Foundation of Latin American economic revival is shaken by US and China
The signs for optimism in Argentina, Brazil and Mexico are under threat from a cooling of the Chinese economy and a probable rise in US interest rates.
When fast-growing China seeks to join the Inter-American Development Bank, things must be looking up in the region, say the optimists. The pessimists, however, argue that China’s only motivation is to take its rightful place in international institutions.
At the risk of being labelled pessimists, The Banker inclines more towards the latter.
Of course it is true that Argentina is recovering from its crisis with GDP growth of 8.7% last year; Brazil, under popular President Luiz Inácio Lula da Silva, is seeing an increase in growth even as interest rates fall; and Mexico is benefiting from the upturn in its northern neighbour.
But the recovery looks like being short-lived due to Latin America’s traditional over-dependence on high commodity prices and on low global interest rates. With the Chinese authorities taking measures to cool down their economy, the main driver of the high prices will stall. Meanwhile, as the US recovery gathers pace, the Federal Reserve looks evermore likely to raise rates. This is a double whammy for the region, which would see investors dump Latin bonds and would have a deleterious effect on regional debt payments.
Even assuming 2004 sees decent growth rates, one year does not make up for the seven lost years to 2003, when a mixture of slow global demand, financial and political crises, and depreciating currencies took their toll. That is why about one-third of the region’s population still live in dire poverty and the will for further reforms has evaporated.
Even the good news is less good than first appears. Argentina’s recovery is too dependent on soya prices and on not paying interest on some $100bn of defaulted public debt. The Brazilian government’s forecast of 3.5% GDP growth this year will make only a small dent in its debt and unemployment problems, as is the case with Mexico’s forecast 3% GDP growth.
In the meantime, East Asia forges ahead with an ever-increasing share of foreign direct investment, while the gap between the two regions in terms of average schooling has been increasing and now stands at almost two years.
China may have stepped up its attempts to join the IADB. It is not, however, doing so because it hopes to take advantage of strong growth in Latin America.
