From: The Economist A special report on Latin America Sep 9th 2010
As Latin America marks the bicentenary of the start of its struggle for political independence, many of its constituent countries have more recent cause for celebration too. The five years to 2008 were Latin America’s best since the 1960s, with economic growth averaging 5.5% a year and inflation generally in single digits. Even more impressively, a region which had become a byword for financial instability mostly sailed through the recent recession. After a brief downturn in late 2008 and early 2009, a strong recovery is now under way, with most forecasts suggesting economic growth of over 5% this year for the region as a whole.
Along with growth came a better life. Between 2002 and 2008 some 40m Latin Americans, out of a total population of 580m, were lifted out of poverty, and income distribution became a bit less unequal almost everywhere. Poverty increased in 2009 because of the recession, but will start declining again this year. Average unemployment went up slightly to 8.2%, but should come down again this year to 7.8%, according to the United Nations Economic Commission for Latin America and the Caribbean (ECLAC).
Latin America weathered the recession partly thanks to good fortune but also to sound policies. After the cataclysmic debt crisis of 1982 the region’s policymakers abandoned the protectionism and fiscal profligacy that had brought hyperinflation and bankruptcy. In their place they adopted the market reforms of the Washington Consensus (opening up their economies to trade and foreign investment, privatisation and deregulation).
But they found the road to stability and faster growth a long and bumpy one. During a second bout of instability, from 1998 to 2002, the region introduced more pragmatic policies. The formula has generally included flexible exchange rates, inflation-targeting by more or less independent central banks, more responsible fiscal policies and tighter regulation of banks, as well as social policies aimed at the poor. The recession was an important test. Last year “may have been the final exam and the graduation party” after Latin America’s lengthy education in getting macroeconomic policy right, says Santiago Levy, the chief economist at the Inter-American Development Bank (IDB).
The region’s newfound economic stability and social progress also owes much to the fact that over the past 30 years democracy has become established almost everywhere. Nearly all elections are now free and fair. The big exception remains the gerontocratic dictatorship of the Castro brothers in Cuba.
Latin America’s new resilience and faster growth is starting to attract increased interest from outsiders. That is especially true of Brazil, now often perceived to be in a league of its own. That is only partly because Jim O’Neill, an economist at Goldman Sachs, did it a huge favour when in 2001 he bracketed it together with Russia, India and China as one of the BRICs which would dominate world economic growth over the coming decades. Another reason is Brazil’s sheer size: with a population of 191m it accounts for a third of Latin America’s total and 40% of the region’s GDP. Since 2007 Brazil has begun to grow faster than the regional average—although by common consent its red-hot pace of 11% in the year to March 2010 will subside to less than half that rate next year.
As multinationals face mounting difficulties in China, some bankers and businessmen are looking at Latin America—and not just Brazil—as an alternative. The region has 15% of the world’s oil reserves, a large stock of its minerals, a quarter of its arable land (much of it unused) and 30% of its fresh water. Mexico, its other giant, with almost 25% of its GDP, suffered a deeper recession in 2009 and is struggling to deal with violent drug gangs, but it has maintained economic and political stability. Like the big two, Chile, Colombia, Panama and Peru have investment-grade credit ratings, and all four are growing fast. Governments, households and companies in all these countries are less indebted than those in many developed countries.
Already, Latin America takes a quarter of the total exports of the United States and around a fifth of its outward flow of portfolio investment. Total bank credit in the region will grow by about 12% a year over the next few years, faster than anywhere except China and India, reckons Manuel Medina Mora, who heads Citibank’s Latin American operations and its global consumer-banking business. Its share of the market capitalisation of publicly quoted companies and assets under management is only 3-5% of the world total but growing at 25% a year, faster than anywhere else, according to Paulo Oliveira of Brain Brasil, a body set up to promote the country as a business hub.
Marketing people are beginning to talk about a “Latin American decade”. If the region can keep up the growth of the past few years, it will double its income per person by 2025, to an average of $22,000 a year at purchasing-power parity. By then Brazil may be the world’s fifth-biggest economy, behind only China, the United States, India and Japan. Half a dozen countries may have achieved developed-country status, with an income equivalent to Spain’s today.