Wed, Aug 15, 2007 - Page 9 News List

Latin American milk and honey

Over the past five years, Chile's GDP has been expanding 5 percent annually, Argentina's by just under 9 percent and Venezuela's by more than 10 percent as they are driven by the frenzied growth of China and India

By Pablo Gerchunoff

Whenever signs of change appear in Latin American economies, people ask if the change will be transitory or permanent. Driven mainly by the almost insatiable appetites of China and India, a profound burst of growth has come to Latin America. Over the past five years, Chile's GDP has been expanding 5 percent annually, Argentina's by almost 9 percent, Venezuela's by more than 10 percent and the Andean Community's by 6 percent. The continent's aggregate growth, at 4.5 percent, is expected to lag behind the world average of 5 percent this year, but only because the largest countries, Mexico and Brazil, are growing more slowly.

One regular aspect of post-war Latin America has been that such bonanzas have been undermined by large current account deficits and thus indebtedness. But that is not happening this time. Latin America will finish this year with a current account surplus and growing foreign-currency reserves, insulating them from financial crisis. On the one hand, world trade is growing and so are Latin American exports. On the other hand, the terms of trade have improved.

High commodity prices have benefited producers of oil and gas -- such as Venezuela and Bolivia -- and producers of minerals -- such as Chile.

Moreover, producers of foodstuffs such as Argentina and Uruguay, which suffered for decades, are now gaining from notable biogenetic innovations that increased arable land area. There is also a surprising phenomenon that favors everyone: prices of technology-based capital assets imported by Latin America have been falling throughout the past decade.

Another phenomenon is linked to the first. Structural deflationary pressures in the developed countries -- such as highly debated increments of productivity in the US -- help the central banks to maintain price stability, which means that growing exports and high terms of trade have been accompanied by reasonably low interest rates.

As long as this combination of factors lasts, the governments of Latin America can maintain fiscal discipline, despite higher spending, as rapid growth translates into greater revenues. Whereas Chile, for example, recorded a slight fiscal deficit in 2003, by last year it boasted an almost 8 percent-of-GDP surplus. With different tools -- including a profound restructuring of its foreign debt -- and less discipline, Argentina accomplished a similar fiscal turnaround.

Likewise, thanks to the discovery of gas, Bolivia turned its 8-percent-of-GDP fiscal deficit in 2003 into a surplus of 1.2 percent of GDP last year. Of the five MERCOSUR economies, the four Andean Community countries, Chile and Mexico (a total of 11 countries), seven had a fiscal surplus last year and six will maintain it -- less easily -- this year.

Of course, skeptics warn against excessive optimism, arguing that something similar occurred in the early 1970s, ending in a deep crisis.

But there is a key difference: whereas the economic stagnation and world-wide inflation of the 1970s originated in the supply cartel of hydrocarbons producers, now it is the Asian latecomers in the process of industrialization that are driving growth, and inflation is a constant threat that never materializes.

Meanwhile, each government, with its own style and political discourse, seeks to associate the state with the benefits of a globalization that, for the past few years, has been showing its generosity. The result is surprisingly orthodox: a sharp decline in Latin America's average public and private foreign debt, from 44 percent to 21 percent of GDP between 2003 and this year, in part because of the exchange rate appreciation generated by the foreign bonanza itself.

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