The following summary was prepared by Helena Cardenas and Matthew Ocheltree, Research Assistant
Trade Equity and Development Project, Carnegie Endowment for International Peace

The United States recently concluded free trade agreement (FTA) negotiations with Peru (December 2005), Colombia (February 2006) and is close to concluding an agreement with Panama. These FTAs bring the total of FTAs with Latin American countries to 10. There is much debate on the impact of these agreements not only on the United States, but also on the countries in Latin America.

The purpose of this event was to analyze the larger context of United States-Latin American trade agreements and explore whether the United States should have a broader perspective of the challenges with regional development and inequality, and take such issues into greater consideration during negotiations. During the session, the main themes of discussion were: the stagnant situation of poverty and inequality that still prevails in Latin America; the need to create better, more development-focused trade partnerships between the United States and countries in the region; and the significance and role of labor provisions in such agreements, particularly in order to address inequality.

Moderator: Viji Rangaswami, Trade, Equity and Development Project

Congressman Sander Levin (Speaker)

Congressman Levin is a senior Congressional Democrat on the House Ways and Means Committee. He is the Ranking Member on the Social Security Subcommittee and a Member of the Trade Subcommittee. Click here to read his remarks in full.

Congressman Levin went on a week-long fact-finding trip in late January to Peru and Panama in anticipation of Congressional consideration of the FTAs with both countries. His remarks reflected what he saw on that trip, and meetings he had with Peruvian and Panamanian government officials, private sector officials, NGOs and individual citizens.
Congressman Levin noted three “larger” considerations that make the Peru and Panama FTAs significant, and useful test cases of globalization.

  • First, the tide of international trade and competition is changing and the challenge is now increasingly in the competitive relationships between already economically-developed nations like the United States, and developing nations with very different economic structures.
  • Second, the heightening political, social, and economic turmoil in Latin America has moved it up on the U.S. radar, forcing the public and policymakers to ask, “what is going on?”
  • Third, the combination of economic growth in Peru and Panama and the persistent poverty and income inequalities challenges the United States to answer a basic question: Is a focus on economic growth through expanded trade, in and of itself, a sufficient approach to the challenges facing these nations? Or must there be broader focus on the terms, the contents, and the impact of the flow of goods and services and how trade agreements can be shaped to leverage expanded trade to benefit a broader range of citizens?

Economic Growth and Persistent Poverty

Congressman Levin noted that while there is clearly considerable wealth in both nations, there is also visible evidence of the persistent poverty. He cited recent estimates that about 50% of the population in Peru lives in poverty ($58 a month) and about 20% in extreme poverty (under $32 a month). In Panama, 40% of the population lives in poverty.

Congressman Levin also pointed out that this poverty comes in the context of immense disparities in the distribution of wealth and income. He noted that income inequalities are wider in Latin America than in any other region on the globe. Congressman Levin cited the World Bank’s most recent World Development Indicators, which report that in Panama, the richest 10% of the population receives 43% of the income, while the bottom 10% receives only 0.7% of the country’s income. In Peru, the richest 10% receives 37% of the income, while the bottom ten percent receives only 0.7% of the country’s income.

Congressman Levin stated that during his trip, everyone did agree that reducing poverty was a top priority. That said, he encountered strong opinions on the question of whether economic growth in and of itself would address that goal. The business community, leading economists and other consultants close to the business community all focused on overall growth as the key to poverty reduction, and in particular, the need to move more workers into the formal economy (informal workers are 60% of Peru’s economy). The basic equation for the business community, even while acknowledging other factors like a weak legal system, insufficient foreign direct investment and corruption, is: economic growth producing jobs equals major reductions in poverty.

Economic Growth and the Role of Workers

Woven into the common analysis about economic growth were statements about the position of workers in the formal sector. Peruvian laws, including reforms of 2002, were described by people in the business world and government officials as consistent with basic international standards on the rights of workers. Congressman Levin found that characterization to be in stark contrast with the perspective of representatives of the International Labor Organization (ILO) in Lima, who stated that workers in Peru do not possess international worker rights in law and practice. He also noted that it conflicts with the recent U.S. State Department Human Rights report. Both the ILO and State Department document the failure of Peru’s laws to comply with the five basic ILO standards (prohibitions on child labor and forced labor, non-discrimination, and the rights to associate and to bargain collectively). Specific problems include the failure to prohibit employer interference in union organizing, anti-union discrimination, laws permitting employers to unilaterally change collective bargaining agreements, use of temporary workers to thwart union activities, and strike requirements that make it difficult for workers to exercise the right to strike.

