Can Latin America Weather a Global Recession?
DEVELOPMENTS
In the final weeks of the U.S. presidential campaign, the declining economy has emerged as the greatest concern of both U.S. voters and onlookers worldwide. The tumult in developed financial markets resulting from Wall Street’s dramatic losses has raised questions as to how strongly the troubles of the wealthy world will impact emerging economies. While Asia and Eastern Europe are sure to be implicated by the U.S. financial meltdown, Latin American nations are particularly vulnerable, as many of the region’s economies have painful memories of previous financial crises within the past two decades.
BACKGROUND:
Latin America has a long history of disastrous financial meltdowns, which over the past twenty years include its largest economies, such as Mexico in 1994, Argentina in 2001, and Brazil in 1999. Those crises devastated financial institutions and created tremendous social instability, pushing many members of the middle class into poverty. Much like the current U.S. financial crisis, many of Latin America’s previous crises were the product of risky growth-centric economic policies and inadequate fiscal protections. As a result, many Latin American nations have enacted a wide range of important economic reforms over the past few decades, sometimes reluctantly in the face of pressure from international financial institutions. Moreover, in recent years several important countries have willingly pursued prudent financial policies that emphasize stable sustainable growth and include a number of protections from future crises.
Financial reforms enacted by some Latin American governments earned the region a newfound reputation for fiscal responsibility; the reputation was so strong that a growing consensus emerged amongst prominent analysts that Latin America might prove far more resilient to an economic downturn in the U.S. than ever before. a There was even speculation that growing domestic consumer spending, ample foreign reserves, and blossoming trade with China and other emerging economies in countries such as Chile, Brazil and Mexico might have allowed them to “decouple” from the U.S. economy by developing enough independent economic strength to withstand a U.S. financial downturn. R, so goes the argument,they could now avoid a severe downturn in their economies even during a recession in the
Nevertheless,, recent declines in Latin American stock markets and commodity prices have made it clear that Latin America’s newfound fiscal responsibility cannot fully insulate the region as a whole from the effects of the U.S. financial crisis. However, those countries that hold fewer foreign reserves and engaged in riskier policies in the pursuit of rapid growth remain far likelier to experience economic turmoil in the event of a global recession.
Argentina, for instance, is especially vulnerable. It has been widely accused of manipulating government statistics under President Christina Fernandez de Kirchner to hide double-digit inflation, while its high export taxes make its agricultural industry a mainstay of its troubled economy. While Argentina’s administration has recently made belated overtures to foreign investors to provide the country with much needed capital, this action may prove too little too late as foreign investors become increasingly wary of risk. The same holds true of Bolivia, where moves by President Evo Morales to nationalize key industries has frozen investment, making his ambitious agenda of wealth redistribution more difficult to accomplish.
Venezuela also is at high risk of economic turmoil, given that many of President Hugo Chavez’s government policies have discouraged both foreign and domestic investment, which has had the effect of making the country dependent on foreign imports for most goods, including basic food products. While Chavez’s government currently has sufficient foreign reserves and can rely on high oil prices to cushion its economy, it already suffers from rampant inflation, and a continued drop in oil prices caused by a global recession could be disastrous to Venezuela’s financial soundness.sgoods
Countries that have implemented plans to avoid the financial crises of decades past are in far safer positions. Chile is especially well positioned to weather a potential global economic storm. Rather than spend most of its windfall from high copper prices, Chile has set aside billions of dollars to maintain important government expenditures during times of economic downturn or low commodity prices. President Michelle Bachelet, a socialist, has been harshly criticized domestically and by global economists for not spending more over the past decade while the global economy was booming; however, her cautious approach now seems likely to pay off in providing Chile with needed protection during a global decline.
Likewise, Brazil, Latin America’s largest economy, had been accused for years of being a laggard among the BRIC (Brazil, Russia, India, and China) group of major global emerging economies for pursuing economic stability at the expense of more rapid growth. However, as a result of its policies, the country now enjoys low inflation, high domestic spending from an expanded middle class, over 200 billion in foreign reserves, and a booming commodities export industry that is more competitive and therefore less vulnerable than many of its neighbors.
Both Chile and Brazil also benefit from their relative independence from U.S. trade in comparison to Mexico, which, despite important reforms under President Felipe Calderón, is likely to suffer from a loss of U.S. trade and a drop in remittances from Mexican nationals in the U.S.
ANALYSIS:
As wealthy nations in North America, Europe and elsewhere face what many worry may be their worst economic recession since the Great Depression, the fact that some large Latin American economies have an opportunity to continue to grow in the coming years may become a benefit for the rest of the world. Unlike during the 1930s, Brazil and the other BRIC economies are already emerging as important engines of global economic growth, a trend that may be accelerated by the current downturn among developed economies worldwide. BRIC economies already constitute 14% of the world’s economic output, while emerging economies have counted for more than half of the world’s GDP since 2005, which has not happened since the industrial era first began. Absent a return to economic protectionism similar to that which occurred during the Great Depression, growth in these economies may help spur growth in developed economies such as the U.S. as well, thereby helping to mitigate the impact of a global recession. Changes to the global economy brought about by the rise of these emerging economies may prove useful in helping the U.S. recover from the economic damage started at home.
Adam Benz is Regional Editor of the Americas for Foreign Policy Digest