New estimates from the World Bank predict that the world financial crisis will produce 6 million new poor people in Latin America this year, triggering a new fear — that, in addition to economic stress, we may see social explosions in some countries.
I heard this fear expressed several times last week in separate interviews from Sao Paulo with former President Fernando Henrique Cardoso of Brazil and former President Alejandro Toledo of Peru, who were presiding over a meeting of more than a dozen former heads of state from the region.
Both agreed that many of Latin America’s current leaders are minimizing the possible impact of the world crisis on the region.
Cardoso, the two-time president of Brazil who started his country’s recovery, told me that few in his nation believe the current government projections that Brazil’s economy will grow by 4 percent this year. Most economists predict 0.8 percent growth.
“The crisis will hit us harder than what the (region’s) presidents are saying,” Cardoso said. “Of course, the presidents who are in power must keep up hopes and boost morale, but I think they are going too far.”
While Brazil and several other Latin American countries are better prepared to face the crisis than Eastern European and many Asian nations, partly because they have accumulated more foreign reserves, “to say that the sky is blue when there are clouds all over is dangerous. It’s better to prepare ourselves now, than to regret it later,” Cardoso said.
Toledo criticized Peru’s official projections that the economy will grow by about 5 percent this year.
“I would like to share that optimism, but let’s be careful: Raising exaggerated expectations can be dangerous,” Toledo said. “The fragile middle-classes are falling into poverty, and the poor are falling into extreme poverty. That can lead us into a continent of turmoil, which would scare away investments, stave off economic growth and weaken democratic rule.”
Over the past five years, Latin America has grown by more than 5 percent a year, its longest period of economic prosperity in more than four decades. But with the United States and China — the region’s biggest export markets — falling into recession, Latin America is expected to remain stagnant this year, according to World Bank estimates.
Most independent economists predict regional growth to be between 1 percent and a contraction of 1 percent, while some ultra-pessimists, such as the London-based Capital Economics forecasting group, forecast a 4 percent region-wide downturn this year — the biggest decline since the 1930s.
Of the estimated 6 million new poor, 4 million will be former middle-class urban workers who will lose their jobs in the automobile, textile and other export industries, according to World Bank estimates. The remaining 2 million will be people who would have moved up to the middle class if the crisis had not hit the region.
Since the former middle-class workers who are likely to join the ranks of the poor tend to be more organized — either because of union membership or political affiliations — than other sectors of society, they are more likely to stage protests, say those who fear possible social upheavals in the region.
And while President Barack Obama and several leaders of crisis-ridden rich countries enjoy high popularity rates, many Latin American leaders are losing popularity.
I asked senior World Bank economist Marcelo Giugale if he feared a social explosion in the region.
“It’s avoidable,” Giugale said. “Latin American countries could easily pay for more and better services for the poor by eliminating ‘universal subsidies’ for water, gasoline and college education whose biggest beneficiaries are upper-middle class and rich people.”
Recent World Bank studies show that Venezuela, for instance, spends $12 billion a year subsidizing gasoline prices, even when 44 percent of that subsidy goes to the richest 20 percent of the population. Mexico spends $7.6 billion a year to pay for universal free college tuition, much of it goes to the upper-middle classes.
My opinion: It’s time for Latin American leaders to be more upfront about their countries’ reality, and to use the opportunity to do things such as slashing subsidies to the rich, reducing military spending and making labor laws more flexible to encourage creation of new jobs. Otherwise, if the crisis goes on, speculation about political instability could become a reality.