Knight Ridder News

WASHINGTON - Tiny Central America may soon benefit from an outsized eagerness in Washington to energize the march toward a free-trade area stretching from Alaska to Argentina.

This week, the Bush administration will launch formal talks with five Central American nations to strip away trade barriers. The goal: reach a free-trade accord by the end of the year.

The five Central American nations have tiny economies. But taken together, the region's 36 million people buy and sell nearly $20 billion worth of goods and services a year with the United States, even amid grinding poverty in corners of the isthmus.

"We buy half of what China buys from the United States," said El Salvador's economy minister, Miguel Lacayo, during a recent trip to Washington, referring to the region's purchasing power. "We buy more than what Chile, Colombia and Peru combined buy from the States. So we certainly are a significant trading partner."

Trade between Central America and the United States has nearly doubled in the past seven years, and any further increase would bring new jobs to South Florida, a conduit for a significant portion of exports and imports.

Washington's efforts toward hemispheric trade liberalization have stumbled in recent years. Economic collapse in Argentina and a leftward political tilt elsewhere in South America, most notably Brazil, have dimmed prospects further. A skeptic of free trade, Luiz Inacio Lula da Silva, took office Wednesday as leader of Brazil, the regional economic powerhouse.

The Bush administration - seeking to build on the 1994 agreement that united Canada, Mexico and the United States in a powerful North American trade bloc - hopes to invigorate the march toward a Free Trade Area of the Americas (FTAA), and it has had some recent successes.

On Dec. 11, the Bush administration wrapped up a free-trade agreement with Chile, the first with any South American nation. Congress is expected to approve the accord in coming months. Adopting a piecemeal approach, administration officials believe a less ambitious free-trade accord with Central America may give vigor to the FTAA talks.

"The administration is saying, 'Look, the FTAA is a lugubrious process, and we want to show some quick progress with Central America,' " said Jerry Haar, a trade expert at the North-South Center of the University of Miami.

Global terrorism has also stirred the Bush administration to push harder for free-trade agreements, believing they will bring greater prosperity and stability to a troubled region.

Whether a free-trade agreement would be an overall boon to Central America is still under debate. Some experts believe the value of free-trade agreements is oversold.

Huge disparities mark Central America. In prosperous Costa Rica, per capita production of citizens is $3,960 a year, while in neighboring Nicaragua, it is $420 per year, the World Bank says. The other countries in the free-trade talks are Honduras, El Salvador and Guatemala.

Leftist opponents say a Central America trade accord would weaken unions, lower wages, foster sweatshops and generally enrich those who already have money.

Others suggest that it will boost overall economic performance of the region, but that the five nations will benefit to different degrees and income disparities may grow.

"At the end of the day, the rich will get rich faster than the poor," said Gary C. Hufbauer, a senior fellow at the Institute for International Economics, a Washington think tank.

Several of the Central American nations lack mechanisms of modern economies, and cling to rigid labor laws, inefficient judiciaries or state ownership of key areas that may inhibit investment even with a free-trade accord, U.S. experts said. "Costa Rica and El Salvador are very entrepreneurial. They probably have a business community ready to exploit it," said Ricardo Hausmann, an economics professor at Harvard University. Disparities between the five nations should not block an accord, proponents say.

After the trade negotiations kick off on Thursday in Washington, they will resume in the last week of January in San Jose, Costa Rica. Nine meetings have been scheduled for the year.

"They are not incompatible. Costa Rica will move into the higher echelon or higher niches, while Nicaragua will be more linked to the lower end of manufacturing," said Alfredo Milian, executive coordinator of the Central American and Caribbean Textile and Apparel Council.

One of the obstacles to reaching an agreement is "great concern" within the Bush administration over corruption in Guatemala, the most populous nation in Central America.

At a congressional hearing Oct. 10, State Department officials said "high-level officials" in President Alfonso Portillo's government in Guatemala maintain close links with drug trafficking and organized crime syndicates.

