Creation and Role of the BRICS New Development Bank

Francisco A. Laguna & Annapurna Nandyal

Map of BRICS countries

In July, Brazil hosted two important events, each significant in its own way: the FIFA World Cup; and the Sixth Annual Summit Meeting of Emerging Economies of Brazil, Russia, India, China and South Africa (BRICS). The members of BRICS meet annually to discuss the world economy, global development and the further strengthening of the BRICS group. Since its inception in 2009, BRICS have called for a greater role in international financial institutions like the World Bank and International Monetary Fund (IMF), as well as transparency in electing the leaders of these institutions. Despite robust economies, BRICS members continue to play a relatively minor role in global finance decisions. In a first step to provide an alternative to “Western-dominated” international financial institutions, the BRICS members announced a proposal to open the New Development Bank (NDB) during their 4^th annual summit, held in Delhi, 2012.

South American Socialist Economies: Brazil

Francisco A. Laguna & Jennie Linder Cunningham

 

Map of Brazil
Photo Credit: Captain Blood via Wikimedia Commons

In our final week of examinations of socialist-inspired economies in Latin America, we turn to Brazil, which found itself the center of attention as the site of this year’s World Cup as well as the host of the 2016 Summer Olympics. Many regard Brazil’s bids for both the World Cup and the Olympics as controversial, considering the basic needs problems confronting the nation: poverty; severe environmental pollution; and infrastructural shortcomings, among others. Although similar criticisms were leveled against both China and Russia, in addition to serious human rights concerns, neither country was in any way impeded by the international community in holding the events as planned. However, continuing protests in Brazil highlight the country’s economic reality, including notable income inequality and a somewhat volatile economic situation dependent upon agriculture and natural resource exploitation.

Of the Latin American economies we have analyzed, Brazil’s GDP tops out the list, with 2012 levels of US$ 2.253 trillion, in comparison with Argentina at 474.9 billion, or with other emerging economies like Russia (2.015 billion). As with elsewhere in the developing world, Brazil has struggled with proper resource distribution and usage as its economy expanded rapidly over the past decade or so, as well as with developing a sustainable plan for continued economic growth, beyond that of a dependence on natural resources and agricultural exports. Indeed, growth projections for 2014 fall far below those of the previous few years, with a possible contraction in the fourth quarter, the first trade deficit since 2000, and a 14% decrease in value of the real against the dollar.

South American Socialist Economies: Bolivia

Francisco A. Laguna & Jennie Linder Cunningham

Today, we continue with our 4-part series on South American countries that self-identify as socialist or that have certain socialist characteristics.  This third blog focuses on Bolivia.

Map of Bolivia

The Bolivian case is somewhat unique, in light of our previous examinations of South American economies that are based on, or heavily influenced by, a socialist system and / or policies. Bolivia has enjoyed increasing economic success and stability, developing the highest surplus in Latin America, while simultaneously improving standard of living and drastically reducing poverty levels. Interestingly enough, the success comes through a pragmatic blend of primarily socialist policies, many of which are redistributionist in nature but have come to be praised by such international organizations as the World Bank (a staunch proponent of neoliberal, never socialist, economic policies). These policies are supplemented by a few deliberate business-friendly measures intended to provide a realistic alternative, or more accurately, a realistic means of sustaining policies of wealth redistribution aimed at decreasing poverty and inequality.

President Evo Morales has historically and consistently been highly critical of capitalist economic policies and, in particular, the large institutions that support, advocate for, and defend big corporations – such as the United States, The World Bank and the International Monetary Fund. Typically, the IMF and World Bank lend money and support to countries in need on the condition that they implement or intend to implement a neoliberal capitalist economic structure and policies. This is an approach that has had mixed results in the past, particularly encountering significant problems in developing nations along the lines of corruption and various means of mismanagement and diversion of funds received from these international institutions.

National Congress, La Paz

Although having dealt with severe economic problems in the past, Bolivia currently looks quite stable in comparison to its neighbors: inflation is under control, as opposed to rampant inflation in Venezuela; and growth rate is high, unlike slow economic growth in Brazil. Growth estimations for 2013 were 6.5%, beating all other countries in the region. Foreign currency reserves are also the highest in the region by far, and, relatively speaking, the ratio of reserves has just surpassed that of China, formerly the world’s leader. Bolivia, under President Morales, has also opted to take an approach much different from that encouraged by the Bank and IMF. According to Luis Arce, Economy and Finance Minister, “[Bolivia] is showing the world that you can have socialist policies with macroeconomic equilibrium. Everything we are going to do is directed at benefiting the poor. But you have to do it applying economic science.”

