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