Sunday, July 24, 2011

Role Reversal between Latin America and USA

Debt, Default, Deficit and Rescue – are the headline news these days in USA and Europe…. not in Latin America which has come out of these nightmares since 2003. The Latin Americans who were lectured by the Europeans and Americans in the past are now returning the favours. "When did the American dream become a nightmare?" ¨When will USA learn to control financial speculation, which has brought ruin on the world?¨, asked Argentine President Cristina Fernandez in a speech at the Buenos Aires Stock Exchange on 18 July. She said, ¨ The Americans thought that money just reproduces by itself, and only in the financial sector, without having to produce any goods or services". She had every right to say so. In 2002, the US Treasury Secretary Paul O'Neill had mocked Argentina saying , "They like it that way. Nobody forced them to be what they are." The Argentines ask who forced USA now?

The Argentines say that they ended up in a mess after listening to IMF in the eighties and nineties. After 2002, they refused to listen to IMF advice and did exactly the opposite of what they were told. The result speaks for itself. Argentina has shown consistent growth since then and is flourishing. The Latin Americans who transitioned from dictatorship to democracies in the eighties were advised to follow neoliberal policies by the Washington Consensus at that time. As a consequence of following these policies the Latin American situation became worse and the eighties came to be known as the Lost Decade for Latin America. This triggered a anti-neo liberal reaction and election of Leftists to govern the region. It is now the turn of Europe and USA to face the prospects of a Lost Decade in contrast to the Latin Americans who are prospering and celebrating this period as their Growth Decade. While Europe and USA are expected to grow by 1.85% and 2.6% in 2011, South America is projected to grow by 5.1% in 2011, according to the July 2011 report of ECLAC ( Economic Commission for Latin America and Caribbean of the United nations). Even Mexico which is tied to USA as a NAFTA partner is projected to grow by 4% while Central America's growth is predicted as 4.3%. President Christina was able to talk so boldly since Argentina's own growth in 2011 is projected to be an impressive 8.3% coming after a sizzling 9.2% in 2010.

The Latin Americans have found their own ¨Brasilia Consensus ¨ and given up on the externally imposed ¨Washington Consensus¨. Another name of the Brasilia Consensus is Lulaism, which means pragmatic balance of pro-Favela and pro-Wall Street policies as practised by the former Brazilian president Lula. Lulaism has become not only the new dominant trend but also a vote winner. Ollanta Humala, the radical leftist won the Presidential elections in Peru in June this year because of the promise that he would follow Lulaism. In 2009, the Mujica, the ex-guerilla fighter of Uruguay won the elections by assuring the voters that he would govern like Lula.

The growth figures of Latin America are not just one-time wonders. Look at the GDP growth rates of some of the Latin American countries in 2010: Argentina (9.2%), Brazil (7.5%), Paraguay (15.0%) and Uruguay (8.5%), Panama (7.5%), Dominican Republic (7.8%) and Peru (8.8%). In the period 2003-7 the region had a consistent growth which was an annual average of over 5%. The growth is only one part of the new story of Latin America. The region is marked by sound macroeconomic fundamentals of the markets and the prudent policy disciplines of the governments.

Here is more news on the fundamentals, from the July 2011 report of ECLAC:

- Sustained economic growth is enhancing the economies’ employment-generating capacities and the unemployment rate is expected to come down again in 2011, to between 6.7% and 7%. What is more, indicators for the first part of 2011 show formal wage employment rising as a proportion of total employment in several countries, suggesting that the new jobs being created are of better quality. Continued economic growth and jobs rising in both numbers and quality should usher in fresh gains in poverty reduction.

-GDP growth was driven by strong domestic demand in the form of both consumption and investment and by buoyant external demand.

-Inflation of the region in 2010 was 6.6% and is expected to increase to 7.5% due to the higher global prices of food and fuel. The average inflation of the region is in single digit since 2003 and it went down to 4.7% in 2009.

-Current account deficit of the region in 2010 was just 1.2% and is expected to increase slightly to 1.5%, although it was much lower at 0.4% in 2009. From 2003 to 2007, Latin America experienced an unprecedented current account surplus that averaged 1% of GDP.

-The region’s continued financial inflows, access to financial markets and historically high levels of international reserves show that its external financial position remains solid.

-Eleven countries of the region recorded nominal appreciation of their currencies in 2010 and early 2011, in particular Brazil, Colombia and Uruguay but also, to a lesser extent, Chile, Costa Rica, Mexico and Peru.

-Foreign Exchange reserves of the region reached a record level of 719 billion dollars in May 2011 from 164 billion in 2002.

-Total gross external debt of the region as a percentage of GDP declined to 19.2% in 2010 from 39.9% in 2003.

-Net Foreign Direct Investment increased to 70 billion dollars in 2010 from 38 billion in 2003.

Latin American market

For those Indian businessmen who still think Latin America is not that important, here are some facts to correct their perceptions:

-The GDP of Latin America has reached 5 trillion dollars in 2011. There are two Latin American members in the Trillion Dollar club. Brazilian GDP has crossed 2 trillion dollars while Mexican GDP is over one trillion.

-The population of the region is 550 million of which 350 million are middle class.

-In 2010 the Latin American imports were 844 billion dollars and exports 889 billion.

-Latin Americans have over 500 billion dollars of investment projects in the coming years in energy, mining, infrastructure and industry. The Brazilians account for the bulk of it with their own projects relating to World Cup 2014, Olympics 2016 and the projects of Petrobras.

Of course, the region faces a number of challenges and is marked by a few aberrations and deviations from the main trends, just as in India and other countries.