Latin America's Economies: Innocent Bystanders?
Eduardo Levy-Yeyati & Luciano Cohan, Brookings | January 2012
Latin America recovered strongly from the financial crisis of 2008-9, but now the region is feeling the pains of financial stress and dwindling global demand. Nevertheless, the major economies (the LAC-7: Argentina, Brazil, Colombia, Chile, Peru, Mexico, and Uruguay) in the region are still expected to perform decently despite a sluggish global economy.
In general, international investors are afraid of the impact the financial crisis in the US and Europe and the slowdown in China will have on Latin America. Central America and Mexico rely heavily on the US while other Latin American countries in the south increasingly look toward Asia. This lack of regionalization means that Latin America is without a common political agenda, and the diversity of situations facing Latin American countries reflects this absence.
Peru and Colombia came out of the crisis well and both have strong economic capacity for further growth, with Peru projected to remain the region's fastest growing economy for the 2012-14 period. However, there are uncertainties over the government's lack of clarity on key issues such as pension reform and the state's role in the economy. Colombia withstood the 2008-9 financial crises due to improved macroeconomic fundamentals such as less public debt and stable inflation rates, a fact recognized by most investors.
In contrast, the Brazilian and Mexican economies both lost some steam in 2011. Due to weak orders from abroad, Brazilian manufacturers are facing trouble, but retail and service industries are expanding. Mexico's economic growth slowed down in conjunction with a lethargic US economy. The downturn came at the worst time, during Mexico's electoral season. Nonetheless, Mexico and Brazil retain good positions to expand economic growth if they implement the proper policies.
Argentina and Venezuela must confront more arduous problems. As a result of heavy intervention and pro-cyclical policies, the Argentinian peso actually appreciates when economic activity weakens, and therefore inflation is relatively high. As for Venezuela, the country's oil boom and strong stimulus policies have promoted growth but also high inflation. In general, Venezuelan economic policy is very incoherent, including hyper-regulation, inflexible foreign exchange, and systemic nationalizations. In light of its high dependence on petroleum income, Venezuela can use oil money to paper over these incoherent policies in the short-term. But sooner or later, the country must face the consequences of macroeconomic mismanagement. Both Argentina and Venezuela face difficult policy decisions ahead of them.
In the end, most problems for individual countries in the region stem from the fact that Latin America lacks any buffer from outside problems. This means that largely global factors will influence the outlook of the region in the short-term. In the future, deeper regional integration (economic and political) could provide a type of buffer, but in the meantime, Latin America will continue to be a region of growth with lowered expectations due to the weak global economy.
This summary was written by Joshua Clapp, an editor at atlantic-community.org. The full report "Latin America Economic Perspectives: Innocent Bystanders in a Brave New World" is available for download as a PDF from Brookings.