Congressman Levin stated that many of the problems in Peru are traceable to the Fujimori regime. The Fujimori Administration instituted a number of legal changes that today undermine the ability of Peruvian workers to exercise basic workers rights. These include systems of “fixed-term labor contracts” and “sub-contracting”, as well as a number of different laws on hiring and contracting labor that are regulated through commercial and civil codes.

Congressman Levin noted that when President Toledo of Peru visited Washington last fall and met with the Ways and Means Committee, he expressed the view that if globalization was going to work, there must be a broader sharing of the benefits of expanded trade. He stated that if that was to happen workers must be included, and to accomplish that inclusion the basic international standards should be incorporated in the trade agreement. Congressman Levin noted that President Toledo had taken steps on this front.

In light of the desire in Peru to make change in the area of labor standards, Congressman Levin questioned the Bush Administration’s insistence at negotiating a standard for workers rights that was not used in any other section of the FTA: that a country must simply enforce its own laws, and that labor laws can be made worse with impunity. He said that such a policy places the United States on the wrong side of those in the region trying to effect change and reduce poverty.

Congressman Levin cited a recent report of the World Bank on Latin America, entitled “Poverty Reduction and Growth: Virtuous and Vicious Circles.” He noted that it possesses a different tenor than the conventional wisdom that trade expansion is “win-win.” The report states that

“a sensible development strategy should focus both on the quantity of growth (that is, on the achievement of a high growth rate) and on the quality of growth (that is, on the benefits from that growth)... .... [U]nfortunately, this general advice is not very useful for policy purposes. For one thing, the achievements of both growth and a more equal income distribution are policy outcomes that are a challenge in themselves. But beyond that, the discussion leaves unanswered a number of questions of extreme relevance for policy making.”

Congressman Levin believes that the role of workers rights can be useful in effecting the “general advice” because such rights can vitally affect the “quality” of growth.

Congressman Levin criticized the Bush Administration for fighting efforts to place in trade agreements a requirement that there be adherence to the basic ILO standards with a reasonable transition period, and noted that the Administration’s opposition was based on shifting arguments. For example, early opposition was based on the argument that these are “social issues.” Later arguments included that the United States should not impose its standards on other countries, or that the main problem is enforcement. The most recent argument is that the United States is concerned about subjecting U.S. laws to vague standards.

Conclusion: An Opportunity

Congressman Levin concluded by stating that he came away from his trip with a better impression of the overall environment in which the countries are negotiating their economic relationships. He noted the considerable civility in discourse in Panama and Peru, the universal expression that poverty reduction is a priority, and the warmth among the people of Peru and Panama towards the people of America. That positive environment should be used to conclude FTAs that both encourage overall growth and stimulate growth to work in ways that reduce poverty.

Congressman Levin noted that President Toledo had invited the full Ways and Means Committee to travel to his country in the immediate future, and he urged the Committee to take advantage of that opportunity. He believes that such a trip could bring about a common understanding between Democrats and Republicans on the overall issue of whether growth must be combined with steps to address the “quality” and “equity” of that growth as well as on the role of workers and international labor standards in shaping the economic conditions.

 

President Luis Alberto Moreno (Commentator)

Mr. Luis Alberto Moreno was elected president of the Inter-American Development Bank in July 2005 and in previous years held the positions of Colombian Ambassador to the United States and Minister of Economic Development in Colombia.

President Moreno noted that Latin America has experienced significant transformation during the last 25 years. The region has changed from having military rule in almost every country to now when democratic government is almost the norm. In addition, these nation-states have experienced an insertion in the global economy. President Moreno stated that the stresses that accompany these processes have caused significant disruptions in both Latin American societies and economies.

President Moreno urged the audience not to forget that even with the stresses, the region is still making progress. He noted that we are in the midst of a decade of inclusion, with labor leaders, women and indigenous people all being elected in national governments. President Moreno indicated that in Latin America, civil society is becoming stronger and democracy is expanding its reach, citing as an example, the proliferation of NGOs in Brazil. While these are steps forward, he acknowledged that there is much that yet remains to be done for development in Latin America.

President Moreno urged the audience that in talking about development and growth, they recognize that there is no single formula for development. Rather, there are elements that contribute to development. President Moreno indicated that one of the most important of these elements is having institutional capacity. Any reforms designed to tackle inequality will be crippled unless institutions have the right incentive structure to support them.

