Will U.S. economic woes expose Latin America to new turmoil?

JANE BUSSEY

Is the party winding down?

After riding an export boom that sent economic growth surging to its highest levels in three decades, Latin America now finds itself vulnerable to U.S. financial turmoil and the possibility that world commodity prices may fall.

A slowdown would not only halt the region’s recovery from its dismal economic performance in the 1980s and 1990s but also could stymie efforts to reduce still pervasive poverty — one of the problems targeted by the Inter-American Development Bank, the 49-year-old regional lending institution for Latin America and the Caribbean that is holding its annual meeting in Miami Beach this week.

Despite gains in the past few years, regional economists estimate that one-third of the people of Latin America and the Caribbean still live in poverty. In some of the poorest countries of the Americas that figure rises to more than half of the population.

Although forecasts point to another year of nearly 5 percent economic expansion in 2008 — capping half a decade of strong growth — a recent plunge in commodity prices has raised questions about how long the region can count on the benefits of soaring prices for its exports of oil, copper, iron ore, nickel, soybeans and other raw materials.

”We went through the commodity boom and we are about to hit the commodity bust,” said Walter Molano, one of the first economists to spot how the commodity price spike would help Latin America and the Caribbean.

”It was a great party while it lasted,” said Molano, head of research at BCP Securities, headquartered in Greenwich, Conn. “But Latin America is unprepared for this reality.”

ANOTHER VIEW

Not everyone thinks commodity prices will go bust any time soon. Some economists say the windfall will endure as long as there is rising consumer demand in Asia for products such as Argentine soybeans, Brazilian iron ore, Peruvian copper and Dominican nickel.

”As long as China and India keep on growing, I would expect that [high] commodity prices will stay, though not as high as they are now,” said Martin Krause, an economics professor at the University of Buenos Aires.

The export boom allowed most countries to accumulate large foreign reserves, which should help cushion the impact of any falloff in exports.

But that doesn’t always guarantee smooth sailing. The Argentine government’s attempts to tap into these windfall profits by raising export taxes on soybeans and sunflower seeds sparked protests last week by the powerful farm sector, with producers setting up road blocks and dumping corn on the highways.

Molano also said that with full coffers, many governments have fallen into the trap of spending too much, while failing to invest enough in highways, bridges, schools and other infrastructure projects that could spur development.

The region’s poor might ask: What party? The United Nations Economic Commission for Latin America and the Caribbean estimates the region’s poverty level fell from 46 percent in 1990 to 36.5 percent of the population in 2006. But that number is roughly what it was 30 years ago, mainly because from 1980 to 2002, the region experienced its worst economic performance in 100 years, with per capita economic growth coming close to zero.

SOCIAL CONCERNS

In its most recent report on social issues, the commission noted the region’s spending on social programs was too low and that the huge gap between the wealthy and the most vulnerable population “threatens social cohesion.”

”The poverty issue is a very volatile issue; it is not going to go away,” said Larry Birns, director of the Council on Hemispheric Affairs in Washington. As the middle class in the region has expanded, Birns notes, “it wants middle-class programs rather than programs that affect the lives of the poor.”

Driving down the poverty rate requires government programs dedicated to fighting the problem.

”It clearly requires an active policy from the government to really construct a safety net,” said Luis Alberto Moreno, IDB president.

While multiyear loans for big projects and infrastructure programs such as rural roads or electricity grids remain a large part of Inter-American Development Bank lending, the bank has tried to target the poor through an initiative called Building Opportunities for the Majority and through micro-loan programs for very small businesses.

As Moreno and the bank gear up for this week’s meeting, there are no major financial crises looming in Latin America. ”The good news is that there is no bad news on the economic front in Latin America,” Moreno said.

Starting in 2003, higher prices for commodities helped pull Latin America and the Caribbean out of a five-year slump.

Since then, the region has staged a remarkable economic recovery, which has captured fewer headlines than the scattered social unrest and the elections of a series of left-leaning presidents — a signal of disenchantment with the “magic of the market.”

The growth has been sustained by robust domestic demand from the recovered middle class and high corporate profits. Countries such as Argentina, Venezuela, Peru, Panama and the Dominican Republic have posted growth rates in the high single digits, something not seen in several decades.

The commodities boom also helped transform a number of big Latin American corporations into global powerhouses. Brazil’s Companhia Vale do Rio Doce is now the world’s largest iron ore producer; Embraer, a Brazilian manufacturer, is one of the four remaining aircraft makers in the world. Brazil’s Petrobras and Venezuela’s PDVSA oil companies are both expected to do some $100 billion in annual business this year.

BUILDING RESERVES

Better economic times have allowed the region to stash away some $420 billion in foreign reserves — double the amount in 2003 — and confidence in the Americas allowed the region to attract $77 billion in foreign direct investment last year, which was nearly a record.

Latin America’s imports also climbed as countries found themselves flush with dollars. Some Latin currencies have appreciated against the dollar — making U.S. goods more affordable.

”In our sector, in healthcare, it is going really well,” said Al Merritt, the owner of MD International, a Miami firm that exports medical supplies and equipment to the region. “Our business last year went up about 25 percent; we are forecasting another 25 percent this year.”

But high commodity prices cut both ways.

Many countries, especially in Central America and the Caribbean, are facing higher oil bills. Countries that import food are paying more for corn and wheat. But even Central America has benefited from the commodity boom since coffee prices are also climbing.

Inflation, while still much less than it was during the 1980s, has begun to creep up from 3 percent or 4 percent to closer to 10 percent. Argentina and Venezuela are battling inflation rates of close to 20 percent. Even Mexico, Chile and Brazil have seen inflation targets surpassed.

So far the region has felt scant effects from the U.S. economic slowdown and subprime mortgage crisis. But few expect Latin America and the Caribbean to escape from the after shocks and the regional media is filled with reports about possible consequences.

CONFIDENCE UNSTEADY

Krause said that global financial problems usually hit the region through financial markets. ”Those countries that need to tap the capital markets will have a harder time most probably,” he said, adding that since Latin America is ”very much based on expectations,” U.S. and European financial problems could shake investor confidence in the region.

Trade with the United States also could be affected.

The Center for Economic and Policy Research in Washington, D.C. recently forecast that a U.S. slowdown coupled with a longer-term adjustment of the U.S. trade deficit, could reduce U.S. demand for imports by as much as 10 percent to 12 percent in some countries that trade heavily with the United States.

Under this scenario, hardest hit would be Mexico and Canada, partners in the North American Free Trade Agreement, and the members of the Central American Free Trade Agreement, which also includes the Dominican Republic.

Many South American countries export as much to Asia and Europe as they do to the United States and they would experience a more muted effect.

There are other possible repercussions: The growth in remittances from the United States slowed in 2007 to the lowest rate in a decade, and policymakers are unsure if this is a long-term trend or just a temporary change.

”We didn’t say anything [in the report] about remittances and we didn’t take into account the financial turmoil,” said Mark Weisbrot, one of the co-authors and co-director of the Center. “There is a lot of uncertainty there.”

The Miami Herald is one of the media sponsors of the Inter-American Development Bank’s annual meeting.