Look South, Not East

The Obama administration is turning to Asia for the defining competition of the next century. But if the United States actually wants to win, it'll need Latin America.

With Barack Obama's administration pivoting toward Asia and with the U.S. president now off to Hawaii for the Asia-Pacific Economic Cooperation summit (and then to Australia and Indonesia), let's remember that the most important trip of his time in office was not east but south. In March, in the midst of the fallout from Japan's tsunami and nuclear meltdown and the brutal escalation in Libya, Obama made an international trip the Western media almost entirely ignored. His destination: Brazil, Chile, and El Salvador. There was pressure to cancel the visits, and photos and media reports revealed that Obama was accompanied by his military advisors and was getting constant updates on both crises from a secure camouflage tent.

Of course, the date for the trip was not movable, especially as it was precisely the 50th anniversary of President John F. Kennedy's declaration of the "Alliance for Progress," which brought about an industrial expansion from Mexico to Argentina. Obama's journey thus had a grand strategic purpose missed by Washington's Mideast- and China-obsessed elites (not to mention previous administrations -- one recalls George W. Bush in 2005 being startled by a map of South America and exclaiming, "Wow! Brazil is big!") By setting out to "forge new alliances across the Americas," Obama has implicitly acknowledged the emerging geopolitical reality that Latin America is nothing less than the third pillar of the West, alongside Europe and North America.

The United States certainly can't take Latin American loyalty for granted, if it ever could. This is an age of multialignment, with most powers playing all sides. South America has rolled out the welcome mat to the new Asian power, with Brasilia and Beijing declaring a strategic partnership years ago and many South American commodities exporters like Chile and Argentina owing much of their recent growth to China's massive appetite for raw materials.

Indeed, the first aim of geopolitics is access to resources, which South America has in abundant supply. Some 30 percent of the world's total biocapacity resides in South America. It may sound cliché to say that the Amazonian rain forest is the world's lungs, but it's true. The continent is also the world's breadbasket. Most of the global supply of bananas, sugar, oranges, coffee, soybeans, and salmon, as well as a major share of beef and pork, come from South America. It also has massive mineral deposits: silver, copper, lead, tin, zinc, iron ore, and lithium.

Perhaps most importantly, Latin America is fundamental to any strategy for energy self-sufficiency. North America's energy future already looks strong with oil and gas deposits under the Arctic seabed, Canada's gigantic oil sands, wells in the Gulf of Mexico, and newfound shale-gas deposits in the United States. Add to this the major discoveries of oil off Brazil's Atlantic coast, plus Venezuela's abundant reserves, and you have a comprehensive solution for total energy independence from the turbulence of Eurasia and Africa. There is also a sustainability angle here. Brazilian sugar cane-based ethanol is four times more efficient to produce than North American grain-based ethanol.

According to energy expert Daniel Yergin, the new Western Hemispheric energy axis runs from Alberta, Canada -- from which the United States gets another 1 percent of its oil imports each year -- through Texas and the Gulf of Mexico down to Venezuela, French Guiana, and Brazil. U.S. energy policy should be increasingly Western Hemispheric -- just as China's energy policy is increasingly Middle Eastern. In this context, the Keystone XL pipeline from Alberta to Texas can be delayed (as it just was), but it is nonetheless inevitable.

Building a new hemispheric economy is crucial to tackling not only energy independence but also industrial competitiveness. Latin America's 900 million people (about 12 percent of the world's population) represent a $6 trillion economy -- equal in size to China's. Furthermore, Latin America is younger and more urbanized than Asia, making it a highly productive partner for the United States. Additionally, Latin economies now feel the Chinese economic threat as much as the United States does. China has dumped everything from clothing to cell phones onto the region, threatening an estimated 90 percent of Latin America's manufacturing exports (which account for 40 percent of all its exports) and undercutting trade. Almost half of Brazil's manufacturing exports go to other Latin American countries, and two-thirds of those markets (in everything from shoes to cars) are at risk from Chinese competition.

Rather than outsourcing to Asia and accelerating the rise of economic competitors, U.S. firms could look much closer to home, forging joint ventures in energy and manufacturing across the region. This is already happening to some extent, but the opportunities have not been seized. With coastal Chinese wages rising, numerous U.S. companies are relocating to Mexico, which offers logistical proximity, a more predictable exchange rate, and a closer political relationship -- all of which mean less risk and eventually greater profits. Even the $100 billion IT outsourcing industry could be brought back from India into the United States' time zones. In the long run, such a hemispheric industrial policy is the only way for the Americas to remain competitive with an Asia that has caught up in brawn and is catching up in brains.