President Moreno noted that there has been economic growth in the region, and that such growth which has pulled 13 million people out of poverty. He stated that this number is not enough, given there are still 200 million people living in poverty. He urged that a change of focus might be necessary for the purpose of reducing poverty. President Moreno noted that the most common topics of discussion in Latin America are inequality and the next cycle of reform, whereas in Asia, where inequality is lower, the focus is on economic growth and technology. President Moreno believes that this difference holds a lesson for Latin America.

President Moreno stated that while bi-lateral trade agreements may be contentious for both sides, such agreements are a vital part of the economic growth agenda. The relevance of trade agreements lies in their ability to lock reforms for the future. Consequently, it is central to look at the things that have been ignored in the past; in the case of Colombia neglected issues include: customs, modernizing sanitary and phytosanitary standards, looking at the causes of decreasing membership in unionized labor, the vast number of informal workers and the size of frictional unemployment.

President Moreno added that trade agreements are a great opportunity to stimulate dialogue and to look at nations in an integrated way. Trade agreements present a challenging opportunity for energizing the base of the pyramid to promote progress in areas ranging from labor market reforms to migration policy. One area that needs to be addressed, for example, is remittances, which can total as much as $54 billion in Latin America—an amount larger than the official development assistance for the countries of the region. President Moreno urged that instead of sending money home, this capital could be used to promote businesses.

President Moreno noted that while there is much to do to promote labor standards in Latin America, and trade agreements have helped to refocus attention on this issue. Even if there is disagreement on the ways in which this issue should be addressed through FTAs, there is a consensus that labor law reforms are necessary and that institution building is a crucial first step in the right direction.

President Moreno also discussed the role of the Inter-American Development Bank stating that the IADB can assist with institution building and integration in the hemisphere. President Moreno noted that Bank focuses on regional policy dialogue through permanent meetings and the preparation of national plans for integration and trade capacity building. He said that within these plans there is a focus on labor and gender issues, and compliance with existing laws through court processes. He noted that the Bank has being working with Peru and Ecuador, for example, in an effort to strengthen labor standards. The Bank has also looked at the possibility of implementing the CAFTA white paper process in the Andean countries that agree with it. Although the Bank can not solve problems of inequality through trade agreements alone, they are a valuable starting point from which to attain this larger goal.

Professor Harley Shaiken

Professor Harley Shaiken is the Director, Center for Latin American Studies in the University of California at Berkeley. He focuses on development and has widely written seminal reports about the North American Free Trade Agreement.

Professor Shaiken urged the audience to move away from framing the debate as free trade vs. protectionism or isolationism against internationalism, and to think about the issue as what is the best way to use trade to challenge poverty and promote democracy. A related central question is how expanded trade might be used to increase the middle class in Latin America, a region plagued by inequality, and simultaneously maintain the middle class in the United States. Professor Shaiken argued that if inequality and democracy questions are not raised and addressed, we risk the promotion of an unsatisfactory status quo.

Professor Shaiken said that the World Bank report mentioned by Congressman Levin, “Poverty Reduction and Growth: Virtuous and Vicious Circles,” is correct in asserting that poverty destroys the national capacity to promote economic growth (a 10% reduction in poverty translates into 1% economic growth), and confirms the need to develop policies that can address this immediate challenge. Professor Shaiken also argued that the Report has an important blind spot: because it seems to omit/overlook the role of labor policy and unions in addressing growth and poverty. These details give the mistaken impression that labor unions do not having a significant impact on labor markets and growth. On the contrary, labor unions are key elements that must be put back in the equation of growth in Latin America. Unions are far from perfect institutions, but they are part of the democratic process and evidence of the existence of a vibrant civil society. If civil society is diminished, then democracy in the region is ultimately undermined.

Professor Shaiken stated that we should examine the ways in which these agreements currently promote labor rights. The State Department country profiles show a low density of labor union membership in the Andean countries. In Peru, this indicator is a little over 5%, while in Ecuador it is between 2 or 3%. Professor Shaiken noted that few unions are in the maquiladoras or Export Processing Zones (EZPs).

