Latin American Economic Outlook

Latin America is forecasted to realize continued economic growth with Brazil predicted to exceed the US economy along with China within the next two decades. The Latin American states have a history mired with political and economic instability, but have grown into functioning democracies with robust economies in the last decade. Despite this solid economic report, there are still investments needed to secure a sustainable growth pattern within the global markets. High economic disparity plagues the region and complicates the barriers to economic health.

Focus Economics is predicting that Latin American regional economic growth will continue to endure a slight slowdown, but still have a respectable 3.2 percent average growth rate. They also note that Brazil and Mexico are the two largest economies capturing about 60% of the Latin American market share. Overall the continued global market stagnation is having an effect on the Latin Americas as large economies such as the US announce that the quantitative easing that has been spurring the low interest lending rates may be coming to a slow down. The US markets responded with volatility as the Wall Street markets realized a significant drop and the bank’s lending rate spiked. Many people ask ‘what is qualitative easing?’ It is an action by the Federal Treasury AKA the "fed" to control inflation. They buy up mortgage backed securities (MBS’s), US treasuries and offer low interest lending rates which are currently at zero. This is intended to encourage economic activity and growth when the private sectors are offering a lackluster performance on their own. Basically, they print money and reduce private debt loads.

US policies have a ripple effect on the world as well as Latin America. If we do slow our quantitative easing, there will be less money to invest in Latin American markets. Even if we say we will slow qualitative easing the credit markets contract. The EURO zone continues to struggle with high unemployment and deep recession after instituting their austerity measures. Germany, the strongest economy, has had to bail out Greece and Spain to keep the EURO from failing altogether.

The currency markets are something I know less about. What I do know is when the dollar becomes stronger; our buying power grows on the importing end of market transactions. However, selling our goods abroad or exports become more expensive. How it affects Latin American countries is dependent on their trade balance and if they are importing to grow their economies and their currency has lost value, it becomes more expensive to build infrastructure and capital investment. Currency exchange rates can play havoc on economies by inducing volatility, destabilizing markets, affecting global competitiveness and influencing access to low interest rate borrowing. There is a little known global currency called Special Drawing Rights (SDR) issued by the International Monetary Fund (IMF). I only know of its existence and its growing presence in the global economy. This may create a stabilizing effect throughout the world markets in the future.

Focus Economics reports moderate to high inflation is the forecast for Latin American economies with the average rate declining slightly to 6.6% while Venezuela will continue to suffer with high rates around 33%. This high inflation will continue to cause the Venezuelan economy to lag behind the majority of Latin America as it tries to compete in the global marketplace.  Venezuela is in a political transition as well now that Chavez has died which will create a barrier to foreign investments especially when places like Brazil look so attractive.

The report released by the Organization for Economic Co-operation and Development (OECD) which is a commission within the United Nations (UN) paints the broad overview of economic markers for Latin America and the Caribbean. The Economic Commission for Latin America and the Caribbean (ECLAC) was created in 1948 and is a regional commission of the UN. Its primary goals are to support economic growth and development, foster social justice and create a more inclusive society, encourage democracy, improve education and infrastructure development, and establish monetary policies helpful to improving trade.

The Latin American states have overall enjoyed solid economic growth since the early 2000’s. Economic growth enhances political stability and stronger democratic governments. The OECD reports that the South American states have realized stronger economic growth than the Central American states with high exports to the rapid growth in China. This has resulted in a decreased debt load on these countries and allowing them to invest their budgetary surpluses in their social safety nets, education and infrastructure. The social investments are directly responsible for the diminished severity of the recent global recession. Their average debts are in the 30% range to Gross Domestic Product (GDP) or total economic activity. This is a similar debt load that the US realized in the boom era from the 50’s to the late 70’s prior to a rapid expansion of debt load under president Reagan that hurled the US from largest lender nation to largest debtor nation.

Global uncertainty plays on every economy as we become increasingly interdependent. The Latin American states enjoyed an economic buffer from recession by the rapidly increasing China economy. The OECD report suggests that the Latin American states create some “fiscal space” to decrease their dependency on any one specific market. I believe the word is diversify and ‘don’t put all your eggs in one basket’ strategies to buffer a downturn in any one area.

What is impressed throughout the OECD report to maintain competitiveness in the Latin American economies is to understand the essential pillars of sustained growth and economic development. The three primary pillars are education, infrastructure and innovation. It is a primary function of a successful government to make the necessary investments in its population to increase productivity and attract foreign investments. Governments need to redistribute wealth to decrease poverty and spur economic growth. The Latin Americas hold large populations but are inflicted with low per capita incomes. This creates social stressors on government and economies. Their lack of a reasonable progressive tax rate structure also injects added stress to their economic systems. The average revenue incomes are considered low among OECD nation members where the average is approximately 35%. In Latin American states the range is 13% revenues in Guatemala to 32% in Brazil. The US as well is low among OECD members with a 15% revenue resource. The lack of revenues translates into lack of funds to build the pillars of economic growth.