With concerns over competition from China growing and with suspicion of multinationals giving way to pragmatism about the need for foreign investment and technology, now is the time to reinvigorate the goal of a hemispheric pact. Currently, U.S. free trade agreements (FTAs) with Colombia and Panama are under consideration, but more FTAs around the region could mean more exports and more jobs for the struggling U.S. economy. But here's how not to strengthen ties: tariffs on Brazilian steel and wavering on a free trade agreement with Colombia. Accelerating job creation and economic growth in the erstwhile "banana republics" of Central America benefits the United States not only through decreased illegal migration but in real dollars: Most of these countries export their goods through Florida, using U.S. airlines and ports.

Seeing Latin America as a grand strategic prize rather than the object of congressional politicking is Obama's fundamental challenge. He could take a line from Brazilian Foreign Minister Celso Amorim, who recently declared, "Integration is an imperative because in a world of large blocs, we will be stronger if we are united."

It is fashionable for pundits to declare that the world's center of gravity is shifting east. But that need not be the case. Elevating South America to its rightful place as the third pillar of the West alongside Europe and North America could be the most decisive geostrategic maneuver still to be deployed. In the coming decades, the United States may well need to direct and project its power to the east, but the source of that power will increasingly be the south. There are some who think that the future of competition will come from across the Pacific -- and they may be right -- but if the United States can succeed in forging a new hemispheric economy with Latin America, the East would have an even longer way to go in catching up with the West.

Parag Khanna is a senior research fellow at the New America Foundation and author of The Second World: How Emerging Powers Are Redefining Global Competition in the Twenty-First Century and How to Run the World: Charting a Course to the Next Renaissance.




Papa's Got a Brand-New Bag

Hold the celebrations. Greece's new interim prime minister, Lucas Papademos, has his work cut out for him. First on the list: save the country from imploding.

Greece's new interim prime minister, Lucas Papademos, was due to teach a class at Harvard this upcoming spring semester. The subject: "The global financial crisis: policy responses and challenges." For Greece's sake, let's hope its new professor-in-chief knows what he's talking about.

Papademos spent 25 years working as a central banker -- so he should be used to dealing with worrying statistics. But even this bespectacled, mild-mannered economist might be daunted by the numbers he has inherited -- and the mountains of red ink that will dominate his premiership. On Thursday, Nov. 10, a few hours before the 64-year-old economist accepted the invitation from an increasingly confused and desperate George Papandreou to succeed him as Greece's premier, the European Commission published a report on the Greek economy that made painful reading. Greece's public deficit is expected to reach 8.9 percent of GDP this year, while the economy is forecast to contract by 5.5 percent, capping off a third consecutive year of recession.

Most shockingly, public debt is predicted to soar to 198.3 percent of GDP -- almost double what it was in 2008 and by far the largest margin in Europe. In another ominous twist of fate, Greece also announced its August unemployment figures on Thursday. The jobless figure climbed to 907,953, or 18.4 percent, which means that about 1,000 jobs have been lost every day over the last year. Even Papademos won't be able to hold on to his job for very long -- early elections are due to be called toward the end of February. But is 100 days enough time to lay the foundations for an economic recovery?

"The country is at a crucial crossroads.... The course ahead will not be easy, but I am confident that the problems can be solved," said Papademos on Thursday. It was an attempt to provide some optimism at the end of almost two weeks of intense political bickering that culminated in his selection to head Greece's first coalition government since 1989. Greeks watched with interest, but the depressed state of the economy means that few will see the glass half-full until growth and employment figures improve. The interim administration has the reluctant backing of the previous ruling party, the PASOK socialists, plus the tepid support of the conservatives of New Democracy and the ultranationalists of the Popular Orthodox Rally (LAOS). Papademos retained PASOK officials in key ministries in a bid to provide some continuity for structural reforms, but New Democracy's concern that a strong presence in the transitional government would damage its popularity at next year's elections means that there are only six conservatives among the administration's 49 members.