Copacabana, Bolivia

One of these “pragmatic” policies is based upon securing oil and gas export contracts into the foreseeable future, with all exports currently going either to Brazil or Argentina. However, this means that although much of the current growth occurring in Bolivia is due to these exports, that growth is also tied to the future of Brazil’s and Argentina’s economic health, neither of which is guaranteed. Morales has encouraged oil and gas exploration for the past several years, in late 2011 proposing an extension of exploration and exploitation to approximately 12 million hectares, four times that of 2009.

The future of Bolivia is certainly dependent upon the future of oil and gas, and specifically to the petroleum needs of only two other countries. However, Bolivia seems to have been able to utilize and pragmatically adapt its socialist policies to the primarily capitalist economy that exists – ideology or not – throughout both the region and the world, and by many measures, better than its bigger, more populous, but not necessarily more economically diversified, neighbors.

TransLegal works routinely with clients doing business in Bolivia and advises on such issues as obtaining government approvals for imported products, including foods, food and animal feed ingredients and transgenic products.  Call us with your questions concerning doing business in Bolivia.

Argentina: Existing Challenges

Francisco A. Laguna & Francisco Moran

This is the first of our Southern Cone country profiles, focusing on Argentina, the second largest member of Mercosur. Together with Brazil, it spearheads Mercosur policies.

Over the past 50 years, Argentina has gone full circle from having a left-wing government initially under General Juan Domingo Peron, to a brutal 7-year dictatorship ending in 1983, and back to a socialist / nationalist regime. Even 30 years after the end of totalitarian rule, many of the country’s domestic policies and political reactions echo back to that period in history.

Over the past 2 decades, Argentina has sustained economic challenges, especially the 2001 collapse of its economy, requiring a restructuring of its sovereign debt and the implementation of austerity measures. In power since 2003, the late Nestor Kirchner and his wife, current President Cristina Fernandez, have overseen a recovery of the Argentine economy and have implemented often nationalistic, protectionist policies.

The Energy Sector & Nationalization of Foreign Assets

Photo Credit: Wikipedia commons: HerFariasP

Argentina’s energy policies have limited industry growth. For years, the government has subsidized consumer costs: Argentines pay a fraction of the cost for energy in comparison to rates charged in Brazil and Chile. Energy tariffs remain essentially at 2002 rates, and at the same time, the government is subsidizing energy companies. In 2011, Argentina was forced to import energy for the first time in 20 years.

The policies do not make sense, and they result in a weak sector that provides irregular service. The Fernandez government cast blame on Repsol – the then-majority shareholder of energy company YPF – charging financial improprieties. It nationalized 51% of YPF stock. Not much good has happened since then: Repsol is suing the government for $ 10.5 billion plus damages; and Repsol is suing other energy companies (Chevron and Brindas) to prevent joint-shale gas exploration with YPF.

Worse, the energy sector has not improved and international and foreign investor confidence has been eroded. The government seems to realize that its policies have to change: it is poised to raise tariffs and end consumer subsidies. That leaves the Repsol issue to resolve.

Government Defaults and Fudging Inflation Numbers

Photo Credit: Economist; INDEC; The State Street PriceStats Inflation Index

As a result of the debt crisis, Argentina renegotiated terms with the majority, but not all, of the holders of its sovereign debt. The government has refused to pay on the bonds owned by the remaining holdouts. The creditors won a significant legal battle in November 2012, when a federal district court ruled that Argentina was, indeed, liable for the repayment of the outstanding original bonds, about ~ 1.3 + billion. The Fernandez government appealed, but the Second Circuit has thus far largely backed the bondholders. Hearings are scheduled for February 27.

Argentina’s international reputation has been further tarnished by the International Monetary Fund, which just censured the country for failure to report accurate economic statistics, particularly inflation. Official and unofficial inflation rates for 2012 differ by approximately 15%.

Again, not good news for Argentina.

Regional Isolationism & Protectionist Measures

The Fernandez administration has followed a steady regional and protectionist policy. For instance, Argentina has consistently opposed trade negotiations between Mercosur and the European Union on the basis of fear of unfair competition from EU companies and products. This move has limited Mercosur’s external commercial relationships and affects member country economies. The Pacific Alliance, recently formed by Chile, Colombia, Mexico and Peru, is ready to compete with Mercosur by negotiating free trade agreements and specifically targeting Asia.

Photo Credit: Denise Mayumi

In addition, since 2011, in an effort to promote its domestic industry, Argentina has increasingly established de facto trade barriers by denying import approvals for finished products in various sectors, including consumer goods and foods. Even products considered strategic to maintaining Argentina’s trade balance have been subjected to additional approvals, such as obtaining a non-automatic import licenses granted at the government’s discretion.

These isolationist and protectionist measures increasingly remove Argentina from the world economic stage.

Despite these challenges, Argentina can still present opportunities for foreign investors and international products. TransLegal has strategized with US and EU firms in the formation of joint ventures in Argentina as well as assisted our clients understand the requirements to import foods and other products into the country. Contact us with your questions related to Argentina and Mercosur.