Most of 2002 was so bad for stock funds that a strong finish couldn't save the year from being a downer. By KENNETH N. GILPIN The New York Times Sunday, January 5, 2003

The fourth quarter was a good one for stock mutual funds, but the market had declined so sharply in the nine previous months that 2002 ended as the third consecutive miserable year.

"It was nice to see something go up, but compared to where we were three years ago, it was a drop in the bucket," said Russ Kinnel, the director of funds research at Morningstar. "We are still looking at some pretty sizable losses in many areas."

Fueled by the rise in major market averages, which spent the first two months of the quarter rallying from lows set in early October, the average domestic equity fund gained just less than 6 percent in the quarter, according to Morningstar data. But that gain merely pared nine months' worth of sizable losses: For the year, the average domestic equity fund lost more than 20 percent of its value.

Last year was the worst for stock funds since 1974 and contrasted sharply with the 1990s, when the group rose in eight of the 10 years.

The 2002 declines were breathtakingly pervasive across the fund industry. Lipper Inc., which tracks fund performance, said 96 percent of equity funds finished the year in negative territory.

For the year, only three groups of funds had positive returns: gold funds, up more than 60 percent; specialty diversified equity funds, which include funds that short the market, up more than 8 percent; and real estate funds, up a bit more than 3 percent.

"Last year was about as bad as it can get," said Thomas M. McManus, chief investment strategist at Banc of America Securities. "But the good thing about the sharp fall in stocks is that it makes the market more resistant to further declines.

"I suppose you could come up with some scenario in which people would want to sell stocks below their October lows," McManus added. "But we think the market is making a gradual recovery."

Those who did well in 2002 did so by "avoiding mistakes" in the stock market, said Thomas F. Marsico, the president and chief investment officer of Marsico Funds. "If you avoided Tyco, WorldCom and Enron, you outperformed the market," he said.

At the end of 2001, he said, he was wary about what might happen over the next 12 months. "A year ago, our portfolios were pretty defensive," he said. "We are now somewhat more optimistic."

It was a good quarter for natural-resources funds, which rode the sharp rise in the price of oil. The end of Brazil's two-stage election process, and the decisive victory of Luiz Inacio Lula da Silva in the presidential race, was a tonic to Latin American stocks. Emerging-markets funds in general did well, as did most funds that focus on foreign stock markets.

Tom Soviero, who manages the $2.2 billion Fidelity Advisor High Income Advantage fund, said that if one event helped the high-yield market, it was the Fed's rate cut in early November. "That was a statement that liquidity was going to be provided," he said. "Also, the equity market helped quite a bit, led by technology and telecommunications stocks."

Although High Income Advantage was up more than 13 percent for the quarter, it fell by more than 5 percent for all of 2002.

"It's been a tough year," Soviero said. "I'm not bragging. But I hope the recent trend continues."

It seemed to be a good quarter for technology and telecommunications stocks, which bounced sharply off what some analysts said were oversold levels. Still, many said fundamental indicators suggested weak demand for products from personal computers to fiber-optic cable.

Nevertheless, technology funds posted a gain of just under 20 percent in the quarter. And telecommunications funds rose nearly 16 percent, according to Morningstar.

But those gains did little to transform a horrific year for the sector.

In 2002, science and technology funds lost more than 40 percent of their value, according to Lipper. So did telecommunications funds – their worst performance on record. Over the past three years, both groups have lost more than 70 percent of their value.

Steven F. Crowley, co-manager of one of the quarter's best performers, Kopp Emerging Growth fund, has about 90 percent of its assets in health care, medical technology and technology stocks.

"In our opinion, these stocks went down to a valuation extreme," he said. "If the economy doesn't grow next year, you will be hard-pressed to make the case that technology spending is going to grow."

Possible War in Iraq Could Drive Up Oil Prices Unless U.S. Successful in Securing Oil Fields The Associated Press

If the United States invades Iraq, there could be oil shortages and gas lines or an oil glut and falling prices.

Much depends on whether American troops can secure Iraqi oil fields and whether other producers continue the flow of oil uninterrupted.

In the growing drumbeat over war with Iraq, the Bush administration rarely mentions oil, even though Iraq has one-tenth of the world's oil reserves. But a military campaign almost certainly will have a major impact on world markets.

