Once and for all, Latin America seems about to say goodbye to the so-called “Lost Half-Decade” – six years of turbulence and negative growth that have left profound social footprints in the region and will take a long time to fade away. The proof lies in the 20 million inhabitants of Latin America who were added to the poverty level beginning in 1997, and in the 17.6 million urban residents who were unemployed at the end of 2003.
According to the Economic Commission for Latin America (ECLA), the region grew by 1.5% in 2003, improving on the 0.4% decline in its Gross Domestic Product (GDP) during 2002. On the country level, Argentina, after contracting by 10.8% in 2002, showed a marked upturn (7.3%). Chile, Costa Rica, Colombia and Peru registered figures above 3%. Mexico expanded by 1.2%. However, Brazil’s growth rate was barely positive – 0.1%. On the extreme opposite end was Venezuela, which fell by 9.5%. That country was immersed in a severe political and economic crisis.
According to ECLA, the improved performance of the entire region is linked to the soundness of the international economy, in which the recovery of the United States and Japan stand out, as well as the strong growth of China. For 2004, ECLA – a United Nations agency that has its headquarters in Santiago, Chile – predicts that the economy of Latin America will expand by 3.5%. In addition, for the first time since 1997, ECLA does not project negative growth in any country in the region.
Economists and academics interviewed by Universia-Knowledge at Wharton agree with the scenario laid out by ECLA, in which continued international growth is the key. But they add that it is also crucial for Argentina, Brazil and Mexico to consolidate the stability that they have achieved during 2003.
International Expansion: More Demand for Basic Products
Tomás Flores, director of the economics program at the Libertad y Desarrollo institute in Santiago, Chile, emphasizes that the driving force in the region will come from further growth in trade (which grew by 1.3% in 2003, according to ECLA). “We are projecting a growth of 3.5% for the economies of the G-7 countries in 2004. That’s a change that has translated into – and will continue to translate into – greater demand and higher prices for the main products exported from this region,” including oil, copper, coffee, gold and soy.
In the ECLA figures, prices of basic Latin American products grew by 15.9% in 2003. In Central America, the Andean Community and Chile, sales to foreign markets grew by 5%, and in the case of MERCOSUR they rose at a rate of 17.9%, a scenario that should continue with greater energy in 2004.
“The improved international landscape is one of the most important pieces of news behind this growth,” agrees Joseph Ramos, dean of the Faculty of Economic and Administrative Sciences at the University of Chile. According to Ramos, the economy of the United States consolidated its recovery and took on quite a lot of power during the second half of 2003. Likewise, Japan “surprised the entire world by registering growth after long years of stagnation. Meanwhile, during the last quarter of the year Europe had already shown recovery signs, which means that during 2004 it (Europe) is going to be in a better position. Moreover, China and Southeast Asia continue to be strong.”
Professor Ramos adds that the favorable international environment and the notable decline in sovereign risk – as the cost of external financing goes back to the same levels as before the Asian crisis – should also favor the return of capital flows into the region. Nevertheless, he warns, “Let’s hope that this turns into good projects that don’t lead to some sort of roller coaster; that when the capital comes, it doesn’t come in over-abundance and then suddenly stop without any soothing of the pain. One would like to see capital coming in at a more regular pace.”
Uncertainty about the American Economy
Speaking of risks, economists agree that there are some factors that could cast a shadow over international growth and, as a result, slow down the recovery of Latin America. They warn that the American economy’s fiscal and trade deficits could lead to a further depreciation of the dollar, which would lead to higher international interest rates. ECLA points out that these adjustments are necessary, and could occur at the end of 2004 or during 2005. “But it is still too early to outline scenarios that could lead to that process in the world’s largest economy,” notes ECLA in its “Preliminary Evaluation of the Economies of Latin America and the Caribbean.”
In any case, Flores rules out devaluations of the American currency during 2004, and notes that the emphasis should be placed on the way in which a new administration in Washington (in 2005) confronts fiscal and current account deficits. For Ramos, changes in the government of the United States have little economic significance. “(If it is assumed) that a Democratic administration would be conservative from the fiscal point of view, this would be an invigorating signal for the result of the world. We know that medium-term debt is how you resolve a major fiscal and current-account deficit. But if you do this in a gradual way, nothing is going to happen.”
Susana Jiménez, a researcher on the faculty of administrative and economic sciences at the Finis Terrae University, points out that the prospect of American elections next November means that the Fed will not aggressively raise interest rates during 2004, “leaving a great deal of the adjustment for 2005 and beyond, despite the fact that the economy could be expanding too fast during this year.”
