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The economy grew by 4.8%, year-on-year, in the second quarter. The growth figures were overshadowed, however, by the anti-inflation policies announced by the economy and finance minister, Danilo Astori. These have already triggered labour unrest.

The question is whether the anti-inflation measures will cool down the economy, without switching it onto a slow growth track. In the first quarter, year-on-year growth was 6.9%. Quarter-on-quarter, growth in the April to June period was only 0.7% higher than growth in the first quarter. The quarter-on-quarter growth rate in the first quarter had been twice as fast, 1.4%.

The main reason for the quarter-on-quarter slowdown was the shut down of the country's only oil refinery, which is operated by the state-owned company Ancap. The oil refinery's weighting in the industrial output index is huge: including it, industrial output grew by only 0.5%; without it, industrial output was up by 9.5%. This suggests that the supply side of the economy is on the verge of overheating.

The assumption amongst local economists is that the growth rate will pick up again, strongly, once the refinery restarts, so the government's anti-inflationary measures are sensible. The growth rate for the first six months is 5.8%, year-on-year, which is decent by any reckoning.

The growth is being led by transport and communications, which increased its output by 10.6%. The strongest parts of this sector are mobile phones; port services; and road haulage of agricultural products. Manufacturing is also doing well, increasing its output by 7.3% in the first half: this is impressive given that the refinery falls inside this index.

The change in the economy is occurring in agriculture. In the first six months it was flat compared to the same period of 2006. Quarter-by -quarter, there was a 1.9% year-on-year drop in the first quarter followed by a 1.6% year-on-year rise in the second quarter. What has been happening is that there is a structural change going on in the sector: farmers are switching from stock-raising (which has implications for the dairy industry) into arable farming. They have been lured by the high international prices for grains and oilseeds. Farmers are also cutting back on rice. The biggest increases are in soya, wheat, maize and sorghum.

The construction sector has slowed down sharply, but this is mainly a statistical anomaly because last year the sector was inflated by the completion of a new power station. Commerce was up by 7.8% and utilities by a so-so 4.3%, but this hides a substantial (near 9%) surge in electricity, gas and water which benefited from the increase in hydro-electric production.

Exports are bumbling along, rising by 4.5% in the first half of the year compared with the same period of 2006. This is a slowdown from the 7.6% they were rising at in 2006. The main reason for the fall is a drop in meat exports.

Domestic consumption was stronger, rising by 7.6% in the first half, thanks mainly to the strength of private sector demand. Public investment fell by 33% (but this is mainly due to the completion of the power station). Private sector investment, however, was up by 16.5% in the first half, though this is roughly half the rate of investment in 2006. The fall is probably largely due to the completion of most of the huge Botnia pulp mill on the banks of the Uruguay River. The mill is the country's largest ever foreign investment and is hugely resented, ostensibly on environmental grounds, by Argentina.

Most local economists are ignoring the vagaries of oil refining in Uruguay and sticking to a forecast for growth of around 5.4% for 2007 as a whole. Most expect the country to escape the effects of the turmoil in international financial markets and to continue to benefit from high commodity prices. The assumption is that exports will continue to rise, investment will hold up and -with employment increasing and wages rising- domestic demand will continue to be strong.

Anti-inflation: Danilo Astori, the economy minister, annoyed public sector trade unions by ruling out any increase in public sector wages. He said that the only way to increase purchasing power was to lower inflation. The trade unions have held a series of demonstrations to assert their demand for higher pay. They are also threatening to go on strike. They claim that the government of President Tabaré Vázquez has reneged on its commitment to ensure that there was no decline in purchasing power.

Inflation: In August the rate was 1.73%, double the July rate of 0.83%. The August rate brought the accumulated rate for the first eight months of 2007 to 8.22%. The rate for the past 12 months is 6.85%. The rate in 2006 was 6.4%.

Exchange rate: The dollar fell to its lowest rate against the peso since 2001 in mid-September. It dipped under 23 pesos to the dollar. What seems to be happening is that commercial banks have been selling dollars to raise pesos to meet shortages of liquidity in the domestic money markets. This money is being lent, by banks, at rates that are a bit higher than the rates set by the government in its effort to bring inflation under control. The government has set a minimum interbank lending rate of 5.25% a year.

The central bank is forecasting that economic growth this year will come in at 4.8%, down from 5.7% in 2007 and 5.3% in 2006. This will be in line with Central America's overall growth rate which is set to be 4.8% in 2008, down from 6.3% in 2007.

The central bank estimates that for every one percentage point fall in US GDP, Guatemala's GDP will be 0.35 of a percentage point lower. By far the biggest effect of the fall in US GDP will be on remittances: the effect of the US slowdown will be the equivalent of 0.24 of a GDP percentage point, the central bank calculates. The next most vulnerable sector is exports (0.10 of a GDP percentage point) and the least affected is tourism (0.01 of a GDP percentage point).