Globalization demands a higher role of government to protect its interests in the global market. Transparency and professionalism are necessary elements to government credibility when taxation is enforced at sustainable levels. All governments have to conduct a balancing act between social safety net programs without incentivizing people not to work. It is necessary for Latin American states to root out corruption to enhance its legitimacy. Unlike the US, Latin American states are experiencing a growth in the middle class and a lessening of their poverty levels. Their education systems are in need of aggressive improvements to attract foreign investors. There has been some consideration given to government and private partnerships such as those in Germany, to build an educated workforce by establishing work-education relationships to develop the work force needed.

There are severe gaps in transportation, energy, road systems, internet, telecommunications and essential government regulations to ensure broad coverage of these deficits that private industry would otherwise be reluctant to invest in. Despite these barriers, Latin American states are poised with low debt and a ready populous to catapult them from developing nation status into the industrialized nation realm. Careful investments and financial controls will be required to sustain such a trajectory. There future indeed looks bright.

 

 

Sources:

Romero, Simon.  Economies in Latin America Race Ahead. The New York Times.30 Jun 2010. http://www.nytimes.com/2010/07/01/world/americas/01peru.html?_r=0   WEB 8 Jul 2013

Economic Snapshot of Latin America. Focus Economics. 18 Jul 2013. http://www.focus-economics.com/en/economy/region-outlook/Latin_America   WEB 20 Jul 2013

Plumer, Brad. QE3: What is quantitative easing? And will it help the economy? Washington Post. 12 Sep 2013. http://www.washingtonpost.com/blogs/wonkblog/wp/2012/09/13/qe3-what-is-quantitative-easing-and-will-it-help-the-economy/  WEB 20 Jul 2013

United Nations Latin American Economic Outlook: Transforming the State for Development. OECD United Nations. http://www.oecd.org/dev/americas/48965859.pdf   WEB 8 Jul 2013

Latin America’s Economic Future: Prospects and Challenges. Brookings. 7 Oct 2010. http://www.brookings.edu/events/2010/10/07-latin-america-economy WEB 14 Jul 2013

Luciano Cohan and Eduardo Levy-Yeyati. Latin America Economic Perspectives: Innocent Bystanders in a Brave New World. Brookings. Nov 2011. http://www.brookings.edu/research/reports/2011/11/economic-perspectives   WEB 14 Jul 2013

Manuela, Kasper-Claridge. DW. World Economic Forum. Latin America: A continent gears up for growth. 23 Apr 2013. http://www.dw.de/latin-america-a-continent-gears-up-for-growth/a-16774680   WEB 8 Jul 2013

Irresistable Quotes

"The Republican Party is throwing corporate welfare at farmers, but telling people who are so poor they qualify for government aid to feed themselves that they are not a priority. As a matter of basic politics, the Republicans have lost their minds. This is Mitt Romney’s 47 percent remark all over again." The American Conservative

The Failed Drug War and Growing Latin American Power

The Latin American countries are plagued with the byproduct of US drug war policies. Drug cartels that facilitate drug trafficking to the insatiable US illegal drug appetite wreak havoc on their host countries with violence, crime and act as a government destabilizer.  The Latin American countries are developing not only their economic muscle, but their political muscle that rides the same train and are creating a coalition to effect change on current US illegal drug policy. Even though the US mandates much of the drug policy by asserting its economic and political power via international institutions and direct US financial aid packages, the Latin American countries are beginning to address the glaring failure of these policies.

The trend in the US is to decriminalize possession, use and even sale of marijuana. Like the failed policy of prohibition, illegalization has spawned the same violence, crime and lethal drug organization outcomes. We can look to Portugal who in 2001 decriminalized the use of marijuana, cocaine, heroin and methamphetamines for data and studies on the effects of decriminalization. They focused more attention on education and rehabilitation and the current trends demonstrate a surprising drop in usage rates. The Cato report suggests that the US drug policy is based on “fear mongering and speculation” not studies or data that offer objective evidence.

