Crystal Balls and Silver Linings

Colombia devalued its currency at the end of June after experiencing the sharpest economic downturn in the region. Recessions in Argentina and Venezuela are expected to be worse than anticipated and Chile will see less growth. Paraguay has not only suffered economically following currency devaluation in Brazil, its biggest trading partner, but it has been thrown into political turmoil following the assassination of its Vice President, Luis María Argaña. Standard & Poor’s, the credit rating agency, has downgraded Paraguay’s debt due to "political paralysis and backsliding on reforms". The lapse of time between my articles sees swift and unpredictable changes in Latin America and a crystal ball would certainly help me. But, as is so often the case in Latin America, dark clouds still have silver linings: the number of Latin American households in poverty fell from 41 per cent of the total in 1990 to 36 per cent in 1997, which has been attributed to steady economic growth in the first half of this decade as well as a decline in inflation. Rolando Franco, the director of the social development division of the United States Economic Commission for Latin America and the Caribbean, has described these developments as "the most outstanding achievement in Latin America this decade. The region is recovering from the setbacks of the 1980’s". The gains, however, have a fragile base and regional experts predict, for example, that the recession in Brazil this year could result in a decline of between 0.2 and 0.8 per cent in the region’s gross domestic product. In 1998 Latin America had growth of 2.3 per cent, compared to the average for the world economy as a whole which was estimated at under 2 per cent that year. Mr. Franco believes that a single year of recession in the region could wipe out between half and all the gains made during up to five years of economic growth, putting at risk the higher level of social spending which has been achieved during the 1990s. Spending on health, education and social security rose in 14 out of 17 countries, with average social spending per head rising by 38 per cent from US$331 to US$457 in the first 7 years of this decade. However, poverty levels during the period increased in Venezuela (8 per cent) and in Mexico (4 per cent). As in Africa, population growth brings immense problems in Latin America and it means that, notwithstanding improvements, some 200 million Latin Americans still live below the poverty line, a figure which is approximately the same as it was in 1990. On a positive note, inflation has been gradually lowered (particularly in Argentina, Brazil and Peru) and during the last 2 years has stabilised in the region at around 10 per cent.

Pockets of Resistance

Panama stands out as a safe haven from most of the troubles surrounding it. Salomon Smith Barney reports that Panama is one of the favourite choices in the region because of its economy, lack of dependence on external financing, conservative fiscal policy and low correlation with the economic cycles of the rest of Latin America. It is twice-blessed: the Panama Canal has assured its position as Latin America’s trading post and its adoption of the U.S. dollar has proved to be an economic saviour, with inflation in 1998 under 1 per cent, compared to 1.2 per cent in 1997. The uneventful and peaceful general elections in May of this year (when a woman was elected President for the first time) established almost a decade of democratic government and generally boosted confidence.

Taking the region as a whole, it is surprising that Latin America has weathered the recent international financial crises so well, but its vulnerability to external events remains a major concern. Export prices are still weak and the cost of financing the growing current account deficits is higher now than in previous years. The perennial problem arises: should interest rates be raised to protect exchange rates – thus avoiding inflationary problems – or is devaluation the answer so that international competitiveness is not lost? On the one hand, raising interest rates will hold back growth and employment, whilst devaluation can lead to inflation, increase the cost of servicing external loans and perhaps also result in real incomes falling. It is a gamble and this is reflected in Latin America’s stock markets where for some investors the lure of large gains make them hard to resist. The brave, as well as frequent visitors to Sun City, can doubtless accept the casino nature of the share prices, but the only sure way of doubling your money is to fold it in half and put it in your pocket.