The effect on exports has already started to emerge. In the year to May 2007, exports were up by 29.7% but in the year to May 2008 they were up by only 11.8%. In the year to May 2008, exports came to US$3.26bn, up from US$2.92bn. Interestingly exports to Central America were up by 22% at US$954m (or 29% of total exports), while exports to the US were down from 53% of total exports in the first five months of 2007 to 43% in the same period of 2008. Exports to Europe are also down as a proportion of total exports (from 7% to 5%) but exports to the rest of the world are up from 17% to 24%.  

The big problem for the economy is the increase in the cost of fuel imports. In the first five months of 2008 these were up by 47%, year-on-year, at US$1.29bn. The total bill for imports was US$6.25bn in the first five months, up 17% on the same period of 2007.

Inflation: Inflation in June was 1.63%. This brought the accumulated  rate for the first six months to 7.54% and the rate for the year to June to 13.56%
The spot exchange rate on 18 July was Q$7.42 to the dollar. The base lending rate was 6.75%.
 
Remittances: In the year to 3 July 2008, remittances were US$2.203bn, up from US$2.033bn in the same period of 2007.

Tourism: tourism revenues in the first six months of the year were up by 7.5% at US$628m.

Reserves: the country's reserves continue to rise and stood at US$4. 8bn on 10 May. This is equivalent to 109% of the disbursed foreign debt

FDI: The central bank is forecasting that foreign direct investment will come to US$837m in 2008 up from US$724m in 2007.

The government is bracing itself for some substantial falls in foreign currency inflows. The finance minister, Vicente Bengoa,  said on 11 May that he expected remittances, tourism and free-zone revenues to fall in 2009.

Bengoa expects remittances to fall by at least 6% annually (or US$187m in cash terms) in 2009. He also expects tourism receipts to fall US$210m (or 5%) and free-zone revenues by US$102m (10%). Together this means that the economy is facing a shortfall of virtually US$500m in its foreign currency inflow.
Bengoa added that the economy would benefit, however, from the slide in oil prices. Over the year, he estimated that the fall would save the economy US$1.4bn. In 2008 the country spent US$4.2bn on oil.

Bengoa also thought that Foreign Direct Investment (FDI) would hold up in 2009. He noted that the Tourism Promotion Council reckons that US$14.5bn worth of projects will begin in 2009 and that Barrick Gold is continuing with its plans for a US$2.7bn mine at Pueblo Viejo (which it is developing in partnership with Goldcorp from Canada) which will start producing in 2011.

Interest rates: The Banco Central de la República Dominicana held interest rates at 5% at its meeting on 30 April. The monetary policy committee argued that inflation was easing. The bank noted that the world economy was still weak, though it argued that perhaps the worst of the financial crisis was over. Domestically, it noted that demand for loans from the private sector had picked up.

Inflation: In April the monthly consumer price index rose 0.14%. This brought the rate for the first four months to 0.89%. The annual rate was 2.44%. The main reason for falling inflation is lower fresh food prices. Debt: In the first quarter the country's foreign debt fell by 2% (or US$144m) to US$7.09bn. Currently, 62% of public sector debt is foreign. The figures were contained in the the first quarterly economic report by the finance ministry to congress for 2009.

Mantega made this forecast at the launch ceremony for the second phase of the government's Growth Acceleration Program (PAC 2), a huge infrastructure plan which involves investments of R$958.9bn (US$534.2bn) between 2011 and 2014, followed by another R$632bn (US$352bn) post 2014.

Under PAC 2, the energy sector will get R$465.5bn in new investment. The second most important area of investment is support for President Luiz Inácio Lula da Silva's low income housing scheme, 'Minha Casa, Minha Vida' ('My House, My Life'), at R$278.2bn. The transport sector will get R$104.5bn, with the remainder shared among areas such as electricity distribution, sanitation and urbanisation.

When the PAC was first introduced in 2007, the government calculated that it would add a full percentage point to real GDP growth every year, while also lifting Brazil's unimpressive rate of fixed capital investment from the mid-teens to about 21% of GDP.

The main reason the massive PAC numbers stack up is that Brazil has been lucky in finding huge new offshore oilfields (known as the 'pre-salt' fields), which provide the security for major investments by state companies. Under PAC 1, state-run companies (such as the state oil company, Petrobras) accounted for 35.5% of total investments, with state and private banks financing a further 32.5% and the private sector 18%. The federal government directly finances just 14% of the total. Mantega said the enhanced PAC programme would boost the country's economic growth, redistribute wealth and generate jobs.

New vehicle sales: New car sales (as measured by new registrations) are expected to reach a record 320,000 by 31 March, when tax exemptions introduced in 2009 to boost sales are scheduled to expire. In February, new vehicle sales came to 253,200, according to the motor manufacturers association, Anfavea. The February figure was 24% up on February 2009 and 2.8% up on January 2010. In February sales of cars and light trucks were up 3.6% month-on-month and 10.8% year-on-year at 221,000 units. The motor industry expects to have shifted 755,000 new vehicles in the first quarter. The big question is whether sales have been cannibalised as buyers rush to take advantage of the tax break which the government say that it will not extend.

Imports: Amid rising import demand as the domestic economy recovers, the central bank has lifted its current account deficit forecast for  2010 to US$49bn, which would be the highest on record since 1947. It expects foreign direct investment of US$45bn this year. International reserves amounted to US$243.5bn on 19 March.