Professor Shaiken stated that the language in the trade agreements’ labor chapter is weak. He noted this stands in contrast to the language on investment or intellectual property rights, which is stronger and ‘binding.’ Professor Shaiken noted that in the case of worker rights, the word that stands out is ‘striving,’ which does not imply a clear recognition. These points are important to consider because the incentives to change the status quo are largely predicated on the presence adequately firm language in the text of trade agreements. Professor Shaiken urged that to accept the status quo is to promote past mistakes. Instead, he called for the United States to learn from our experience with previously concluded agreements, such as NAFTA. Professor Shaiken stated that in the FTA with Mexico there were important gains and plenty of missed opportunities as well. President Toledo has said that he would be able to accept core labor standards as part of the agreement, so there is an opportunity for progress this time around.

Professor Shaiken agreed with Congressman Levin’s suggestion that expanding trade offers potential gains and can help build mechanisms and institutions that create opportunities. Nevertheless, labor rights should be addressed, and effective language is necessary. Professor Shaiken stated that meaningful language becomes the vehicle to extend a middle class there and to ensure a middle class here. Such developments will promote the participation of civil society, and this is indispensable to tackling poverty and promoting democracy in the region.

 

Question and Answer Session


Latin America’s income inequality is a concern generally raised. How does the United States factor in the morality of this debate, if this country itself has grown steadily more unequal in the post-WWII era?

Congressman Levin responded that it is necessary to address both inequalities. America should worry about income inequality in the United States and the topic should also be considered when the United States is negotiating trade agreements.

To Congressman Levin: Is your view on labor rights and its consideration in the FTAs shared by members of the Democratic Caucus?

Congressman Levin responded that we should not undertake a headcount without allowing for a full dialogue on the topic first. Peru and Colombia are drawing attention to this issue, and the United States needs to take a broader perspectives on how to shape trade agreements so they achieve the goals of addressing poverty, especially among farmers in these developing countries.

To Congressman Levin: How do you assess the receptivity of the USTR to the dialogue that you call for?

Congressman Levin responded that it is important to assess the receptivity from both sides. USTR Robert Portman has shown increasing receptivity to considering the issue. President Toledo has also shown concern and has made a formal invitation to the Ways and Means Committee to visit his country. Congressman Levin hoped that a bi-partisan group would go to Peru because this would be a great opportunity not only to emphasize dialogue on the topic, but also to reassert the United States position of support to Latin America.

Sandra Polaski, Director of the Trade Equity and Development Project at the Carnegie Endowment, referred to Congressman Levin’s comment on the issue of temporary contracts, short term contracts and subcontracts, as a relevant item to add to the discussion.

Congressman Levin commented on the fact that once norms are ingrained in an institution or society, it is easy to deny the existence of underlying problems and to resist change. However, these norms have important impacts on the rights of human beings and they need to be addressed. If the issue is viewed in this way there will be a broader landscape for possible action.

Ms. Rangaswami asked President Moreno to comment on the technical assistance that the IDB is providing to Peru and Ecuador for the strengthening of labor institutions and standards.

President Moreno explained that these countries do include labor standards in their white papers; however, the issue is the wide flexibility in interpretation and implementation, which leads to ineffective protections for labor rights. Hence, they are helping these countries to introduce and consolidate respect for the core labor standards.

A question was raised on the tone in which the theme of labor standards was being addressed, specifically that the United States should not take a paternalist view when the governments in Latin America have the responsibility to take care of such domestic issues apart from the incentives and requirement of trade agreements.

Congressman Levin asserted that it is necessary to be careful about the tone of the discussion and to be sensitive about the complex dynamics involved. In such cases, there is a danger of accepting the status quo, which is left intact if trade agreements do not provide an incentive for change. Hence, if there is resistance to core labor standards, trade agreements can have a role in spurring reform. An FTA should ensure that the country is taking the steps that it needs to take. In the case of Peru, mechanisms that address the issue of enforcement are necessary to address before proceeding with the agreement. This is why the eagerness of President Toledo to include labor rights in the FTA with the United States is a great opportunity. In Congressman Levin’s opinion, the United States should accept this invitation to his country and extend a dialogue that could make the agreement more successful.

Given the issues with agriculture and small farmers in developing countries, how can the United States work towards the integration of development objectives in the negotiating strategy of the USTR?

Congressman Levin recognized that importance of looking at the impacts of FTAs on agriculture and small farmers. Moreover, these issues are closely related to the support of core labor standards, which is a factor in the successful creation of a middle class. The existence of a middle class is important because then they will have a greater opportunity to present their needs and interests. Congressman Levin made his final remark, saying that the United States needs to tackle these issues at the bilateral and multilateral level because much of the opposition to globalization and to the United States comes from the part of the population who has not been able to share in the benefits of trade liberalization.