Papademos's first task will be to assure his counterparts in the eurozone that Greece has regained political stability, which was undermined by PASOK's internal divisions, attacks on its policies from opposition parties, and growing anti-austerity protests. He will also have to convince them that Greece is committed to the euro and will work with its partners to implement the terms of two bailouts, worth a combined 240 billion euros. Greece's future in the eurozone was put in serious doubt by Papandreou's surprising decision two weeks ago to call a public referendum on the terms of the country's latest round of financial assistance. The initiative (which the prime minister eventually backed away from) enraged Germany and France, panicked markets, set Greek politicians against each other, and triggered Papandreou's downfall.

It is no coincidence that in his statement on Thursday, Papademos said he aims to set Greece on a course to ensure its continued membership with the single currency. "I am convinced that Greece's continued participation in the eurozone is a guarantee for its stability," said the former vice president of the European Central Bank. As governor of the Bank of Greece between 1994 and 2002, Papademos was one of the architects of the country's entry into the euro. Critics argue that Greece became part of the eurozone based on questionable economic policy -- and even more questionable economic statistics -- and that Papademos must share some of the blame for this. But it looks like that will be a debate for another time. For now, the man who helped take Greece into the euro wants to make sure he is not the one who has to take it out.

His immediate priority will be to secure the next loan installment from the European Union and the IMF bailout agreed to in May. If Athens does not receive the 8 billion euro tranche by mid-December, by the government's own admission it will no longer be able to pay its debts.

And with the threat of a disorderly default removed from the table -- at least for now -- Papademos and his team will have to begin negotiating the nuts and bolts of the next bailout. The outline of the deal between Greece and its eurozone partners on Oct. 26 foresees Athens's receipt of another 130 billion euros in loans from the EU and IMF, with private holders of Greek bonds accepting a 50 percent haircut. To continue to receive the loan payments, however, Greece will have to continue implementing structural reforms, including a new tax system and the liberalization of dozens of closed industries. In certain policy areas, such as privatization of state assets that include public utilities, ports, and the railway company, the government has until 2015. Although there is some room to negotiate how Greece achieves its targets, the adoption of a new loan agreement will largely bind Papademos's government -- and the one that succeeds it -- to a policy of strict austerity and structural reforms aimed at ensuring that the government is not spending more than it collects in revenues.

Despite the ravaged state of the Greek economy and the public anger, Papademos will not concentrate on trying to convince Europeans for an immediate letup in the austerity forced upon Athens, but will instead try to argue for better terms once Greece is able to prove that it can balance its budget, says financial expert and Skai radio presenter Babis Papadimitriou. "The terms of the bailout are unlikely to change," he says. "If Papademos can have an impact on anything, it will be to convince the Europeans to give Greece a little more room to maneuver once it manages to produce a primary budget surplus and after the bilateral lending from eurozone countries ends in 2014.

"His task will be to convince the Europeans and the Greek politicians that the agreed program is realistic, can be implemented, that it won't destroy Greek society, and that it should be signed so we can all move on," says Papadimitriou.

Papademos, who studied at the Massachusetts Institute of Technology and had been teaching a course on the global financial crisis at Harvard University before being called to lead the Greek government, is a well-respected figure within European institutions. His appointment was greeted positively by EU officials and international markets -- and even in Athens. "At least for 10 years now, faith in politics and institutions has been eroded," says Dimitri Sotiropoulos, a professor of political science and public administration at the University of Athens. "With a figure like Papademos, there is an opportunity for the political system to regain the trust and respect of citizens."

Thus far, the technocratic Papademos has tried to keep out of Greece's partisan political scene. But though he plays well with European technocrats, the political bruisers and an austerity-weary public at home may not be so welcoming. For all his knowledge of economic issues, Papademos is the unelected leader of a government that has the halfhearted support of two deeply troubled parties in PASOK and New Democracy. When it comes to passing more unpopular austerity measures, this democratic deficit could become a key rallying tool for his opponents.

Papademos might, however, succeed where his predecessor failed by taking his message directly to the people, rather than allowing the political parties to act as the filter. "People close to Papademos, such as his ministers, will have to manage to do something the previous government failed to, which is to adequately communicate its achievements," says Sotiropoulos. "Bypassing the usual representatives, such as the unions ... he can give a voice to less-represented sectors of society, such as the unemployed, self-employed, young and skilled migrants who are ready to pack up and go."

While at the European Central Bank, Papademos developed a reputation for shunning the spotlight and letting his superiors do the talking. That will have to change for the next three months or so. It seems that at this late stage in his career, Papademos might have to rely on words as much as he has on numbers to carry out his task of pulling Greece from the depths of its economic crisis.