It is rare to hear economic analysts attempt to forecast measures that can be applied to a whole world region. The only times when so-called scholars and television economists appear on main stream media warning about the need to execute massive changes in the way regions manage their finances and investment, is usually when those measures are imminent.
Although Europe and Asia have traditionally attracted the attention of studious ‘experts’ when it comes to economic policy, this time around it is Latin America’s turn.
The thesis mainly supported by the ‘experts’ is that Latin America needs to adopt a “bold and credible structural reform agenda”, focused on improving education, infrastructure and business climate.
The last time the continent heard words like bold and structural reform was in the 1990’s when the US mandated its Structural Adjustment Programs (SAP) on many Latin American nations as a condition to negotiate trade deals. The SAP’s turned out to be worst than the disease the US thought to be curing.
The region is now preparing for SAP 2.0, a second wave of banker interventionism that will surely mean European style austerity. The new measures, ‘experts’ say would improve the way Latin America countries meet the needs of their growing middle class.
Analysts say that Latin America has passed with flying colors the biggest financial crisis since the Great Depression, when the economies of the region benefited greatly from strong Asian demand for raw materials and industrial commodities and the large inflow of foreign capital as well as a result policy of zero interest rates by major central banks.
“Responding with complacency to the shock of 2008 may be the greatest risk,” says Jorge Sicilia, chief economist of bank conglomerate BBVA.
According to BBVA Research, the Latin American economy will grow 0.9% this year and 1.8% in 2015, due to the slowdown in domestic demand and less favorable external environment, which highlights the slowdown of the Chinese economy and lower global demand for commodities.
“On average, the region is probably already overcome the worst of the downturn,” the bank said in its latest report on the region. It also notes the growing gap between the Pacific Alliance (Mexico, Colombia, Peru and Chile), which recorded growth of 2.8% in 2014; and Mercosur (Argentina, Brazil, Uruguay, Paraguay, Venezuela and Bolivia), whose GDP will contract 0.5% this year and grow just 0.4% in 2015.
However, the region is far from the average growth between 2003 and 2011 -4.5%, according to the International Monetary Fund (IMF) – and rhythms from other similar income economies, such as Asian countries, which recorded an average growth of more than 7% a year.
“The slowdown in economies like Brazil and the drag effect of the situation in Europe and China makes Latin American governments need to take action with both adjustment and reforms to deal in an appropriate way the next time,” says Javier Santacruz, economist and researcher at the University of Essex, UK.
Governments will need to address these reforms in a less favorable environment, as noted by international financial sources, and passing through “the implications on investment normalization of monetary policy in the US, the need to re-embark settings for reducing external deficits and a scenario of lower prices of raw materials “.
It is true that IMF economists recall the importance “that the region has prudent fiscal policies, low inflation and flexibility to improve its ability to respond to any shock change”, but beyond macroeconomic policies it also recognizes that it’s time to implement reforms aimed at raising the low productivity of the region and move up the value chain; to correct the shortage of transport infrastructure and improve the business climate.
“We must pass reforms that allow growth, lead to macroeconomic stability, reforms that promote growth, requiring investment in physical and human capital and a reduction of the underground economy,” said Sicilia. “The problem is not the diagnosis, but the will and capacity to implement reforms.”
This is where the first cracks are already appearing. Mexico has approved the larger battery of structural reforms, but violence and state weakness against crime may jeopardize the reform agenda, an approach that is not expected in Argentina, where the fiscal deficit continues to grow and monetary policy is dedicated to finance public spending.
What banks forget to mention in their analyses is that Latin America’s current conditions have their origins in the pre-global depression that began in 2008. America’s predatory policies on the region are responsible for the increased poverty and misery of many Latin American nations. There are people who still think that NAFTA and CAFTA were positive for developing nations in the region, but those people have never been on the ground asking average middle class folks about it.
“Most Latin American governments have only partially completed the political and economic reforms needed to sustain robust growth and healthy democratic institutions,” writes Peter Hakim on Foreign Affairs. He is right in the sense that most Latin American leaders have used the position of power to corrupt state institutions. What he does not say is that they have also danced along the US tune to implement policies that have destroyed the means of production, infrastructure and government programs aimed at meeting the needs of their populace.
Along with neo-liberal policies and corruption, Latin America suffers from the imbalance generated by trade agreements that seek to strengthen the interests of large global corporations, whose goals are defended on every page of every economic and trade agreement. See here a list of policies that helped wreck, not help Latin America.
“Often political change is the driving force behind the new reform initiatives, as in India or Mexico with the election of Enrique Peña Nieto in 2012,” says Geoff Dennis, strategist at UBS. He is right. When politicians do not play along, new faces are put in place who will adopt and enact deteriorating economic policies mandated by the US through the IMF and the World Bank.
The signs of public discomfort with their leaders’ incapacity, inability or unwillingness to legislate in their favor as supposed to in favor of foreign interests, is palpable all over Latin America. “The last elections have not caused major alternations of government but have brought very close results that are no longer so comfortable for the ruling classes as it used to be before,” says Malamud.
The consequences on the political agenda heavily dependent on each country’s government institutions. “Where institutions have more weight, as in Chile or Brazil, judging by the recent appointments of President Dilma] Rousseff, the political agenda is changing depending on the current situation, but in others it is not the case, as you can see in Argentina or Venezuela. “
The first effects are already being felt in the form of investment flows, with notable exceptions such as Mexico. “Recessions never help political and social stability,” points out the Swiss investment bank Lombard Odier, in a recent note to clients.
“Not surprisingly, capital flows to emerging markets are already giving back to South America, thereby exacerbating the deterioration in the current accounting, the depreciation of currencies and the widening of sovereign debt throughout Latin America,” it concludes. Latin American countries were expecting a continuous inflow of foreign investment to try to balance their deficits, but bad management from governments and unattractive conditions prompted foreign capital to leave as fast as it came.
Luis R. Miranda is the Founder and Editor of The Real Agenda. His 16 years of experience in Journalism include television, radio, print and Internet news. Luis obtained his Journalism degree from Universidad Latina de Costa Rica, where he graduated in Mass Media Communication in 1998. He also holds a Bachelor’s Degree in Broadcasting from Montclair State University in New Jersey. Among his most distinguished interviews are: Costa Rican President Jose Maria Figueres and James Hansen from NASA Space Goddard Institute. Read more about Luis.