Latin American economies are on a growth trajectory, but that doesn’t mean expansion will be even.
Two distinct “clusters” are emerging in the region, suggesting two-speed growth that will require distinct policy responses, the Inter-American Development Bank said in a report Sunday.
The Brazilian cluster – all of South America plus Trinidad and Tobago – is distinguished by swift growth thanks to commodity exports and burgeoning trade with other emerging markets.
The Mexican cluster – Central America, Mexico and the Caribbean – will see slower growth due to closer commercial ties with the U.S., dependency on remittances and manufacturing competition from China. These countries are net commodity importers, and thus aren’t as well positioned to benefit from the new global environment.
Still, the Washington-based bank believes the current growth through the whole region is sustainable. “Much of the region is likely to enjoy an unprecedented favourable external environment, providing fertile ground for what could be called ‘Latin America’s decade.’ ”
Sound macroeconomic policies and a prolonged commodities boom, underpinned by demand from India and China, points to lasting growth, said Alejandro Izquierdo, regional economic adviser and co-author of the report in an interview from the IDB’s annual meeting in Calgary, where the report was released.
Latin America’s resiliency in the face of the last recession is further proof of that sustainability, he said.
“This is the first time in my living memory that I can recall a global financial crisis that does not end up in a financial and banking crisis in Latin American countries,” said Mr. Izquierdo, who has been an economist for 24 years. “It’s a combination of better domestic policies and a good management of international liquidity.”
Each cluster faces its own unique challenges. The Brazil cluster’s main task will be keeping economies from overheating while investing in productivity. The Mexico cluster must diversify its trading partners and ensure stable financing of current account deficits, the bank said.
Global capital is rushing into the region. Latin America and the Caribbean’s share in total capital inflows to emerging markets more than doubled to 25 per cent in 2009 from 12 per cent in 2006.
Moves by policy makers to slow the flow of capital into emerging markets could pose a threat to the global recovery, Bank of Canada Governor Mark Carney warned in a speech at the IDB Saturday.
“Many emerging markets are trying to forestall capital inflows and delay necessary monetary tightening,” Mr. Carney said. “This in turn is feeding domestic demand, which drives commodity prices up further and leads to more generalized overheating.”
Emerging markets now account for three-quarters of the world’s economic growth, up from about a third a decade ago, and commodities are “in the midst of a supercycle,” he said.
Latin America will benefit – but the whole region should now tackle long-standing issues, such as raising the quality of education, shrinking the informal sector and boosting productivity. “In the absence of these actions, growth may not be sustained and the region may continue to depend on the vagaries of the international context,” the report warned.
Economic growth for the Brazilian cluster is pegged at 4.4 per cent this year, compared with 2.7 per cent growth for the Mexican cluster, the report said.
Peru is expected to have the highest growth rate in the region this year, followed by the Dominican Republic, Paraguay, Argentina and Brazil. Venezuela is the only country expected to have a contraction this year.
The report was released in Calgary at the IDB’s annual meeting.
With a file from Richard Blackwell
