The Pacific Alliance: A Promising Yardstick of Latin America’s Prosperity

With a stroke of a pen at the Chile’s Paranal Observatory, the presidents of Chile, Colombia, Mexico and Peru formally launched the Pacific Alliance (“Alianza del Pacífico” in Spanish) on June 6, 2012. The creation of this newly-minted economic bloc joins the ranks of other regional trade organizations like MERCOSUR, the Andean Pact, the Community of Latin American and Caribbean States, the Bolivarian Alliance for the Americas (ALBA in Spanish) and the Caribbean Community (CARICOM), to name a few. Taken together, the Pacific Alliance exported over $440 billion in 2010, about 60 percent more than MERCOSUR, Latin America’s largest trade bloc, according to the World Trade Organization. As the Pacific Alliance almost enters its first year, the lingering question is whether yet another trade bloc will truly narrow the perennial gap between the haves and the have-nots in Latin America while meeting other regional challenges that could threaten the bloc’s prosperity.

The Pacific Alliance has met both optimism and skepticism. Some analysts believe that Latin American countries have signed a myriad of economic and political blocs in the last decade, including also the Union of South American Nations (UNASUR in Spanish) and the Latin American Association for Integration (ALADI in Spanish), yet the population quickly forgets them since they can’t recall any fruitful outcome of these blocs thus far. What the Pacific Alliance seeks, however, is the recognition of the rule of law, the legitimate separation of branches of government, civil liberties and respect for human rights. In essence, the Pacific Alliance primarily seeks to strengthen bonds with Asia—its main competitor—particularly with the Association of South-east Asian Nations (ASEAN).

The newly created bond totals a population of more than 200 million people (slightly lower than the 275 million people living under the MERCOSUR bloc), 50 percent of the region’s imports and exports and 30 percent of Latin America’s gross national product. The Pacific Alliance has taken landmark steps, chief among them merging Bogotá, Lima and Santiago’s stock markets under the Latin American Integrated Market (MILA). So far MILA is the third largest stock market in the region, but it may aspire to be the largest by merging with the Mexican stock market. Intensive trade has also begun among some of these countries. In 2011, Chilean investments reached US$8 billion in Colombia, displacing the United States and Spain as Colombia’s main foreign investors. Additionally, the Pacific Alliance’s member countries lifted visa requirements and created overseas trade offices, and Panama and Costa Rica intend to join the bloc provided that they both have signed free trade agreements with all member countries. On March 2013, Colombia and Costa Rica inked a free trade agreement and is expected to bolster imports and exports between these two countries, which currently amount to nearly US$342 million.

The Pacific Alliance has a promising future, and it’s seeded in fertile ground. These countries enjoy a buoyant economy, a vibrant and growing middle class, strong democracies and relatively low inflation rates. Colombia has become Latin America’s rising star in the last decade, and the financial industry is paying attention to it. In 2007, Colombia was labeled the world’s most extreme market, partly because the Álvaro Uribe administration between 2002 and 2010 earned global investors’ trust after substantially stemming social unrest by the guerrillas and right-wing squads. Two years later, then-HSBC Group Chief Executive Michael Geoghegan added Colombia to a watch-list of countries called CIVETS, also comprised of Indonesia, Vietnam, Egypt, Turkey and South Africa. It is said that this new batch of emerging markets will take over the BRIC countries, as the CIVETS became more economically dynamic. Once the murder capital of the world in the 80s and 90s, Medellin was recently selected as the world’s most innovative city in a Citigroup-The Wall Street Journal contest, beating frontrunners New York and Tel Aviv. Colombia’s second largest city was chosen for its environmental-friendly policies, transportation equity and vast network of libraries and cultural centers that pave the way to social inclusion.

Colombia and Peru have also received praise last year. Named the “Andean Tigers” by The Wall Street Journal, both countries are lauded for their mixture of low public debt and dynamic economic expansion, aggressive foreign direct investment and resilient economies that weathered the 2010 economic recession. Colombia exported more than $37 billion in natural resources, and foreign investment in oil, mining and natural gas topped $9 billion in 2012—making up 12.5 percent of its gross national income. Peru, for its part, has similar patterns to that of Colombia. Peru emerged from a rebellion waged by the group The Shining Path, opened up its market in a process known as apertura económica, signed a long-awaited free trade agreement with the United States and added China as one of its main trade partners.

Mexico is arguably the Pacific Alliance’s economic motor. It’s the Alliance’s only G-20 member country, one of the OECD members alongside Chile and home of Latin America’s second largest economy. It has signed nearly 44 free trade agreements—more than any country in the world—and is recovering manufacturing market share back from Asia, including automobiles and household goods. Similarly, Chile has been Latin America’s darling after the restoration of its democracy in 1990. It has the highest nominal GDP per capita in the region, and it leads the pack in human development, economic freedom and low corruption index. Chilean Central Bank forecasts a 5-percent growth of Chile’s GNP by 2014 and inflation will be kept at 0.4 percent.

As promising as the Pacific Alliance can be, each member country faces unique and common challenges. Mexico, Colombia and Peru still rely on substandard infrastructure that impedes full-fledged economic development. Only a third of Mexico’s roads are paved, and its ports, railways and airports don’t meet the population’s needs. In addition, bureaucrats have belittled greater infrastructure overhaul, and public spending in Mexico is only half of what is needed for basic transportation maintenance, according to the World Bank. Peru has seen a $55 billion deficit in infrastructure development of electric grids and telecommunications, according to the Lima Chamber of Commerce. The Chilean Chamber of Construction released a report in May 2012 that addresses the need to increase infrastructure investment by adding $48 billion in the next five years—or 6 percent of the GNP and double what it currently is—in order to reach the goal of becoming a developed country by 2018. In the case of Colombia, Juan Manuel Santos pledged to invest $100 billion to rebuild an ailing highway grid and port system.

Perhaps the biggest challenge for the sustainability of the Pacific Alliance is security. Though there has been remarkable progress in restoring the rule of law in countries like Colombia and Peru, much needs to be done to stem the devastating effects of the War on Drugs—Colombia and Peru are the world’s top cocaine producers. It is believed that the Sinaloa Cartel has criminal cells in the Córdoba and Antioquia departments of Colombia, as well as the Colombian-Venezuelan region of Catatumbo. The Mexican cartels are strengthening bonds with the Revolutionary Armed Forces of Colombia. The Colombia and Mexican government have exchanged military and law enforcement strategies to curb drug violence, but the results still remain to be seen. If both Mexico and Colombia become safer, foreign direct investment will propel their economies to the likes of the newly industrialized countries.

Other challenges await the Pacific Alliance, such as the climate phenomenon “El Niño,” the lack of anti-monopoly legislation and freedom of the press, a crippled public education system and an over-dependency on natural resources as the driving economic force. These tasks, however, can be overcome if member countries can learn from one another’s experiences by expanding this alliance, thus bringing long-overdue prosperity to their nationals.