Budget  forecasts: The government cut the 2010 budget by US$12.24bn in an effort to meet a higher primary fiscal surplus target of 3.3% of GDP this year, up from 2.5% in 2009. The government also confirmed a higher real GDP forecast of 5.2% year-on-year in 2010, up from 5% previously, with an inflation rate of 4.5% and an exchange rate of R$1.82/US$.

Tax: Total federal tax receipts rose 13.23% year-on-year and 27.25% month-on-month in February to R$53.54bn, a new record for the month. The accumulated tax take in the first two months of 2010 was R$112.05bn.

• The consensus for real GDP growth in 2010 is now 5.5%, a bit above the government forecast.

On 19 January Brazil's central bank did what economists and the financial markets wanted, and raised the base interest rate (known as the Selic) by half a percentage point to 11.25% a year. Businessmen were unhappy. Their complaints are based on three arguments. The first is that Brazil already has the highest real (inflation-adjusted) interest rates in the world, so raising rates further is going to have little effect. The second argument is that all higher rates will do is push the Real to even more overvalued heights against the dollar and thus start to price Brazilian manufactured goods out of not only export markets but also their own domestic market. Their third argument is that the increase was not needed because inflationary expectations are subsiding in Brazil.

The central bank's monetary policy committee said that its decision was unanimous and driven by its policy of bringing annual inflation rates back down to targeted levels. The monetary policy committee, Copom, said that its stance ahead of the next meeting on 2 March was without bias (i.e. neutral),

Our view is that the interest rate rise is down to the outgoing president Luiz Inácio Lula da Silva. He impressed the financial markets by allowing the central bank to push up rates (to over 25% nominal) when he first took office in order to prove to international investors that his government was serious about controlling inflation. Pimco, one of the world's biggest fixed interest investors, took Lula at his word and loaded up on Brazilian bonds and made shedloads of money as interest rates came down. Lula's heir, Dilma Rousseff, who took office on 1 January 2011, is under less pressure than Lula was in 2003, but she still has to prove that the central bank will remain independent.

Now that the central bank (and the government) have made their points they may surprise the markets and orthodox economists who are already clamouring for even higher nominal interest rates and hold interest rates at current levels. It is worth noting that both big business and the trade unions criticised the Copom's decision.

The Federação das Industrias do Estado de São Paulo (Fiesp), which represents the country's big business, said that the move was a mistake and a bad start for the new government. It said that the increase would add R$9bn (US$5.4bn) to the government's annual interest bill. Paulo Skaf, the president of the Fiesp argued, as though he was a leftwing populist rather than a successful textile magnate, that the money could have been better spent on building 390,000 new houses or boosting the government's anti-poverty programme, 'Bolsa Familia'.

The unions were equally critical. Força Sindical, which is allied to the ruling Partido dos Trabalhadores (PT), said that the decision was unbelievable and would be paid for by jobs, lower growth and lost output.

The big question is whether the interest rate increase is as important as either the financial markets claim or the real economy fears. What is clear is that the economy is still growing healthily. In 2010 the economy created a record 2.52m new jobs, according to official figures from the labour ministry.

The total was just above what Carlos Lupi, the labour minister, had forecast (2.5m) and reflects a change in methodology. Without that change, the country would have created 2.14m formal (i.e. social security paying) jobs in 2010, more than double the 995,110 new jobs it created in 2009. Lupi is forecasting that the economy will create another 3m new jobs in 2011.

Lupi has a point. Even before the construction jobs now needed to repair the damage caused by the floods in Rio de Janeiro in the first part of January, the country was gearing up for major infrastructure projects. Besides the normal needs of business for better ports and roads, the country needs to improve facilities for the World Cup in 2014 and then the Olympics in 2016.

Lupi said that there would be little impact on job creation from the new government's pledges to make substantial spending cuts in the 2011 budget. Lupi said that what the new government wants to cut is current spending rather than investment. This means, he claimed, “that if there is no cut in investment, there is no reduction in job growth, because what generates employment is investment."

It is worth noting that the 2.54m job figure comes from the Cadastro Geral de Empregados e Desempregados (Caged) which is calculated by the labour ministry. The official figure on jobs created in 2010 comes from the official statistics agency, the Ibge, and this will not be published until 27 January. The Caged data suggests that 58,000 people found formal sector jobs in December.

What is significant is that growing numbers of jobs are being created in the services sector. In 2010 around 1m jobs (or 39% of the new job total) were in the services industry. Commerce was the next highest contributor (602,000) followed by construction with 329,000.

What these figures show is that manufacturing is already feeling the pinch. This may not be a problem because modern manufacturing is much more capital than labour intensive. Nevertheless some alarmists claim that the economy is starting to de-industrialise, as Argentina did when convertibility (i.e. an overvalued exchange rate) was the central element in its economic policymaking.

Arguably, manufacturing jobs are now higher quality than service-sector jobs. This is a reversal of the situation of a generation ago. It is worth noting, for example, that call centres in the state of São Paulo now employ 400,000 people. A lot of these jobs are low paid and the turnover in them is often high, but they do provide some training for people who might otherwise become disconnected from modern technology and developments in labour markets.

