THE WORLD : Clinton Backslides on Bold Initiative for Western Hemisphere

It is less than five months since President Bill Clinton presided over a summit of Latin American chiefs of state in Miami, at which the goal of a free-trade zone for the Americas was proclaimed. Two weeks later, Mexico was struck by an economic crisis. Ever since, the most creative U.S. foreign-policy initiative of the 1990s--the Partnership of the Americas--has been in jeopardy.

South America is preoccupied with avoiding the experience of Mexico. Brazil is fostering Mercosur, an association of Brazil, Argentina, Paraguay and Uruguay, as the forerunner of a possible Latin American free-trade zone. Argentina, convinced that devaluation had started the Mexican slide, has opted for a stabilization program that looks to Brazil to spur its growth.

Both initiatives can lead to important progress, provided the United States remain committed to a wider concept of Western Hemisphere cooperation. If Argentina succeeds, it will set an example of how to avoid the vicious circle of adjusting currencies to offset inadequate domestic policies. Growth in the Western Hemisphere would be fueled by stable exchange rates imposing domestic discipline. Brazil’s new dynamism, too, could provide an intermediate stage for the southern part of the Western Hemisphere until a global Western Hemisphere organization emerges.

All these hopeful prospects presuppose that the United States will hold the North American Free Trade Agreement together, demonstrate continuing understanding for Mexico’s plight, adopt a constructive attitude toward Mercosur and engage in a permanent political dialogue with Brazil. Otherwise, there is a real danger that America may become marginalized in what it has heretofore considered its own hemisphere.

U.S. Western Hemisphere policy cannot confine itself to providing relief for Mexico. Nor should it acquiesce in the fashionable tendency to blame NAFTA for Mexico’s travail. For stability in Mexico would be in our self-interest even if NAFTA had never been heard of.

A vital Western Hemisphere structure is also important for economic reasons. If the new principles of the World Trade Organization come to permeate the world economic community, a Western Hemisphere structure would encourage cooperation among the nations of the Americas within their own region. If the WTO develops slowly, a Western Hemisphere structure will facilitate competition with other regional groupings.

The ultimate challenge before U.S. Western Hemisphere policy, however, is political, not economic. Mexico’s travail was the outgrowth of success, not failure. To smear Mexico’s achievements of the past decade retroactively is to play the game of those who prefer statist economics and authoritarian rule.

Moreover, the countries of Mercosur--especially Argentina and Brazil, which are striking out on their own--have some advantages over Mexico. The percentage of foreign investment represented by speculative capital is much lower. Political reform is much more advanced. In Argentina, President Carlos Menem and his finance minister, Domingo Cavallo, seem determined to handle its financial problems by deflation rather than by inflation and, unless Brazil were to alter its exchange policy dramatically, bid fair to succeed. Brazil has ended years of political uncertainty with the election of Fernando Henrique Cardoso, who, as finance minister, stabilized the Brazilian currency and seems dedicated to fostering privatization and market economics. If Brazil pursues his economic policies, it could become the strongest country in South America. This will give a new impetus to Mercosur, the South American counterpart to NAFTA.

The current crisis, then, is an opportunity to remove the remaining hurdles on the road to democracy and free markets in the Western Hemisphere. This makes it imperative for the United States to put forward its vision of how to use the decade envisaged by the Miami summit for the creation of a Western Hemisphere free-trade area.

Attention will have to be paid to the role of purely portfolio capital in destabilizing fragile economies. So long as banks were the chief source of credit for Latin America, financial crises were handled by a relatively small number of institutions that had a stake in the long-term well-being of the host country. But the rapid expansion of credit in the late 1980s and 1990s in Latin America, and especially in Mexico, was driven by investment funds and individuals whose primary motivation was to maximize immediate gains. They had no incentive for long-term solutions; instead, they would keep their capital in a particular country only so long as it earned the highest return and would withdraw--indeed, felt obliged by their fiduciary responsibility to do so--as soon as problems emerged. Speculative flight magnified the difficulties national policy failures had caused. A long-term economic policy for the hemisphere should therefore try to create incentives for direct investment.

Still, the ultimate challenge is political. In Mexico, the dominance of the governing party is ending, but a new system is not yet apparent. It is in our national interest to facilitate evolution by establishing a relation between economic-restructuring proposals and what the political system and social cohesion can bear. Despite its internal difficulties--indeed, precisely because of them--Mexico should be treated less as a ward and more as an important partner of the United States. It should be conspicuously and regularly consulted at a high level, not just on bilateral issues, but on major problems, especially those concerning the Western Hemisphere.

In elaborating the vision of a Western Hemisphere community sketched at the Miami summit, there is a need for closer cooperation between the United States and the southern cone countries, and particularly Brazil as an emerging giant. In 1975, Brazil and the United States signed an agreement to consult before undertaking major initiatives in the Western Hemisphere. The time is propitious to implement these provisions.

One of the key issues for consultation should be the eventual merging of Mercosur and NAFTA, which, of course, requires that NAFTA continues to be fostered. It cannot be in the U.S. interest that Mercosur thrives while NAFTA withers and the United States becomes a bystander in a Western Hemisphere where Brazil and Argentina assume the leading positions.

Western Hemisphere policy may turn out to be the Clinton Administration’s most enduring foreign-policy legacy, but only if it is prepared to live up to the vision it put forward in Miami.