Latin America vs. crisis

The recent news of Brazil’s emergence from recession in September has brought more attention to the general economic state of Latin America. It also raises the question of how well Latin American governments have responded to the crisis and what we can expect to happen in the future.

Rachell Hall

The Brazilian Institute of Geography and Statistics showed that the Gross National Product of the country grew 1.9% during the second quarter of the year, in comparison with the three previous months, indicating that the recession had technically ended in Brazil. According to reports and predictions made by analysts from international agencies, Latin America is better prepared to combat the current crisis after having experienced economic difficulties in the eighties.

Furthermore, the current debt caused by the crisis is not as severe as that of the rich countries of the North. As well as Brazil, the economies of Peru and Chile are also recovering. One of the reasons why the region has not suffered as much as the experts had warned us last year is the nature of the Latin American banking system. The banking structure is small in comparison to the international banks of the North and the central banks have strictly controlled lending in dollars.

In Brazil, 30% of bank deposits are kept in reserve by the Central Bank. In addition, bank mergers, such as the one between Itau and Unibanco in Brazil, have helped to protect them against the shocks of the international banking crisis. The crisis once again highlights the importance for Latin America for diversifying both production and export markets. For some countries, the crisis has worked in their favor; Peru has literally struck gold during the recession. The country exports this precious metal and at the moment is enjoying its high price.

However, the risk of depending on only one main export product can also be a curse for these countries. Venezuela for example was worse affected and slower to recover than some other economies. It has been predicted that recovery will not begin until 2010. Some of this is due to its dependence on its oil wealth whose price fell at the start of the crisis.

Still, Venezuela has always had problems with managing its economy. In 1994 there was a greater economic collapse than is occurring in the USA at the moment. The Venezuelan government is trying to diversify the amount of foreign investment in the oil industry, with 20 countries already putting money into projects. The other side of diversification is escaping from over dependency on a single export market- which for Latin America has always meant the USA. In Mexico, 90% of products go to the United States. Reports show that exports fell 35.6% between January and April 2009. This deceleration in Mexico has a worrying significance: the danger of not diversifying markets has once again affected a Latin American country, revealing that some countries have still not learnt the lesson of the past.

Fight against poverty

In Mexico, this crisis has been more serious due to its economy being structured on the capitalist models of the North, and has resulted in the contraction of the motor industry: closing factories and dismissing workers. Brazil by contrast, has managed to overcome the crisis partly due to its economic networks with Europe and Asia, where there has been a high demand for products from Brazil in recent months. Latin American countries have also been affected during the crisis by a fall in remittances sent by the millions of Latin Americans living and working abroad. They fell by 11% in 2009 to $62 million, the lowest level since 2006. This problem is greatest for countries like El Salvador, Haiti and Nicaragua whose main export is labour.

These economic shackles have always impeded the social development of the region. It is clear that this recession has blocked the progress of the fight against poverty. According to the United Nation’s Economic Commission for Latin America and the Caribbean (ECLAC), poverty rates in the region fell 10 percentage points, from 44 to 34 percent of the population during the economic ‘boom’ years of 2003-2008. But studies now reveal that, due to the crisis, the region’s GDP is to contract 1.7 percent this year after growing 3 percent last year.

This will have a negative effect on poverty levels, where there are already more than 180 million poor people, and more than 70 million who qualify as ‘extremely poor’. Problems still remain, such as infant malnutrition and children dropping out of school. As if this wasn’t enough, public health has also deteriorated. The World Bank reported that the number of unemployed people in the formal sector increased to 3 million in 2009 in the seven largest countries in Latin America, highlighting yet another trait of the catastrophe; that the middle classes are also affected by the financial collapse.

In Brazil, one reason why the impact of the recession has been less severe is because of a continuing consumer demand for goods. At the same time, the poorest section of the population has been further protected by the cash transfer program, ‘Bolsa Familia’, and by the maintenance of government spending on public services. So, what can we expect from these countries in the future? The chief economist for the World Bank, Augusto de la Torre, has called for growing consumption and investment to increase at a faster rate than GDP. However, it seems that the remedy to this nightmare will not be easily achieved. Recovery will not only depend on the actions of the Latin American governments alone but also on the future decisions surrounding economic growth by the
rest of the world.

In the last few months, the world has looked towards the G-20 in Pittsburgh for new approaches concerning the economic future of the globe. The three musketeers championing Latin America at G-20 were Mexico, Argentina and Brazil. What came out of the summit in September was an increased role to be played by developing
countries in global affairs, reflecting the relative strength of these countries in their management of the economic crisis. Equally important for Latin America will be the further reorientation of its economies towards other developing countries. The most obvious economicaly important partner is China, but other developing countries are also central in this process. The possibility of achieving stronger economic ties became the focus of the Second Latin America- Africa Summit in Venezuela. It seems that the dependence on the old imperial countries of the North who dominate global markets might be about to change.

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