The tight labour market in the country may mean that wages will rise. At the end of 2010 the official  unemployment rate was 5.7%. Traditionally Brazilian economists reckon that an unemployment rate of 7% of less is negative for wage-driven inflation. As most economists expect the economy to grow by at least 5% in 2011, the national labour market is likely to remain at least as tight as it is now.

It may even get tighten. Petrobras, the state-owned oil company which is developing huge offshore oilfields in the South Atlantic, has announced that it expects to hire 14,000 people by 2014. The company currently only employs 77,000.

As the economy will continue to need more engineers, electricians, plumbers and doctors, education and training, rather than simple poverty reduction, will start to move up the political agenda. What is interesting is that Brazilians' performance in arts such as design, music or soccer, suggests that the country does have the educational and training infrastructure to get the best out of its most talented individuals.

The other labour market development that is likely to take place is that Brazil will start to take on more expatriate labour. Traditionally, the country's poorer neighbours have looked to Argentina and Chile for jobs. Language is one issue. Another has been Brazil's huge reservoir of labour in the north and northeast of the country. This reservoir is now being tapped and foreign companies have set up in these areas, partly because they are significantly closer to target international markets. 

It may be that Brazil's traditional industrial heartland in the south of the country will start to import more labour from neighbouring countries.

Retail sales: Retail sales rose 9.9% year-on-year in November 2010. Month-on-month, they were up 1.1%. The strongest sector was books, newspapers and magazines, which saw a 23% year-on-year rise. Furniture and white goods sales were up 21% and electronic equipment and office equipment sales were up 20%. The other five subsectors (personal and household items; cosmetics and pharmaceuticals; clothes, textiles and shoes; food, drink & tobacco; and fuel were up by between 5% and 13%, according to the national statistics agency, Ibge. Sales of big ticket items such as cars and home-improvement materials were also strong. Vehicle sales were up by 30% year-on-year, while construction material was up by 16%. The strong November data suggests that growth in the final quarter of 2010 is likely to be higher than the consensus forecast. 

Vehicles: The country licensed 3.52m new vehicles in 2010. This was 11.9% more than for the whole of 2009. The motor industry produced 3.64m vehicles, up from 3.14m in 2009. It is also worth noting that Brazil's buoyant agricultural industry means that the country's agricultural machinery industry had another strong year in 2010. Sales were up 23% at 68,500. Almost 99% of the agricultural machines sold in Brazil are manufactured in the country. [For a fuller discussion of Brazil's and the region's vehicle industry, see p26 of this report].

Inflation: The official inflation index, the Indice de Preços ao Consumidor Amplo (Ipca), closed 2010 at 5.91%, the highest level since 2004, when it reached 7.6%. The Ipca ended 2010 within the official target band of 4.5% +/-2.0%, but the rate is unlikely to get down to the targeted 4.5% soon. Even so, the consensus forecast from independent economists polled by the central bank, shows that they expect inflation to be lower in 2011 than it was in 2010. The current consensus forecast for inflation in 2011, which is compiled weekly by the central bank, is for a rate of 5.32%.

The Ipca in 2010 was largely driven by an increase in food prices, itself a result of higher public consumption. According to the Ibge, 40% of the total Ipca last year came from food inflation, which rose by 10.4% last year, compared with an increase of 3.2% a year earlier. As such, food prices contributed to 2.34 percentage points of the total Ipca rate, according to the agency's calculations. The highest increase in the food sector came from the price of meat, which rose by 30% in 2010, contributing to 0.64 percentage points in the total result of the Ipca.

Non-food inflation rose by 4.61% in 2010, slightly below the 4.65% rate in the previous year. But, significantly, the main contribution for inflation in non-food prices was the higher cost of domestic staff, following a real increase in the minimum wage. The cost of domestic staff rose by 11.82% last year, making up 0.40 percentage points of the Ipca, according to the Ibge.

Minimum wage: Brazilian trade unions want President Dilma Rousseff to increase the minimum wage by 13.7% to R$580 (US$345) a month. Rousseff has approved an increase to R$545.

Washington has granted Colombia US$25m to help with the fight against kidnapping. Under the new programme, the US will help train and equip the 400 members of the Colombian anti-kidnap unit, Gaula. This latest assistance package is a sign that the US is intensifying its efforts in Colombia despite the ban imposed on military aid to Colombia due to the disagreement over the International Criminal Court (ICC).

Although incidents of kidnapping are falling in Colombia, down 34% so far this year, it is still a major problem. Someone in Colombia is kidnapped every four hours, and the crime still provides a major source of revenue for rebels groups such as the Farc or the ELN. The Farc was responsible for 36% of the 1,016 kidnappings which occurred between January and July 2003. The Colombian government, in conjunction with the US, has made cracking down on kidnapping one of the central planks of its campaign against these rebel groups.

The US assistance will provide for the construction of a centre for anti-kidnapping training, the establishment of a database, and improvements in the way in which Gaula is organized. The unit will also receive a small fleet of helicopters specifically for use in anti-kidnapping operations, a batch of M-16 machine guns, and training from foreign experts.

