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Crisis: Limiting LatAm Damage

Capital is a coward, and taking a hard turn toward resource nationalism and expropriations scares away investors.


As the global economic crisis deepens, the blame game is in full swing. And of all the people who have a right to be incensed by the global meltdown, the most aggrieved could well be Latin Americans. After years of questionable policy choices, the region took the requisite steps to emerge as a healthy player in the global economy, stabilizing inflation and reducing debt, diversifying exports, and promoting investment while attacking poverty head on. Now, as crisis grips the global marketplace, Latin American leaders must stay on track. To use the language of the stock market, they do not want to take policy steps that will lock in their losses.

When the economic tornado landed on Wall Street, hemispheric leaders thought they would escape the downdraft and spoke disdainfully of any need for a plan B.  Why, Latin Americans asked, should they listen to any policy prescriptions coming from Washington, implementing them at considerable political cost when, in fact, developed nations themselves were playing roulette with the global economy?  

But as this crisis materialized and metastasized, Latin Americans were drawn into the vortex. Some countries like Brazil are better positioned than ever before to weather an economic storm.  But the worse it gets—lowering growth, reversing job creation, reducing living standards and increasing poverty—the greater the cause for concern. How Latin Americans respond to the crisis will determine their fate.
In the first instance, they should do no harm. Latin American nations need open North American and European markets now more than ever. They also need those economies to be healthy in order to maintain the global commodities trade. In recent years, the exploding commodities trade with Asia allowed commentators across the region to suggest Latin America was in the process of “decoupling” from the United States economically. But Washington still stands as Latin America’s top trade and investment partner. Without a doubt, China is an increasingly important market, too, but if demand in the developed world decreases, so will Chinese demand for raw materials from Latin America to produce goods for export to other markets. As a commodities exporter, Latin America should make a concerted push to open markets wider, especially in agriculture, fighting hard against the inevitable calls for protectionist retrenchment—whether their own or others.
Second, Latin America should do everything it can in the near term to attract increasingly scarce global capital flows. Capital is a coward, and taking a hard turn toward resource nationalism and expropriations scares away investors. Unfortunately, in the midst of the financial crisis, some countries in the region have already stepped up their anti-investor rhetoric and actions. More broadly, development of a growth agenda should be pursued with a laser-like focus, including improvements in education, judicial reform and rule of law, regulatory structures, and efforts to strengthen the micro-economy.

After losing a decade of development in the 1980s due to years of economic stagnation and questionable policy choices, Latin Americans learned hard lessons. They ended wars, reined in dictators, and got their economies under control. They cut the cord with a dying Soviet Union and patched up relations with the United States, which itself did immense good in promoting debt relief, investment promotion, and trade expansion.
Regional leaders can now assist their own cause by taking tangible steps to cauterize the fresh economic wounds inflicted by global meltdown. And the United States, where the crisis began, has a responsibility to assist.  Our strategic interests demand that we do.

Eric Farnsworth is Vice President of the Council of the Americas/Americas Society in Washington.This column is based on the Viewpoint Americas series from the Council of the Americas. Republished with permission.


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