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Starting the Discussion: Why the Southern Cone Has Potential

Credit: CIA World Factbook

Credit: CIA World Factbook

The term “emerging markets” is a broad and loaded one, encompassing nearly all of the developing world. Such wide coverage can create risk-based biases in observers and investors alike given the many legitimate unstable hotspots that exist across the globe today. This reality often obscures upcoming opportunities to engage and grow in regions ripe for further economic activity and development.

In this post, I will focus my attention on one of these areas which I believe has some potential for expansion in the foreseeable future: the Southern Cone. This region - encompassing the southern South American nations of Argentina, Chile, and Uruguay - has histories of boom and bust, as well as attachment to traditional Latin American economic trends of currency crisis and reliance on natural resource commodities. That said, these countries appear to be collectively turning the corner away from Venezuela-style collapse and towards stable growth.

The following factors, many personally witnessed on my trips to each of these countries, play key roles in setting the stage for a Southern Cone renaissance:

Immigration Tolerance

“The Argentines are Italians who speak Spanish, educated by the British, who want to be French.” - Jorge Luis Borges

Argentina and Uruguay stand out for histories defined by mass immigration, especially from Spain, Italy, and Germany. A welcoming attitude is even enshrined in the 1850s Argentine constitution. Even Chile, which has a more limited history of immigration, had waves of migration from Germany, Europe, and throughout Latin America. While the current international mood is more defined by right-wing xenophobia, this background provides a solid cultural foundation for accepting the flows of people and ideas necessary to succeed in a globalized economy even though national populations may prefer some restrictions at a time when migrant flows are increasing due to conservative US border policies.

The Southern Cone countries in particular also have a history of specifically adopting immigrant populations for positive social and economic purposes, as seen in previous efforts in Argentina and Chile to welcome Korean immigrants who revitalized national textile industries. Today, Chile has accepted thousands of refugees from countries such as Haiti and Venezuela, recently expanding a visa program to stabilize immigration status for migrants from those nations. Venezuelans in particular stand out given contemporary political developments in that state. Interestingly, those that migrate to places like the Southern Cone are mostly well educated and can take advantage of more developed economic settings. This allows states like Chile to expand its presence in economically competitive sectors like tech through advanced practitioner visa programs.

These three countries are also influenced by multilateral policy, namely the efforts of the Mercosur bloc. As members (Chile is an associate while Argentina and Uruguay are full members), the Southern Cone countries abide by a 2002 decision to allow guest workers from participating countries to live and work freely within member states.

Political Commitment to Macroeconomic Stability

Movements away from socialist-leaning political leaders throughout Latin America have led to economic liberalization policies. This is particularly the case in Argentina, where serious efforts to tackle the country’s global financial pariah status are taking place for the first time since the catastrophic national default in 2001; in fact it hopes to attain the same level of international trust that Uruguay gained when it effectively utilized International Monetary Fund (IMF) support to avoid spillover effects from Argentina in 2002. These strategies follow the lead of neighbor Chile, the wealthiest country in South America, which has successfully implemented sustainable budgets and commodities management policies for decades.

Chinese Appetite for Goods and Raw Materials

China is the singular most crucial economic influence driving the Latin American region today. Hungry for commodities, raw materials, food, and new export markets, China’s commitment to international development in Latin America is part of its One Belt One Road policy (OBOR), a plan conceived by China to increase Chinese investment and infrastructural growth to key strategic partners around the world. This policy is more than geopolitical realpolitik, with the focus on the Southern Cone as a prime example of its wider objectives. With Chile’s copper and Argentina/Uruguay’s beef (among many other products produced at a comparative advantage), the Southern Cone is poised to deepen ties with Beijing and provide quality sustenance to the world’s most populous international market.

Chile boasts South America’s longest running diplomatic relationship with the People’s Republic of China (since 1970) and the two nations first signed a free trade agreement in 2005, with a 2017 update now fully in effect. Agreements to remove tariffs have benefitted Chinese access to Chilean copper and forestry exports. Food (seafood in Chile, fruit from Argentina) is also a particular Latin American import of focus for China as it feeds is developing population. Not surprisingly, therefore, Chile has joined China’s One Belt One Road project in order to establish itself as Latin America’s premier destination for foreign investment.

Argentina, for its part, has more deeply integrated itself with China’s international ambitions. It played host to the world’s most powerful nations during the 2018 G-20 summit, where China and the US held important negotiations. Buenos Aires has also recently concluded a multibillion-dollar deal for what would be only the fourth nuclear power plant in South America, constructed with Chinese capital. This type of high profile financing is particularly attractive to a country like Argentina with its contemporary history marked by economic crises, currency devaluations, and sovereign insolvency. The deal also builds off of growing Sino-argentine technological and military cooperation, as evidenced in a Patagonian space station project already built by China and housed on Argentine soil.

Like its two larger neighbors Uruguay also counts China as one of its most important trading partners. Montevideo’s desire for closeness and cooperation is so strong that Uruguay has started to go against its fellow Mercosur members by pursuing direct bilateral partnerships with Beijing, including becoming the first Mercosur country to participate in OBOR. At the same time, a duty-free port has been opened in Montevideo for a major Chinese fishing company, a controversial development that promises to increase Chinese influence in the country for years to come.

From these three factors, it is clear that the Southern Cone countries of Argentina, Chile, and Uruguay stand to gain significantly due to a confluence of global trends. At a time when regional neighbors like Venezuela are experiencing “brain drain,” these larger economies - particularly Chile and Argentina - can easily reap the benefits of new talent into societies accustomed to immigration. Concurrently, the rise of China and its growing emphasis on fellow emerging markets represents a key driver for enhanced economic development despite a series of protest and similar sociopolitical risks. As such, the most important element in fully capturing this multifaceted potential for economic expansion will be policy driven, namely keeping the commitment to macroeconomic stability that has sustained each of these countries (Chile most recently) during boom times. For this reason, upcoming national elections in each of the three states in the Southern Cone - with Argentina’s the most high-profile of the three - are worth close attention as the policies that can assist with further economic growth and balance will likely come down to the choice of particular candidates.

I welcome your thoughts. Please feel free to respond in the comments or to email me at info@wpglobalconsulting.com to discuss further.

William VogtComment