In a separate incident, Washington announced yesterday that suspected Farc rebels had shot down a light aircraft spraying drug crops north of Bogotá. The pilot of the plane, which was under contract with the US government, escaped from the crash with minor injuries.

The news that Moody's, one of the main credit rating agencies, had put the Mexican state oil company Petróleos Mexicanos on notice for a possible downgrade sent shudders through the foreign exchange market. The peso dropped to 11.19 against the dollar, close to its record low of last March.

Moody's reasoning is clear. Pemex has been used as a cash-cow by successive governments: they have swiped most of its income and then forced the company to borrow to fund its capital and (sometimes) its operating expenditures. This policy has unhinged the balance sheet: debts now tower over the company's capital. Pemex has long-term borrowings of US$14.6bn.

Businessmen said that Moody's statement was a wake-up call for the government and congress. The government is preparing to unveil fiscal and energy sector reforms which are intended to shift the fiscal burden off Pemex. The oil company currently supplies the government with about a third of its total income.

Yeidckol Polevnsky, the president of the manufacturers' association, Canacintra, welcomed the fall in the peso. He said the lower peso would enable hard-pressed manufacturers to undercut competitors in export markets.

In a major climb-down the US appears to have dropped its idea for a broad and comprehensive Free Trade Area of the Americas agreement. After a meeting on Friday and Saturday outside Washington, trade negotiators from 15 of the 34 FTAA countries agreed that each country should decide whether it wants to open its markets fully to all other 33 countries or whether it will just open its markets to a minimum common standard.

It also seems that the US and Brazil have agreed that each country can pick how much it wants to liberalise in various trade areas, such as intellectual property and investment.

It is little wonder that the Brazilian foreign minister, Celso Amorim, called the meeting positive: the FTAA seems likely to develop on the Brazilian multispeed, variable geometry model, rather than the US one, in which Latin American countries had to open up their economies in the areas the US stipulated. Amorim agreed, however, that there was still a lot of work to be done in Miami on the details of the agreement. But, he said, that the architecture was now clear.

The US Foreign Trade Representative, Robert Zoellick, called the Washington meeting after it became obvious that the Miami summit on 20 and 21 November, to launch the final phase of the FTAA, was in danger of failing and producing a standoff similar to the one which caused the failure of the World Trade Organisation summit in Cancún in mid September. US officials agreed that the Miami meeting would still be a challenge. They said that getting a communiqué summing up what would be agreed would be difficult. The 15 countries represented at the Washington meeting were: the US, Brazil, Argentina, Canada, Mexico, El Salvador, Costa Rica, Jamaica, Trinidad & Tobago, Colombia, Peru, Chile, Panama, The Dominican Republic and Uruguay.

Separately, there are strong rumours in Washington that Zoellick is about to move from his job as USTR to heading one of the mortgage agencies, Freddie Mac. The rumour is that Zoellick will be replaced by Grant Aldonas, a deputy minister at the Department of Commerce. Zoellick, who apparently nurses ambitions to become US Secretary of State, is said to want to avoid negotiating the nitty-gritty of the FTAA next year.</

President Lula da Silva, back in Brazil after a 10-day trip to the Middle East, said yesterday that he wanted to clinch more trade deals with emerging market countries. He said that he would travel to India and China in the middle of next year and was hoping to set up a meeting with the Russian President Vladimir Putin some time soon.

The government's strategy seems clear: to build on the G-20 grouping which so upset the US and the European Union at the World Trade Organisation meeting in Cancún by standing up for the interests, especially in agriculture, of emerging market economies. At the G-20 meeting of foreign ministers held in Brasilia last week, the group agreed to work towards establishing a free-trade area encompassing their countries.

President Lula said that he understood that the G-20 FTA would be open to other emerging market economies to join. The G-20 currently comprises: Argentina, Brazil, Bolivia, Chile, China, Cuba, Egypt, India, Indonesia, Mexico, Nigeria, Pakistan, Paraguay, South Africa, Tanzania, the Philippines, Venezuela, and Zimbabwe.

The Brazilian President pointed out that currently 52% of the country's exports went to the US and the EU. He said that it was imperative for the country to increase exports to other countries. He said that instead of sitting at home in Brazil hoping that things would happen, he would travel round Africa, the Middle East and other places trying to make the things he wanted happen.

The leftwing opposition party Polo Democrático Independiente (PDI) yesterday called on all paramilitary organisations to be concentrated in particular areas to ensure that they were adhering to the ceasefire. The president of the PDI, senator Antonio Navarro, said that any armed groups found outside such areas should be treated as hostile by the military.

Yesterday's debate into the paramilitary peace process allowed the PDI and other political parties the opportunity to express serious reservations about the peace process, which last week received the backing of the Organization of American States (OAS). Navarro said that there had been over 600 killings since the umbrella paramilitary group, the Autodefensas Unidas de Colombia (AUC), signed a ceasefire in December 2002.

