Economic flight may be short for Latin America

December 30, 2009


The good news is that Latin American economies are expected to do reasonably well in 2010. But economists warn that unless they become more competitive, their recovery will look like a chicken’s flight — they get a few feet off the ground, and fall.

Of course, international financial institutions will not describe it that crudely in their public statements. But that’s pretty much what they are saying about the region’s future.

Let’s start with the positive news. According to the United Nations Economic Commission for Latin America and the Caribbean (ECLAC,) the region’s economy will grow by 4.1 percent in 2010, recovering from a 1.8 percent contraction in 2009.

The best performing economy will be Brazil, with a projected 5.5 percent growth, followed by Peru and Uruguay, with 5 percent growth rates each, and Chile, Panama and Bolivia, with 4.5 percent growth rates, respectively, the U.N. commission says.

Argentina is expected to grow by 4 percent, and Mexico, Costa Rica and the Dominican Republic by 3.5 percent each. The worst performing economies will be Venezuela, Nicaragua and Haiti, with 2 percent growth rates each.

But when it comes to 2011 and beyond, economists are less buoyant.

“The growth engines have been turned on, but we don’t know for how long the fuel will last,” said ECLAC’s head, Alicia Barcena. There are questions over whether this recovery can be maintained in 2011, she added.

The world’s economic pie has shrunk, and Latin America will need to be much more competitive to maintain its current export markets or gain new ones, economists say.

To make things worse for the region, a free trade deal between China and the 10-country Association of East Asian Nations will go into effect Jan. 1, creating a 1.8 billion people economic bloc that will be able to produce goods at more competitive rates.

Barring measures to modernize the economy in many Latin American countries, the medium-term trends don’t look good.

According to International Monetary Fund figures, Latin America’s share of the world economy has fallen from about 6.5 percent to 6 percent over the past 30 years while China’s share has risen from 2.5 percent to 7 percent over the same three decades.

IMF projections show that Latin America’s share of the world’s economy will remain stagnant or fall slightly between 2010 and 2013, while China’s will grow from 6 to 8.5 percent.

What can the region do to get out of its three-decade stagnation? I asked Nicolas Eyzaguirre, the head of the IMF’s Western Hemisphere department.

Eyzaguirre, a former leftist militant and finance minister in his native Chile, told me that the main challenge to avoiding a post-2010 economic fall in most of the region will be to take advantage of the current high commodity prices, and save for a rainy day.

“They key is to prevent volatility because Latin America tends to fall when commodity prices fall,” he said. “There is a consensus that what can speed up economic development is spending in infrastructure and education, but to do that you must be able to spend regularly and continuously. That requires planning, and saving in the years of fat cows to be able to spend in years of lean cows.”

Some countries in the region, such as Chile, have already done this successfully, he said. And there will be a great window of opportunity for others to follow that path in 2010 because commodity prices are not expected to fall, he added.

“What’s the risk?” Eyzaguirre asked. “It’s that commodity exporters will have a combination that will be almost too good to be true, of high commodity prices and low interest rates, and that they will not learn from past boom-and-bust cycles. There is a risk of a new bubble.”

My opinion: Economists’ projections have to be taken with a grain of salt because things often change. At this time last year, the United Nations and most international financial institutions were forecasting that Latin American would grow by 1.8 percent in 2009, which turned out to be way too optimistic.

But I agree that unless countries become more competitive and save for a rainy day, the expected 2010 recovery will be short-lived.

Which brings me back to the chickens. Peasants say that chickens don’t fly because they are too heavy, and have become complacent after generations of being fed on the ground. The same thing happens with countries, especially when they are used to benefiting from outside factors such as high world commodity prices.

Let’s hope that the new year won’t be a chicken’s flight, and that Latin American economies will fly high. Happy holidays and have a good 2010!


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