Brazil to take a more active approach to the Summit, with Brazil in particular likely to press its case for greater weight in international decision-making.