Human rights groups allege that the AUC has continued its campaign against those suspected of belonging to, or sympathising with, leftwing guerrilla groups such as the Fuerzas Armadas Revolucionarias de Colombia and the Ejército de Liberación Nacional. Recent clashes between the paramilitaries and government forces, however, suggest that the problem is more extensive than a mere continuation of old grudges.

The former mayor of Apartadó, Gloria Cuartas, was even more forthright. She demanded that the government investigate the claims of AUC chief Salvatore Mancuso that the paramilitaries have the support of 35% of congress. She questioned whether, if that was the case, the government's forthcoming legislation regarding alternative punishments for the AUC would receive proper debate.

General Gustavo Tapia of the Ecuadorean armed forces yesterday denied newspaper reports that the Colombian armed forces have crossed over the border on several occasions in recent weeks to attack the Fuerzas Armadas Revolucionarias de Colombia (Farc).

The El Comercio newspaper claims that the Colombian military has intensified its use of lightning raids against Farc positions in Ecuador since February. The paper also says it has used helicopters and other aircraft to attack villages which farm coca and which are presumably under Farc control.

General Tapia denied the incursions had taken place, however. He admitted that 'shots can be heard' in the region bordering Colombia's Putomayo department, but that these were the other side of the border.

Tapia did admit, however, that the 4,000 Ecuadorean troops on the border were not enough to control the entire frontier, a sentiment which will further concern the government in Quito which is desperate to avoid being caught up in Plan Colombia. President Lucio Gutiérrez will travel to Bogotá on 18 March to pass on these concerns to his Colombian counterpart Alvaro Uribe. Legislators are demanding Gutiérrez ask Uribe to step up Colombia's own troop presence in the border area.

The Colombian government has finally broken its silence on the plan to alter the constitution to allow presidents to stand for a second term. Interior and justice minister Sabas Pretelt de la Vega yesterday called on congress to approve the measure, which has been brought by legislators loyal to Colombia's President Alvaro Uribe.

Pretelt de la Vega justified his intervention on the grounds that the issue was clogging up the legislative agenda. However, he said that Colombian democracy was ready for such a measure, and that the people should be allowed to choose the leader they want. Uribe himself remains tight-lipped on the issue, but he has in the past said that four years is not enough time for a president to push through his political agenda.

It is not yet clear what support the proposals will gain in congress. As the measure requires constitutional change it will need a strong backing. For one thing, the government must try to allay suspicions that it, rather than the people, is behind the plan.

Meanwhile, President Uribe received a boost yesterday when a congressional body approved an enabling law for the government's anti-terrorism statute, which was passed by congress last December. It will now head to the constitutional court in June before being given official approval by the president.

Six youngsters were killed in a bomb in a disco in Apartadó, 800km northeast of Bogotá. The police say that the bombing was ordered by the Fuerzas Armadas Revolucionarias de Colombia (Farc).

The bomb went off at 10pm on Saturday night when the disco was packed. The authorities at Apartadó have offered a reward of US$7,500 for information leading to the arrest of the perpetrators.

A further 23 people have been flown to Bogotá for treatment. Several of these people are very badly injured.

Development: The Mexico City administration recovered some of the initiative in the law and order debate by announcing on 30 June that it would start paying for information about serious crimes. The move is designed to show that the city administration, headed by Andrés Manuel López Obrador, is fighting hard against crime. The federal government is due to meet the leaders of the march against crime, which took place on 27 June, later today, 1 July.

Significance: The Mexico City move is doubly significant because the money for the payments will come from the private sector. Last year, businessmen clubbed together to hire a former mayor of New York, Rudolph Giuliani, to advise the city government on how to reduce crime. Giuliani introduced a zero tolerance scheme in New York which clamped down on petty crime and, his supporters claim, reduced serious crime. The Mexico City administration took up some of his proposals, but not zero tolerance. The rewards for information about serious crimes (in particular kidnapping, murder and armed robbery) will be between M$500 and M$5,000 (US$45 to US$450).  

Police officers who collar serious criminals will also be eligible for bonuses. Marcelo Ebrard, the city's public security commissioner, said that the administration had a fund of M$140m (US$12m) to draw on. The bulk of money had been provided by businesses, though some money would also come from fines levied by the city council.  

Ebrard said that what the authorities wanted was information which would enable them to break up gangs: the authorities wanted to know what the gangs were planning, where they met and where they had their safe houses. Ebrard added that the police reward system was still being worked out but that the scheme would come into force today. He said that he was sure that the authorities could ensure the confidentiality of the informers. This must be in doubt because recent arrests in both Mexico City and elsewhere have shown that there are close links between the police and criminal gangs.  

The city government, under its mayor, López Obrador, has changed its line on crime quite dramatically this week. Initially López Obrador, who heads the opinion polls for the presidential elections in 2006, dismissed the march on 27 June, which some commentators now claim amounted to 500,000 people, as a political stunt. The mayor started the week with the jarring claim that his administration was beating crime. No one believed his stats and his claim jarred with the fearful public mood that the city and the country risks being submerged by a crimewave. López Obrador appears to have heeded the advice of his colleagues in the leftwing Partido de la Revolución Democrática, and accepted that he had to make gestures to recapture public support. The stunt of paying rewards has done that.  

