Articles / Rubric: Global

South America Gets a Prescription for the Virus
July - August 2013 | Global

Latin America could be faced with the consequences of the financial crisis in Europe and the U.S. Though the World Bank had a positive growth forecast for the Latin American countries, it recommended that they take care of themselves and not rely on commodity exports.

The World Bank has turned the attention of governments to the fact that Latin American ountries need to “harden” the successes they’ve had over the past decade and increase production to accelerate development and become more independent from the export of commodities. According to the forecast, average growth this year will be 3.5%. This is better than in 2012, but it still isn’t a stable figure.     The IMF is naming a similar number: 3.4%, four-tenths of a percent more than last year, but three-tenths less than the unjustified January forecasts. In 2014, according to the IMF, growth will continue (3.9%), as demand remains stable and high commodity prices support that rate.

“This is not bad, but is insufficient to maintain the pace of social progress,” wrote Augusto de la Torre, Chief Economist for Latin America, in the World Bank report, and that is why the IMF is also calling on governments to implement reforms in order to stimulate growth. The World Bank hasn’t made forecasts for 2014, but warns that the 3.5% could remain unchanged if the economic situation in Europe and in Latin America itself doesn’t change.

Achievements over the past decade have “significantly reduced poverty levels,” according to the World Bank, and have improved the socio-economic situation. Nevertheless, these results could be in jeopardy if the Eurozone’s problems aren’t solved in the near future, the Chinese economy slows down, or if the American economy doesn’t begin to bounce back. “That’s why the region needs to build the potential of the domestic market, based on current demand, especially in services. That is essential. As the international situation becomes more complex, the ability of the countries to lift trend growth above 3.5 percent depends on themselves,” de la Torre continues.

A Lack of Ambition
Yet each country has its own problems. Venezuela is stagnating and Jamaica’s modest 1%  growth contrasts with 6% growth in Peru, 9% in Panama, and 11% in Paraguay. Argentina and Brazil have fallen back to the 3% mark, but breakthroughs in their development are expected this year. Bolivia, Chile, and Colombia are growing 4-5% on average, which experts say is insufficient.

In Asia, everything is totally different. “The services sector is creating value and demanding more skilled labor. Industrial competitiveness is closely tied to the services market. Exporting cheap products in exchange for lower labor costs and favorable exchange rates isn’t a strategy that has a future,” de la Torre says. He also notes that Latin American economies are unlikely to grow at the same rates as developing countries in Asia, as they lack the “ambition” to achieve their goals.

One of the faster growing countries is Peru. The country’s Economics Minister announced that in 2013, “GDP growth of 6.3% is expected, not because of better pricing policies, but due to an increase in sales in the mining sector.” In turn, the giants in this region – Mexico and Brazil – are maintaining stable growth rates. For 2012-2013, the Mexican government is forecasting growth of 3.5% and in 2014, 5%,thanks to a positive macroeconomic situation and previously planned reforms.

“We need to manage public money wisely. Some countries have gotten themselves into substantial debt, but the overall level of national debt in the region doesn’t call into question its macroeconomic stability or their state finances. But attention should be given to the growth trajectory of national debt. It currently averages 3%, but three years ago, it was only 1.5% of GDP. There figures aren’t terrible, but it is an ominous trend,” says Antonio Peres, Economist at the Latin American Economic Institute. The process of economic recovery for Brazil in 2013 could spill over into Argentina, Bolivia, and Paraguay. However, this expected recovery could yet again be based on expected improvement in the U.S. and the growth of China’s markets.

According to economist Ramiro Castinera, “2013 will be a continuation of 2012. Important reforms were implemented throughout the region, significantly reducing unemployment levels. Issues of general backwardness, of course, like in energy for example, won’t completely disappear, but obstacles hindering increases in exports are disappearing. Uruguay, the Dominican Republic, and Ecuador will be able to achieve 4.5% growth, despite inflation. In Central America and Cuba, we can predict an average of 3.5%.”

Venezuela and El Salvador, according to the UN, will grow a maximum of 2%. The situation in Venezuela was strongly affected by the death of Hugo Chavez and the subsequent election of a new President, as well as serious inflation of 15-20%, significant tax deficits, and the threat of a default. In addition, revenues from the sale of oil could decrease. A report from the U.S. Department of Energy gave this forecast: In 2013, revenues of oil-producing countries could decline by 10%.

Don’t Catch a Virus
The Inter-American Development Bank (IADB) reiterates what the World Bank said: government spending must be cut and domestic de demand supported in order “not to catch the global crisis virus.” In the event inflation remains under control, the IADB advises tightening fiscal policy and simplifying financial matters, since “only structural reforms can fuel domestic development.”

Among these structural reforms, the IADB is calling labor market reform the most important and necessary. Latin America is a leader in the gray economy and illegal employment, with 56% of the population working “in the black.” The IADB proposes reforming the business registration system to create more “medium-sized and large companies,” thereby providing more stability to their employees and their professional training by having access to government credit. Thus, according to the IADB analysis, increased productivity is guaranteed, which in turn will stimulate economic growth.

The next reform is investments in infrastructure: “Latin America is investing only 2.5% of its GDP in building infrastructure. If these investments were doubled, annual growth could increase by 2%. In order to ensure these investments, the economy requires long-term funds and an improved regulatory environment for the private sector.”

Text: Valentina Rinkon

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