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Latin America: Past Lessons Help Recovery

The road to recovery is shorter for Latin America than for other nations.

BY PAMELA COX

A year ago, things looked pretty gloomy in Latin America. World demand had taken a nose-dive, and exports from Latin America and the Caribbean had dropped more than a third in just six months.

More concretely, commodity prices had collapsed. A barrel of oil had gone from $147 per barrel in July 2008 to $42 in February 2009. Prices of soybeans, wheat and copper also dropped dramatically. For a region, where 90 percent of the population resides in net commodity exporter nations, the plunging prices were destined to take a toll.

In human terms, we calculate that the recession added about 10 million to the ranks of the poor and 2.5 million to the ranks of the unemployed in Latin America.

To make matters worse, remittances, while still resilient, have shown some decline. These flows had been known to be countercyclical and to grow in times of economic hardship, but this crisis was different. Because the epicenter was in rich countries, it affected industries with large concentrations of immigrant workers, thus reducing employment and remittance flows. Mexico, for example, suffered a 16 percent drop in remittances, from $25 billion to $21 billion between 2008 and 2009, though the depreciation of the peso softened the impact of this reduction in dollar remittances.

Overall, economic growth collapsed by more than 6 percent between 2007 and 2009. Some countries such as Argentina, Costa Rica and Mexico suffered a contraction in real gross domestic product of more than 10 percentage points.

In broad terms that is what the worst global recession in 80 years meant to the region. Now, let us consider what the worst global recession in 80 years did not mean.

Countries in the region felt nearly every international economic crisis in the recent past. The Asian and Russian crises of the 1990s, for instance, led to turbulence in domestic economies in Argentina, Brazil, Chile, Colombia, and Peru.

This time around, the global crisis spelled financial disaster elsewhere but not in the region. In Eastern Europe, for instance, the downturn triggered turbulence in banking systems and devaluation of local currencies. In Latin America there were no bank collapses and no debt defaults.

Having learned from past experiences, the region was in a much stronger macroeconomic and financial situation when the crisis hit - and it remains relatively strong as it comes out of the crisis. In 2010 public debt levels among the top seven countries in LAC are expected to be on average one third of debt levels in OECD countries. Also the region’s international reserves last month were more than three times what they were half a decade ago.

Thanks to sounder financial regulation and supervision, as well as improved monetary and fiscal policies, the region weathered the downturn much better than in the past and much better than other regions including Japan, Europe or the United States. Yes, the region did not come out unscathed from this crisis, but it is fundamentally less vulnerable today than it has been in modern economic history.

As such, we at the World Bank are convinced that the road to recovery is shorter for Latin America than for other nations.

EMERGING ECONOMIC CHALLENGES

Global economic recovery is now underway. Brazil, like other large emerging economies, has been helping lead the world’s recovery since the beginning of last year. Brazilian gross domestic product is expected to grow more than 5 percent this year. Even Mexico, which suffered a contraction of more than 7 percent last year, is expected to grow more than 3 percent in 2010.

Latin America’s net commodity exporters, particularly Argentina, Brazil, Chile and Peru, are bouncing back thanks to higher prices for commodities, which are in higher demand due to ramping up of production in Asia. Last month, oil prices had reached nearly $80 per barrel, a jump of more than 80 percent since last year. Other commodities such as copper, soybeans and wheat have been following a similar upward trend.  

Of course, the way back won’t be homogenous across the region. The global crisis hit the Caribbean at a particularly vulnerable time. A fragile financial sector and high indebtedness, combined with diminutive size, have meant the Caribbean has had to face the global crisis with a limited set of alternatives. Before the devastating earthquake hit Haiti a month ago, the growth forecast for that Caribbean nation was in fact among the highest in the region, where many other countries are expected to see zero to negative growth this year.

Despite the differences, most of the post-crisis challenges will naturally recede as rich and emerging economies around the world recover. As domestic demand in Europe and the United States recovers, for example, commodity prices will continue to rebound. Recovery will also hinge on the availability of financial support from multilateral institutions.

That doesn’t mean that recovery is completely out of the hands of Latin American countries. In fact I am a firm believer that recession can inspire smarter and more widespread development. More specifically, as the region begins to fully address certain shortcomings it will be better prepared to make the most of current and future global trade.

Even if only to preserve a slice of a smaller, post-crisis global trade market, Latin American governments and industries need to improve competitiveness. Many of the long delayed reforms that make integration a worthy pursuit, from infrastructure and logistics to tertiary education and property rights, are now even more urgent. Transportation and storage costs are about 10 percent of product value in industrialized countries, but in LAC they range from 15 percent in Chile to 34 percent in Peru.

Successful Latin American countries will have to learn to live with appreciated currencies. With interest rates in the developed world likely to stay low for a while, money will continue to flow into the region’s more promising economies. This will make them less competitive--exporting from Bogota, Lima, Sao Paulo or Santiago will be more expensive in U.S. dollars.

Getting additional free-trade agreements will still be good. But Latin America cannot continue to rely solely on selling more of the same – that is commodities. The region will need to find ways to add value to goods or create new ones.

Another problem for Latin America is that, on the whole, it has not excelled at innovation. It invests too little in research and development, provides few tax incentives, and does not protect intellectual property well. Its universities operate without any connection to companies, and students interested in research and development see little future staying in their countries.

Except for Brazil, all other countries invest much less than the recommended 1 percent of their gross domestic product in research and development. Today, the number of patents issued to Latin Americans for new inventions is a fraction of those issued to residents of Korea, China, India or Singapore.

It will take years to fix those problems, but the new global reality will make reform unavoidable.

Today it is still unclear when and how we will fully emerge from the global crisis and how the world will be reshaped by the recession has been shaking the global economy.

One universally emerging trend seems to be an increased reliance on the state for economic recovery in ways unthinkable only a few years ago and a broader debate on the role of governments. Latin America has recently entered a busy political season. Successful and peaceful presidential elections have already taken place in Uruguay, Bolivia and Chile. In Honduras too, we hope that the new government enters a process of reconciliation that focuses on the challenges ahead, including poverty reduction and strengthening democratic institutions.

But whether the incoming leaders are labeled old left, new left, liberal, neo-liberal or conservative, these new leaders, as their predecessors, will likely embrace pragmatic solutions that wed sound economic and fiscal policies with human and social concerns.

Overall, Latin America has learned from its past and is on track toward a better future. Still, a return to the strong growth of recent years is not guaranteed. It will require new proactive and visionary policies, enacted by equally visionary leaders, to ensure that the new decade we now enter will be an era of shared prosperity for Latin Americans.

Pamela Cox is Vice President for the Latin America and the Caribbean Region at The World Bank.

 

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