In the event of a war, Secretary of State Colin Powell said recently, "We would want to protect those fields and make sure that they're ... not destroyed or damaged by a failing regime on the way out the door."

The growing prospect of war, combined with the monthlong political strife in Venezuela that is hamstringing that country's oil production, already has caused unease among energy traders.

Last week, prices for crude to be delivered in February jumped to more than $33 a barrel, 65 percent higher than a year ago. The average price of gasoline has risen steadily to more than $1.40 a gallon. On Dec. 26, pump prices in several cities jumped by as much as 20 cents a gallon overnight.

World oil stocks have been tight and fell sharply last week, the Energy Department says.

"The loss of Venezuelan oil is beginning to hurt," says Robert Ebel of the Center for Strategic and International Studies. "What people are beginning to worry about is suppose the loss of Venezuelan oil continues when we intervene in Iraq."

Together, Iraq and Venezuela produce about 5 million barrels a day. Ebel and other energy experts wonder whether increased production from other countries will be able to make up such a shortfall.

With global production at about 76 million barrels daily, a loss of several million barrels could cause prices to soar, economists say.

U.S. officials emphasize that oil markets have changed dramatically since the 1970s, when Mideast supply disruptions led to fuel rationing, high prices and long lines at gas pumps.

Nearly 4 billion barrels of oil are in emergency stocks worldwide, including nearly 600 million barrels in a U.S. reserve. If withdrawn at 2 million barrels a day, the U.S. stocks could counter a disruption of 286 days, the administration told Congress this past summer.

"It's premature to say we're heading for any price spiral up or down," says Yasser Elguindi, an analyst with Medley Global Advisors in New York. "We have to see what kind of conflict emerges."

Among the scenarios outlined by economists:

President Saddam Hussein's government falls quickly, the Iraqi oil fields remain intact and the country's already dwindling oil exports about 2 million barrels a day disappear for a few months. Venezuela's exports resume and other countries, led by Saudi Arabia, boost production to make up any losses.

Prices briefly spike, as they did in the onset of the Gulf war in 1991, to more than $40 a barrel, but within three months recede to normal levels or even lower with supplies plentiful.

An invasion meets stiff resistance, Iraqi oil fields are set aflame, production is disrupted elsewhere in the Persian Gulf, global supplies fall by 6 million barrels a day. Emergency stocks cannot close the gap.

In such a case, oil prices could climb to $80 a barrel and stay above $40 well into 2004, halting the U.S. economic recovery and triggering a global recession, according to Ebel, whose group has mapped out a range of scenarios. There is gas rationing and lines at service stations.

George Perry, a Brookings Institution economist, analyzed a similar "worse case" possibility and forecast a potential loss of 7 million barrels a day, a tripling of crude prices and $3 per gallon gasoline.

From all indications, the administration believes Saddam can be toppled without severe impact to oil flow, and some officials have even suggested clear, long-term economic benefit.

With Saddam gone, "you could add 3 million to 5 million barrels of production to world supplies," Larry Lindsey, then Bush's top economic adviser, said in September, suggesting a successful war "would be good for the economy."

The White House retreated from the comment and Lindsey was later replaced.

Economists agree that a revitalization of Iraq's decimated oil industry in a post-Saddam, more pro-Western atmosphere, could have lasting impact on global markets.

"A quick victory in Iraq followed by relative stability in the region could lead to increases in oil production capacity in Iraq, Iran and other countries, putting downward pressure on oil prices," Yale economist William Nordhaus recently wrote.

Iraqi oil experts maintain production could reach 3 million barrels a day within a year and double that in a decade claims viewed by many as overly optimistic.

"When people talk about Iraq, there are so many unknowns," says John Felmy, chief economist of the American Petroleum Institute. "We haven't been in the country for years."

It is estimated that it would take billions of dollars to get Iraq's oil industry into shape where production could be expanded significantly.

January 6 2003

The five-week strike that has paralysed Venezuelan oil shipments is constricting supplies to several Caribbean countries, causing prices to rise and governments to look elsewhere for fuel shipments, officials said.