Stability in the Big Three
External factors aren’t the only things responsible for a change in the trend of the Latin American economy. Another very relevant factor is the internal strengthening achieved by countries that confronted their deepest crises, such as Argentina and Brazil, which will greet 2004 with fiscal and monetary policies that are under control, as well as exchange rates that are more competitive and stock markets that show an important upward trend.
According to estimates by ECLA, Argentina will grow by 4.5% in 2004. Brazil will also have greater growth – calculated at 3.3% – sustained by more domestic demand, interest rates that continue to drop, and greater industry activity. Meanwhile, Mexico – because of its strong commercial ties with the United States – will grow by 2.8%, as Ramos notes. These three economies add up to about 75% of the region’s GDP.
The solidity of the “Big Three” will also add to the recovery of their smaller neighbors, says Jiménez. “To the extent that Argentina and Brazil consolidate their economic recovery during the course of 2004, it is possible to hope that smaller countries such as Uruguay and Paraguay will benefit from the growth of commerce they will have with these economies. In that way, they will improve their prospects compared to what we have seen during the past two or three years.”
Flores and Jiménez agree with the ECLA estimates regarding Argentina. “I see that country growing by around 4.5%, benefiting from the positive prices of grains and soy and because there is confidence that it will be able to achieve more agreements with the International Monetary Fund (IMF),” says Flores. “Over the next year, the country will continue to benefit from not paying its foreign debt, so that economic results will continue to be favorable during a large part of 2004. This guarantees that the economy will be able to continue growing at rates above four percent,” predicts Jiménez.
Brazil is another country that earns the highest praise. Flores projects a growth rate of 3.5%, and clear progress in the restructuring of its debt with the IMF. “The government (of President Luiz Inácio da Silva, known as Lula) is being stricter about its promises, and the fiscal accounts are getting in order. Lula is committed with his stabilization program, and the signals that he has given have been well regarded by the international community which appreciates that this process will not be reversed.” Lula, adds Ramos, “has shown that he is a president who is quite responsible, and quite far from the populist image that people feared.”
Along with estimating Brazil’s GDP growth at above 3% for the coming year, Jiménez suggests there will be an absence of inflationary pressures, and that the still lethargic behavior of economic activity “will also allow the Central Bank to continue to lower interest rates.”
As for the rest of the countries, projections are generally positive. For example, Chile, the most stable economy in the region, should grow by 4.5%, according to ECLA – propelled by a 6.4% growth in exports of goods and services, and a 5.6% expansion in domestic demand. The country’s free-trade treaties with the European Union, the United States, and South Korea will play an important role in its higher level of trade.
Nevertheless, storm clouds are rising over some countries in the region. Flores suggests Venezuela will continue to have a fragile economy but warns that during 2004 Bolivia will play the leading role when it comes to negative performance “due to its high level of indebtedness and the crisis in its balance of payments.”
Is Expansion Sustainable?
José Luis Machinea, ex-minister of the economy for Argentina and currently executive secretary of ECLA, is “moderately optimistic” regarding the question of whether this new growth cycle is sustainable. But he warns that his response to this question will depend on the ability of Latin American countries to combine [economic] growth rates with growth in their levels of savings and investment.
In 2003, investment as a percentage of regional GDP reached only 18%, still far from the 22% and higher levels that were registered until 1997. “We have to attract financing, but to do that we need to bring the financial system into line, and make progress in restructuring debt,” he says.
Flores takes that point into account, and alerts that savings rates are even lower in the largest economies. “Brazil needs to undertake a restructuring of its tax system with the goal of driving in investment. Nevertheless, the recent reform of social security has already made some progress,” he argues. In the case of Argentina, Flores notes that the country didn’t take advantage of the savings cycle, “and most of its AFJP (administrators of pension funds) are bankrupt.”
Beyond that, says Machinea, the big lesson left behind from Latin America’s lost half-decade is the need – or obligation – to anticipate countercyclical policies. In other words, “You have to save during the good years. That’s the only way the region can achieve growth rates of above 4-5%.”
By the same token, he adds, it is also important to develop social policies in order to solve a structural problem in the region – high rates of unemployment. “The main idea is to grow, but other policies in the strictly economic arena are also important. If you help small and midsize companies with processes that add value to their exports and to regional development, the same growth rate can lead to higher job growth. That would not happen if there were excessive concentration in capital.”