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Outlook for Latin America
by Michael Riska and Jennifer Solomon
As a group, the Latin American economies picked up speed during the year 2000. Twelve or eighteen months ago, much of the continent was still floundering in the wake of the Brazilian currency devaluation. It looked like the 21st century was getting off to a pretty bad start. But now, Latin American growth is running at a steady 4% annually, inflation has been more or less stable, fiscal positions have strengthened and current account balances have improved. It's been a pretty sharp turnaround, especially where inflation is concerned, and gives testimony to a renewed commitment to creating sustained growth on the part of most Latin American countries. Leaders are embarking on cautious macroeconomic policy management programs, and have committed to structural reform for the long-term benefit of their respective countries.
That said, Latin America is still really a mixed bag. The overall numbers mask significant differences from country to country. The average growth rate is boosted by strong performances in Mexico, Chile and Brazil. Mexico's strong showing is rooted in consistent policies that were instituted during the 1994-95 currency
crisis. Brazil and Chile have both instituted good economic policies as a reaction to Brazil's own currency crisis two years ago. These countries are expected to
continue to grow above the overall rate. A number of large countries — Argentina, Colombia and Venezuela — show much weaker growth.
Got oil?
World trade is a big factor, and is expected to grow almost 8% in the region in 2001. As usual, much depends on the United States. As the principal industrialized trading partner for most Latin American nations, continued strong demand from the U.S. makes an important contribution to these economies. On the whole, Latin America has gained from recent developments in commodity prices, although the impact varies from country to country. For example, as
energy prices go up it pays more to be an oil exporter than an oil importer. Copper and wheat prices are up about 25%, but coffee and corn prices are down. The overall effect has been a 5% improvement in Latin America's terms of trade.
Even though higher oil prices have a net positive effect on the region — oil exporters outnumber importers — a lot of countries would be negatively affected by higher import costs if oil prices continue to rise. Also, most would take a hit from the decline in world growth that would likely result from significant increases in energy costs. The unexpected rise in oil prices in 2000 fueled demands for trade protection and assistance programs in some Latin American countries.
Spare the rod, spoil the child
Still, Latin America as a whole is looking very solid these days. With a few exceptions, there's not much wrong that a little old-fashioned discipline can't cure. Here are some things to look for that will really sweeten the deal:
Labor markets need to be reformed to promote job creation. The whole region is experiencing unemployment problems that can't be allowed to go unchecked. Liberalization of the markets would be better than simply increasing public sector employment to generate jobs.
Countries have to maintain and develop good relations with private creditors, to guard against preventable crises and deal better with the unavoidable ones.
Latin American countries must promote good governance. Gross political scandals and misplays like those seen in Argentina and Peru in 2000 cannot continue to be routine.
Financial institutions need to be strengthened. Governments must be held accountable for their spending habits through strong legislation, like Brazil's Fiscal Responsibility Law.
Trading systems should continue to be opened up, and protectionist measures should be avoided. Latin America is rich in resources and sensible trade policies are vital.
Ultimately, investors in Latin America need to look at the track records of individual countries. Some of them are looking more and more like tight ships; others are having trouble dragging themselves into the 21st century. There is no doubt that the region as a whole is headed for substantial growth, but that growth will be a result of the push and pull between countries that have their act together and those that don't. Here's a rundown of the major players.
Please read on...
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