Venezuela and Trinidad are the main suppliers of refined oil to the region. But as Trinidad and Tobago receives one-third of its crude from Venezuela, it will need to buy crude elsewhere at higher prices if its Venezuelan shipments don't arrive this month.

"Picking it up at a higher price, that is going to affect all of us," Byron Blake, assistant secretary general of the 15-member Caribbean Community, said on Friday.

As Venezuela's general strike affects world oil prices, at least six Caribbean countries, including Guyana and Jamaica, have asked neighbouring Trinidad for help in keeping up reserves of refined oil products, a Trinidadian diplomat in Venezuela said.

"When we receive Venezuelan crude, we first have to take care of our domestic needs and then consider helping our neighbouring countries," Trinidad charge d'affairs Nieves Callender said on Friday.

Under the 1980 San Jose Pact, Venezuela and Mexico provide oil at preferential rates to 11 other Caribbean and Central American countries, including Guatemala, Dominican Republic, Haiti, Honduras, Belize, Nicaragua, Barbados, Costa Rica, El Salvador, Jamaica and Panama.

Other countries, like Trinidad, have separate deals with Venezuela.

Prior to the Venezuelan opposition strike, Venezuela and Mexico each provided 80,000 barrels a day to countries under the pact. But Venezuelan exports have been reduced to a trickle by the protests against President Hugo Chavez's government.

2003-01-05 By Alan Clendenning Associated Press Writer

BRASILIA, Brazil -- Breakfast with Hugo Chavez, dinner with Fidel Castro.

The first day in office for Brazil's new president, Luiz Inacio Lula da Silva, projects the image of a leftist alliance in Latin America, one that Chavez, Venezuela's president, has already nicknamed the "Axis of Good."

Such an alliance could hinder U.S. efforts to create a Free Trade Area of the Americas stretching from Alaska to the tip of Argentina by 2005.

The United States sent trade representative Robert Zoellick to the inauguration, seen by the Brazilians as something of a snub because Zoellick suggested last October that Brazil's only trading partner would be Antarctica if it did not join the hemispheric trade zone.

Silva responded by calling Zoellick "the subsecretary of a subsecretary of a subsecretary" during his election campaign.

At the breakfast meeting, Chavez asked Silva to send technical experts from Brazil's state-owned oil company to replace some of the 30,000 Venezuelan state oil workers who have joined a crippling nationwide strike. Silva said he would consider the request.

And before dining Thursday night with Silva, Castro told Associated Press Television News that Brazilian-Cuban relations will grow stronger now that Brazil has its first elected leftist president.

Castro and Chavez had front- row seats in Congress at Silva's inauguration Wednesday, where an estimated 200,000 Brazilians waved red flags.

The Cuban and Venezuelan leaders had dinner together Thursday.

But experts said Silva's efforts to accommodate Castro and Chavez in Brasilia could be carefully calculated political window dressing.

Silva angered his party's left wing by appointing fiscal moderates to key cabinet posts, but he needs their help to push programs through Congress, where he lacks a majority.

"Embracing Castro and Chavez, the symbols of anti-U.S. influence in Latin America, gets Silva political capital in Brazil," said Stephen Haber, a Latin American expert at the Hoover Institution at Stanford University. "But this is a dangerous game, you go too far one way or the other and this will blow up in your face."

So far, Silva seems to be pleasing his supporters without spooking financial markets. The real, which ended down 35 percent last year, finished stronger Thursday as the market reacted positively to second-tier finance ministry appointments.

Named to the posts were a mix of left-leaning, moderate and liberal economists with strong credentials, along with officials from the administration of former President Fernando Henrique Cardoso.

Chavez coined the "Axis of Good" term after Silva was elected in October, hailing the victory and saying Venezuela, Brazil and Cuba should team up to fight poverty.

U.S. State Department spokesman Richard Boucher would not comment on the possibility of the alliance.

During his breakfast with Silva, Chavez also brought up the idea of increasing cooperation among Latin American state-owned oil industries and setting up a company called Petro-America.

"It would become a sort of Latin American OPEC," Chavez said.