Latin America is on a roll, which is unusual for a region that is more accustomed to bankruptcy, coups, and economic meltdowns. From Mexico in the north to Argentina in the south, Latin America is basking in growth and prosperity. Malls are packed, new cars are rolling off lots, and shiny new apartment buildings are shooting up. Even more remarkable, governments – with a few exceptions – have resisted the temptation to splurge, as they always have done when times are good. Instead, they have avoided trade deficits and paid down their debts. Serial debtors like Brazil and Mexico have no significant foreign debt left to speak of.
So why are Latin American analysts getting worried? And should companies looking to do business in Latin America be thinking twice?
Guillermo Perry, the World Bank’s chief economist for Latin America, said at a recent conference at the Carnegie Endowment in Washington, that the picture of robust financial health is misleading. Stripping out the effects of high commodity prices, low interest rates, and other transitory data from government finances shows that Latin America is as fiscally irresponsible as ever.
Few Latin American governments have used the boom times to cut taxes, encourage investment, or improve the quality of public services, especially education. Instead they have increased public spending.
Waste, inefficiency, and corruption have gone up too. Were global commodity prices to slip, Latin American government finances would lurch into the red.
Violence and unrest usually rises whenever Latin American economies slump. In 2001, police shot protestors rioting in downtown Buenos Aires when the economy began a spectacular meltdown. In 1989, Venezuelan police killed over 300 people in Caracas when the government cut spending because oil prices fell.
Today, Venezuelans are spending their oil bonanza as if it will never end and this makes them the most vulnerable to trouble. Other countries are ramping up spending too. Brazil’s public sector is hiring more bureaucrats instead of trying to rid itself of red tape and encourage private investment.
Latin America’s prosperity is tied to growth in China and India, which have become its fastest-growing new export markets for oil, soybeans, beef, and minerals. Politicians and business leaders avoid – in public, anyway – even thinking about the risk that trouble in Asia or on Wall Street could trigger a crisis in Latin America.
Speakers at the conference complained that instead of saving and working hard, Latin America is just partying, and paying for all the fun by mortgaging its future. Meanwhile, social inequality, insufficient private investment and migration are undermining Latin America’s long-term growth prospects.
George Gray, a Bolivian economist who spoke at the event, pointed out that governments and voters cannot wait 70 years for long-term development policies to deliver fruit. Poverty needs to be addressed now. But he says that even a country as poor as his can move ahead if politicians adopt the right policies. These include adding value to basic commodity goods, exploiting market niches, such as ecotourism and demand for organic produce, and cutting the cost of doing business in Bolivia.