López Obrador's move now puts pressure on the federal government, which is meeting the leaders of the 27 June march later today. The public will now expect an equally populist gesture from the federal authorities. The interior minister, Santiago Creel, has promised that the federal government will unveil new policies to combat crime at the meeting.

Marí­a Elena Morera, president of México Unido Contra la Delincuencia, one of the main organisers of the 27 June march, said that President Vicente Fox had agreed to meet the organisers at 5pm today in his residence, Los Pinos. This is a change to what had been previously announced: then the organisers expected just to meet Creel, at the interior ministry, at 6pm this evening. This development illustrates how the federal government is competing with the city government over law and order. The law and order activists are now demanding meetings with both houses of congress and judges on the supreme court to discuss what should be done to improve law and order across the country.

Development: The senate approved the government's controversial reforms to the Instituto Mexicano de Seguridad Social.

Significance: The biggest party in the senate, the Partido Revolucionario Institucional, split over the reforms. The leftwing Partido de la Revolución Democrática was the most significant opponent of the reforms. 

The reforms are highly controversial because they will prevent employees' social security payments being used to pay pensions and benefits for civil servants at the (virtually bust) Instituto Mexicano de Seguridad Social. The second element of the reform is a hiring freeze at the IMSS.

IMSS employees were furious at the proposed changes, which also include raising the minimum term for pension eligibility for IMSS employees from 28 years to 30 years and increasing the pension contributions IMSS new employees will have to make to their pensions. Currently, they only pay 3% of their wages towards their pensions.

The senate decision may trigger a strike. Francisco Hernández, the leader of the independent trade union, the Unión Nacional de Trabajadores, said that his members were likely to come out on strike to support the IMSS employees. The UNT is particularly strong in the telecommunications and electricity industries. The IMSS is a major employer in Mexico with 375,000 people on its payroll.

Development: A Paraguayan judge, Gustavo Santander, has issued an arrest warrant for the former dictator, Alfredo Stroessner, for his role in the disappearance of three Paraguayans who had fled to Argentina. Stroessner, now 91, who ruled Paraguay from 1954 to 1989, currently lives in exile in Brazil.

Significance: Stroessner might be about to suffer from the recent progress Chile has made in going after its former dictator, Augusto Pinochet. The three abductions to which Judge Santander has linked Stroessner were part of a wider plan called Operation Condor whereby the rightwing regimes that ruled various countries in the Southern Cone co-operated in tracking down and killing eachothers' leftwing opponents. Pinochet is likely to face trial for his part in the same operation.

As Chile and also Argentina at present making such an effort to imprison those responsible for Operation Condor, Paraguay wants to follow suit. Stroessner's lawyers are confident that this effort to bring the former dictator back to Paraguay to face trial will fail like countless others have in the past, but developments in the Pinochet case might yet set a new legal precedent in the region.

Development: Early this morning (14 October), the Bolivian congress voted to prosecute a former president, Gonzalo Sánchez de Lozada, and his whole cabinet for their role in the use of the army to deal with protests last year. At least 91 people were killed in two separate bouts of violence and on 17 October 2003 Sanchez de Lozada was forced to flee into exile in the US.

Significance: The congressional decision is only a partial victory for the radicals who want to prosecute the pro-US Sánchez de Lozada for what happened in 2003. Congress rejected the proposal from the constitutional and judicial committee that only Goni and his two closest ministers should be prosecuted. The wider scope of the prosecution means that it will take longer to build up a case. Nevertheless, the decision is historic: this is the first time that congress has voted to prosecute a democratically-elected president.

Congress made its decision at 12.30am local time (4.30GMT). Earlier in the evening it had narrowly rejected the proposal to prosecute just Goni and his two closest advisers, Yerko Kukoc, the interior minister and Carlos Sánchez Berzaí­n, the defence minister. 

The decision to prosecute the whole cabinet was supported by a considerable element of Goni's Movimiento Nacionalista Revolucionario which has 47 seats in the 157 two-chamber congress. For the prosecution to go ahead congress needed to make its decision with a two-thirds majority (ie 105 votes). In fact 126 of the 140 members of congress present voted to prosecute Goni and his whole cabinet. 

The radicals only narrowly lost their preferred option of prosecuting Goni and the two ministers: they mustered 103 votes. Evo Morales, the leader of the Movimiento al Socialismo and the coca growers in Cochabamba, argued in congress that only by prosecuting Goni would the country avoid the shame of having to resort to international tribunals to prosecute those people who were responsible for the deaths of so many people last October.

The case will be heard before the supreme court at Sucre. The ministers all face charges of failing to uphold citizens' constitutional rights. The 15 ministers who will be prosecuted are: Carlos Saavedra Bruno, Carlos Sánchez Berzaí­n, Yerko Kukoc, Javier Torres Goitia, Hugo Carvajal, Guido Añez, Adalberto Cuajara, Dante Pino, Erick Reyes Villa, Mirtha Quevedo, Javier Comboni, Carlos Morales, Jorge Berindoague, Guillermo Justiniano and Jorge Torres Obleas. 

