Bush's Latin American Initiative: a Reassuring Move

THE United States invitation to Latin America to forge a new relationship based on economic self-interest rather than strategic concerns is a positive, reassuring move toward a much troubled region. President Bush announced the Enterprise for the Americas Initiative June 27 as the cornerstone of a new, post-cold-war, economic partnership with Latin America. The proposal is noteworthy in several respects.

First, it gives a much needed boost to the morale of Latin Americans who feel that events in Eastern Europe have overshadowed the equally profound political and economic transformations under way in Latin America and who fear that the support the region needs to consolidate those reforms might be diverted elsewhere.

Second, it recognizes the complexity of the problems confronting Latin America and the fact that the cycle of recessive adjustment and inflationary growth can only be broken by supplementing domestic efforts with external support on a broad range of issues, including trade, debt, and finance.

Third, while it offers only limited tangible, short-term benefits, the initiative does set an agenda for future US-Latin American economic relations, with potentially larger mutual benefits down the road.

The initiative rests on three pillars: trade, debt, and investment.

In the area of trade, the proposal sets as a long-term objective the establishment of a hemispheric free-trade zone. The US would enter into free-trade agreements with countries ready to engage in reciprocal trade liberalization and negotiate more limited bilateral accords with other countries.

On debt, the key proposal is to reduce the region's $12 billion official debt to the US. A sizable share of the concessional debt (currently about $7 billion and spread among the smallest, poorest countries in the region) would be written off on a case-by-case basis. In addition, a portion of the outstanding official nonconcessional debt would be sold at a discount, to be used for debt-for-equity and debt-for-nature swaps. The remaining official debt would be rescheduled and future payments on it would be made in local currency and set aside to fund environmental projects.

In terms of investment, the main proposal is the creation of a new investment fund at the Inter-American Development Bank, to provide up to $300 million a year to support market-oriented investment reforms and privatization.

In the short term, the main impact of the initiative is likely to be felt on the official debt side. If half of the concessional and one-quarter of the nonconcessional official US claims were eliminated, the savings in debt-service payments for Latin America would be on the order of $1.6 billion over the next four years. This does not amount to much in the overall scheme of things, but for the smaller, poorer debtors in the region it would provide much needed relief. If other industrial governments did the same, the benefits would multiply.

But while the benefits of the initiative in terms of debt reduction may well be limited, its environmental implications are likely to be significant: Even if only a small fraction of the official debt were set aside to finance environmental projects, it would likely represent a considerable increase in such spending.

In the longer term, the removal of tariff and nontariff barriers to trade is potentially the most important element of the initiative. Whereas the notion of a hemispheric free-trade area has a certain intuitive appeal, it should not undermine ongoing efforts to strengthen and liberalize the multilateral trading system. An open, global system of commerce remains the best option for both the US and Latin America.

In sum, the initiative was superb diplomacy and may become significant economics, provided the US and Latin America work together to fully develop this embryonic proposal into a dynamic and mutually beneficial partnership over the years.