Wednesday, February 04, 2009

Latin America and the financial crisis - Article by Jorge Heine

Here is the Article of Prof Jorge Heine published in Hindu newspaper of 4 feb 09.

Jorge Heine holds the Chair in Global Governance at the Balsillie School of International Affairs and is a Distinguished Fellow at the Centre for International Governance Innovation in Waterloo, Ontario. He serves currently as Vice-President of the International Political Science Association.

He was earlier the Ambassor of Chile to India. He is the top India expert from Latin America

Latin America and the financial crisis

For the first time in a century, Latin America has managed to at least partially “cushion” itself from the seismic waves of economic turmoil in the U.S. and Europe.
The United Kingdom will face a 2.8 per cent negative growth rate in 2009, the worst economic performance since World War II (in fact, the British economy has already shrunk by 2.7 per cent since last April). In Spain, unemployment has reached 14 per cent, and the government is offering a “golden handshake” to recent immigrants to leave the country for three years. Ireland, so often held up as an example for the developing world because of its relentless tax-cut ting, is in dire straits, and Iceland is bankrupt.
In the United States, Dow Jones slipped below 8000 in the very week President Barack Obama took office, the automobile industry continues its downward spiral (Toyota has already displaced GM as the world’s largest automaker) and in one day in January, some leading companies announced shedding 72,000 jobs. In California, unemployment is just below 10 per cent, and the State faces a staggering deficit. In Canada, which lost 34,000 in December, Ontario, the nation’s industrial heartland (40 per cent of Canada’s GDP), is in trouble and looking for ways to renegotiate existing financial arrangements with Ottawa.
Projections indicate that the developed world will have a negative growth in 2009. What about Latin America?
The standard line is that “when the United States sneezes, Latin America catches a cold.” And that was exactly what happened in the past. The Great Depression had a devastating effect on Latin America — so much so that in the late 1930s and early 1940s, it begot the import-substitution-industrialisation (ISI) strategy, as governments realised that in times of global slowdowns they could not be left at the mercy of having enough hard currency to buy essential goods from the industrialised North; they needed some installed capacity of their own.
Something similar happened in the early 1980s when rising interest rates in the U.S. pushed the region into its worst debt crisis and a “lost decade,” in which countries like Chile saw 14 per cent negative growth in 1982 and unemployment rates of 30 to 35 per cent for several years. According to the conventional wisdom, Latin American economies should be in the doldrums, with the Northern recessionary waves hitting Southern shores with a multiplier effect leading to an even deeper economic downturn there.
Yet, this isn’t happening. Yes, this is a global recession and the region has not been spared. Growth will be cut in half; commodity prices have dropped and so have export volumes, thus affecting regional exports which reached a record $902 billion in 2008. International credit has tightened, and some projected FDI is not materialising. Remittances to the region, which also reached a record ($67 billion) in 2008, will take a hit.
After six consecutive years of over 4 per cent economic growth rates, the region is projected to grow 1.9 per cent in 2009. Unemployment, at 7.5 per cent in 2008, is projected to rise to between 7.8 and 8.1 per cent. Whatever else it may be, this is not a recession.
Countries like Peru, the star economic performer over the past few years, may grow as much as 5 per cent in 2009, with smaller economies like Cuba, Panama and Uruguay clocking 4 per cent or more. And the larger economies like Argentina (2.6 per cent), Brazil (2.1 per cent), Chile (2 per cent) and Venezuela (3 per cent) should perform quite respectably. In fact, South America as a whole, according to ECLAC, will grow at 2.4 per cent. It is Mexico (0.5 per cent) and many Central American and Caribbean nations that will be especially affected by the drop in tourism and in remittances and by lower demand in the U.S. market.
This does not mean that if the financial meltdown continues to wreak havoc on the North and the economic wreckage is extended over time, it will not eventually have a greater impact in Latin America. My point is a different one. For the first time in a century, Latin America has managed, if not totally, to “decouple,” at least to partially “cushion” itself from the seismic waves of economic turmoil in the U.S. and Europe, markets on which it traditionally depended. The fact that several countries from the region (Brazil, Mexico and Colombia) are placing bonds in international markets in these difficult times speaks for itself.
That this should happen at a time when eight of ten countries in South America are ruled by Left or Left-of-Centre parties is ironic. For much of this decade, we have repeatedly been told how Latin America, by veering towards the Left, was once again “missing the boat” on economic development, and how it risked being caught in a time warp, left behind by the twin imperatives of globalisation and economic interdependence, beholden to outmoded ideologies at a time of the end of ideology.
Instead of dollarising their economies (as Ecuador did in 2000, much to its subsequent chagrin) and opening themselves up to whatever Washington demanded, many countries (led by Brazil) preferred a different path, one that turned out to be not so misguided after all. If anything, many Latin American governments seem to have shown a better understanding of the perils of unfettered globalisation and “casino capitalism” than several of their counterparts in the North.
What does the Latin American Left stand for today and what has it done in government?
Far from the “populism” so much of the Western media labels it with, the modern Left in the region today embodies a set of beliefs very different from the mid-20th century populist movements associated with this term.
It is fully democratic, believing in free and fair elections, having strongly opposed the military regimes supported by the Right in the 1970s and 1980s; it is secular, standing apart from the integrista Catholicism of so many conservative forces in the region; it is committed to greater social equality in a region with the dubious distinction of having the highest economic inequality; it believes in diversifying trading and investment partners, as well as the number and variety of export products, thus moving away from the econom’a monoexportadora syndrome of the past; finally, it is fiscally responsible — starting from the premise that only by having macroeconomic equilibria (that is, if the government balances the books) and tackling inflation will you be able to make progress. Prudent economic policies combined with aggressive social programmes — like Brazil’s Bolsa de Familia or Chile‘s recent pension reform — are at the heart of this approach.
It is these principles and the policies that flow from them that have allowed the countries in the region to bring down their foreign debt from 37 per cent of the GDP in 2000 to 20 per cent today. They have permitted Brazil to start a $48-billion infrastructure programme, and Chile to launch a $4-billion stimulus package to deal with the global slowdown.
But the region being partially cushioned from the worst effects of the latter is also due to something else. For large export-oriented economies today, diversifying their export markets means targeting Asia. This is what South America’s leading economies have done. China, Japan, South Korea and India are the prize markets. For Chile, in 2007, China was its number one export market (displacing the U.S.), Japan was number three, South Korea six and India 10 (displacing Germany). Asia received 43 per cent of Chile’s exports that year; not surprisingly, a dip in the U.S. market, which gets a little over 20 per cent of Chilean exports, is not a major blow to its economy. Though Chile, because of its Asia-Pacific orientation, is a bit of an extreme case, for Argentina, Brazil and Peru the pattern is not too different.
In this context, a critical question is whether the “Asian giants,” China and India, will also be dragged down by the recession in North America and Western Europe. Initial indications are that they have already been, with their growth projections going down from double digits to 6-7 per cent. A second question is to what extent this growth will be export- or internal demand-driven. China’s $ 600-billion stimulus package is designed to pump up domestic demand in an economy that until now has been largely driven by exports. India, on the other hand, has based its high growth mostly on its internal market.
These are, make no mistake about it, perilous times, and the treacherous waters of the world economy need to be navigated with a steady compass. Nonetheless, it is refreshing to see, for once, that Latin America may well grow its way through a global recession, as opposed to being once again the region most seriously affected by it.

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