The Latin American countries understand US resistance and are willing to push legalizing marijuana, but are hesitant to push for new policies on harder drugs. It is a system failure with many in the US fighting to maintain their hard line policies. The US is home to 5% of the world’s population, but they are responsible for 25% of the world’s prisoners. With much of the US prisons becoming privatized, there is a significant lobbying force to keep the status quo to maintain incarceration rates. The Drug Enforcement Agency (DEA) will also maintain their hard line to sustain their bureaucracy and their livelihood. The military industrial complex will lobby hard against the decriminalization and certainly the legalization because they ship weapons and military supplies to countries fighting the drug war and would realize a drop in sales. The cost of education and prevention programs and drug rehabilitation programs would impose a much lower cost to taxpayers than the billions we spend on the failed War on Drugs, but the institutions that stand to lose financially are adamantly opposed to change for economic reasons. The Latin American countries may have to go it alone without the US when they are strong enough to do so.

Perez Diaz, Sonia . Latin America Will Push U.S. To Discuss New Drug War Strategies At OAS Meeting . The Huffingtonpost. 4 Jun 2013.  http://www.huffingtonpost.com/2013/06/04/new-drug-war-strategy-_n_3383786.html   WEB 14 Jul 2013

Szalavitz, Maria.  Drugs in Portugal: Did Decriminalization Work? Time Magazine. 26 Apr 2009.    http://www.time.com/time/health/article/0,8599,1893946,00.html   WEB 15 Jul 2013

Puerto Rico: Our Caribbean Child.

Puerto Rico was first a Spanish colony, but then became a US territory in 1898 after the Spanish-American War. It was first a military outpost for Spain and then became a US naval outpost and remains such today. Puerto Rico was largely impoverished and illiterate under Spanish rule. The US saw Puerto Rico as a strategic naval base to bolster its military supremacy in the Caribbean. The US kept Puerto Rico under military rule until 1900 when it transitioned to a civilian government still under the US umbrella of power. It was titled the “Commonwealth of Puerto Rico” by US officials. Their foreign policy is under the control of US foreign policy; however their government is largely independent of US control and acts more like an independent nation making its own trade agreements.

Puerto Ricans have automatic US citizenship. They do not pay federal income taxes, but do pay Social Security and Medicare taxes.  They use the US dollar as its currency as well as the US military for its defense. They cannot vote for President of the USA nor have congressional representation, but they are subject to US federal laws. They have a democracy and vote for their own representation. Puerto Rico has long been comfortable with her Commonwealth status and has in the past voted on whether to become the 51^st state of the USA. It is Constitutional procedure for a territory to first vote to petition Congress with a majority of support from its citizens to become a state. It was the last vote in 2012 that garnered the majority of votes necessary to petition for statehood. Puerto Rico has had three options: continue the status quo as a Commonwealth, go for statehood or declare its independence.   

What I find most interesting is that the House of Representatives is a majority republican. They are not interested in admitting Puerto Ricans who favor democrats into the fold when they are doing their best to gerrymander states to insure republican seats. They would be opposed to their statehood because of the likelihood of more democrats in both houses of congress.

The changing dynamics of the Puerto Rican population are at the roots of why they now favor statehood by a majority of votes. They are experiencing a decline in population as there are more Puerto Ricans on the US mainland than there are on the island itself.  Also according to their Secretary of State Kenneth McClintock, a weak economy and lack of jobs are also contributing factor.   

Economics and social freedoms are primary drivers in any reformist movements. Puerto Rico is our poorest child with a population that places it in the middle of current state members of the USA. Its labor costs are lower than the mainland US while it falls under US laws, banking and finance laws and existing trade agreements make the transfer of goods as easy as from state to state. The kicker for investors is the lack of federal income tax on personal or corporate incomes. I would suspect that those industries that are stationed there would be absolutely opposed to statehood simply because they like the tax advantage and they get cheap labor. The US mainland receives 80% of Puerto Rican exports according to the article on Current Issues in Economics and Finance and they note that 4% of the population works for the pharmaceutical industry.

I never fully understood out relationship with Puerto Rico and I can understand their desire to become a state to help realize better representation since they are American citizens and they are compelled to live by our federal laws. They are acting like a state. Why not become one?

 

Bram, Jason. Trends and Development in the Economy of Puerto Rico. Federal Reserve Bank of New York: Current Issues in Economics and Finance.  Vol 14, No 2 Mar 2008. http://www.newyorkfed.org/research/current_issues/ci14-2.pdf  WEB 1 Jul 2013

Brás,Marisabel Ph.D. The Changing of the Guard: Puerto Rico in 1898. Library of Congress, Spanish Division. http://www.loc.gov/rr/hispanic/1898/bras.html   WEB 1 Jul 2013

Palen, Marc William. Will Puerto Rico Become the 51st State? History News Network. 12 Oct 2012. http://hnn.us/articles/will-puerto-rico-become-51st-state  WEB 1 Jul 2013

Puerto Rico: The 51st state? The Economist.17 Nov 2012. http://www.economist.com/news/united-states/21566697-america-may-not-want-what-its-caribbean-outpost-now-does-51st-state   WEB 1 Jul 2013