Five of the ministers belong to the MNR; five belong to the Movimiento de la Izquierda Revolucionaria (MIR), which is headed by another former president, Jaime Paz Zamora. Three come from the Nueva Fuerza Republicana (NFR) and two are independents.

The MNR made the proposal that the whole cabinet should stand trial because it did not want just its members (Goni, Kukoc and Sánchez Berzaí­n), to shoulder the whole blame for the tragic events of October 2003. The MNR argued that Goni headed a coalition government, backed by the MIR and the NFR, so these two parties should take their share of the opprobrium. The MNR argued that prosecuting only the three key players was a squalid little political deal to benefit the MIR and the NFR, which are now in a de facto alliance with Morales's MAS.

Development: On 16 November the US defence secretary, Donald Rumsfeld, met his Ecuadorean counterpart, Nelson Herrera, President Lucio Gutiérrez and the foreign minister, Patricio Zuquilanda, to discuss regional security, and in particular, Ecuador's support for the US-backed Plan Colombia.

Significance: Rumsfeld's visit came ahead of today's (17 November) meeting in Quito of 32 defence secretaries from across the Americas to discuss hemispheric security issues. Rumsfeld used his visit to stress his belief that no country could confront terrorism on its own. This is a thinly veiled plea to ensure Ecuador's continued acquiescence in the hammer and anvil strategy of Plan Patriota: the idea is to hammer the Fuerzas Armadas Revolucionarias de Colombia (Farc) against the anvil of a heavily fortified Colombia-Ecuador border. Herrara was not unmitigatedly enthusiastic: 'the problems of Colombia are Colombia's', he said.

The US defence secretary made all the right noises in support of the Ecuadorean government; this, however, is a mixed blessing for the government. Rumsfeld followed the US ambassador, Kristie Kenney, in endorsing the Gutiérrez government and supporting constitutional democracy in Ecuador.

Rumsfeld's focus, however, was Colombia. He said that Ecuador had to define its own role in the fight against terrorism, drug trafficking and guerrillas, but that whatever strategy it decided upon had to adjust to regional and hemispheric requirements. 'In the 21st century, these problems have become more and more globalised and regionalised, they are not problems that affect only one country and they cannot be resolved by only one country. This means that countries that want to be free and prosperous have to cooperate,' said Rumsfeld. He added that the fruits of economic cooperation within the regional are already visible, but are still lacking in the area of security. The US currently occupies a military base in Manta, in the north-east of Ecuador, from where it launches surveillance operations on suspected drug routes in the region.

Development: The umbrella indigenous group Conaie meets on 20 December in Otavalo in order to discuss the current political crisis afflicting the country and elect a new president.

Significance: The government is itching to get its own man to replace Leonidas Iza, who will step down after three years in charge. The government's man is Alfredo Viteri, the Confeniae (Amazonian indigenous organisation) candidate; a confidante of Antonio Vargas, the social welfare minister and ex-head of Conaie. His main challenger is Luis Macas, former agriculture minister and head of Ecuarunari, which represents indigenous peoples from the sierra region of Ecuador.

Conaie is the most significant indigenous organisation in Ecuador; although its political arm, Pachakutik, has only 6 seats in the 100 seat congress, around 40% of Ecuador's 12 million inhabitants are indigenous and Conaie is able to organise mass rallies. The overthrow of both Jamil Mahuad in 2000 was brought about, in part, by the mobilisation of indigenous demonstrators.

Conaie, and subsequently Pachakutik, abandoned the ruling coalition in August 2003, believing that President Lucio Gutiérrez had reneged on his electoral pledges when he turned from being a populist leftwinger into a disciple of macroeconomic orthodoxy. Although neither Pachakutik nor Conaie has joined the opposition street protests over the government's purge of the supreme court, they have declared the move unconstitutional.

Any new president of Conaie will have a difficult job reconciling differences between highland and Amazonian Indians, Catholics and Protestants as well as supporters of Gutiérrez and his detractors. The organisation will also have to iron out its differences with Pachakutik in order to work as an effective political force to improve the lot of Ecuador's 4.2 million indigenous people.

Development: The teachers' union launched a new political party, Nueva Alianza, on 29 January.

Significance: Despite the protests of the new party's president, Miguel Angel Jiménez, the Nueva Alianza is a vehicle for Elba Esther Gordillo, the secretary general (number two in the hierarchy) of the Partido Revolucionario Institucional. He said that she had nothing to do with the party: however it is based around her fief, the teachers' union (Gordillo is president of the SNTE). He added that it was outdated to believe that one person could control an organisation of 1.5m teachers.

Although Jiménez denied that Gordillo had anything to do with the setting up or financing of the Nueva Alianza, he also made it clear that the new party supported her and the political positions she has taken. He added, perhaps for the sake of propriety, that the Nueva Alianza also approved of the mayor of Mexico City, Andrés Manuel López Obrador and the rector of the country's most prestigious university, Unam, Juan Ramón de la Fuente.

Under the electoral law, no-one can be a member of two political parties. The expectation is that Gordillo will resign from the PRI, unless she manages to outmanoeuvre the party president, Roberto Madrazo.