Recent Economic Success of Latin America: Good Luck or Good Policies?

Since 2004 Latin America’s economic performance has been much better than in the previous decade of financial crises that hit Mexico, Brazil, Argentina, Ecuador, Uruguay, Dominican Republic, etc. Growth has recovered and inflation has been low. How much of this success is due to good policies as opposed to good luck? Certainly economic policies have vastly improved: lower fiscal deficits, primary surpluses, lower debt ratios, current account surpluses, accumulation of reserves, less balance sheet mismatches, financial sector reforms, central bank independence, low inflation, more moderate and reform oriented governments. So these are fundamental economic and policy improvements that explain the improved economic outlook and higher growth. However, external/global conditions have been ideal: the highest global growth of the last two decades, high commodity prices, very easy monetary policy conditions in the G7 until 2005 and modest tightening since then; low risk aversion of investors; excess supply of global savings leading to lower global long term interest rates and investors’ searching for yield. So, good luck in the form of the most ideal global conditions has also helped. And in spite of this ideal external conditions not all is well in Latam: Brazil is lumped among the BRICs but while all the other BRICs grow at 8 to 11% rates, Brazil last year – in the best of global conditions – grew only 3.5%. Or take Ecuador: with oil prices at very high levels it has changed presidents 8 times in the last decade and the last president threatened to default on it external debt; so what would Ecuador do if global growth slows down and oil falls to $50 rather than being at $65 a barrell? And in spite of this ideal global conditions, there is reform fatigue in Latin America and a populist backlash against the Washington Consensus in Venezuela, Bolivia, Ecuador, Nicaragua, etc. So not all is well in Latin America. The macro, structural and policy improvements are real; but part of the better performance was also due to good luck.So let us open a dialogue on these important issues….

4 Responses to "Recent Economic Success of Latin America: Good Luck or Good Policies?"

  1. Guest   May 14, 2007 at 2:04 pm

    Latin America stands tall amid the global highs  By Michael Mackenzie in New York, Financial Times Published: 14/5/2007 | Last Updated: 14/5/2007 18:55 London Time    In spite of new peaks across a range of global stock markets, Latin American benchmarks still manage to stand out with impressive gains this year.  The big two markets, Brazil and Mexico, followed by Chile, have already gleaned double-digit gains less than halfway through the year and have each set new record highs in the past week. That performance, against the backdrop of booming commodity prices, has been fuelled by better earnings prospects and cheaper valuations compared with other emerging and developed markets.  Now, however, some analysts believe a period of consolidation looms.  According to Emerging Market Portfolio Fund Research, the 110 LatAm investment equity funds that it monitors had last week extended their winning streak to eight consecutive weeks and absorbed an inflow of $273.6m. So far this year, the funds have received total inflow of $1.1bn, a rise of more than 5 per cent of total fund assets.  In contrast, total inflow into all emerging market funds covered by EMPFR are up by just 0.5 per cent of assets this year, with outflows of about 5 per cent for Africa, emerging Europe and the Middle East. Funds for emerging Asia are up 1.8 per cent of total assets so far this year.  The flows into LatAm markets have helped drive Brazil’s Bovespa index of 60 companies up 13.8 per cent this year, or 20.8 per cent in US dollar terms, closing at 50,902.38 last Friday.  Citigroup recently raised its year-end target for the Bovespa to 54,000, “based on improving fundamentals, not valuations”.  Mexico’s Bolsa index of 35 companies has risen 13.3 per cent, while Chile’s Stock Market Select index of 40 companies has rallied 20.4 per cent. Leading the pack is a 78 per cent rise in Peru’s 34-member index, though analysts say the market is very illiquid.  Such performance looks overdone, some analysts say.  Citigroup says: “With overall valuations in Latin America becoming increasingly stretched, earnings growth will likely be the driver of modest market returns.”  But there are other professional observers who believe Latin American markets are on a long-term path that will usher them from emerging to developed status.  Terrence Gray, global emerging markets portfolio manager at DWS Scudder, points out that Brazil is on the way to gaining investment-grade status.  At the same time, more investors are seeing emerging markets as a long-term investable class.  Mr Gray’s fund remains overweight on Brazil in spite of recent gains because valuations are still attractive relative to other markets.  He says: “Average earnings for companies in Brazil, Mexico and Chile are expected to grow by 19-20 per cent this year, while earnings in emerging Europe and Russia are slowing.”  He warns, however, that “near term, things are getting toppish”, particularly for Chile and Mexico.  “Mexico is heavily tied to the US economy and it is clearly slowing, and while Chile is a good story it’s very tied to copper prices.”

  2. Anonymous   May 14, 2007 at 6:07 pm

    Santiso in his new book says the recent good growth and stability of Latam is all due the new pragmatism of moderate policy makers in Latin America; see:*.html But some of these policy makers in Vennie, Bolivia, Ecuador do not look that pragmatic…

  3. Ernst   May 14, 2007 at 10:27 pm

    In Latam only two countries have investment grade status: Chile and Mexico. Mexico has going for it the oil exports and close and big commercial ties with the US. As the US enters recession, Mexico will take a hard hit, just as Canada will. The most immune countries to a severe economic downturn in the US are Brazil and Chile whose export markets are most diversified. As to the question of if the good economics in Latam are policy or luck, I believe that Venezuela, Ecuador and Bolivia depend exclusively on the luck of being oil and gas exporting countries. And, despite Venezuela’s huge oil exports, their current economic policies will result in achieving no more than a 2 to 3% GDP growth. Nicaragua has committed to Venezuelan policies in exchange for free energy. Who knows how long that will last since Venezuela is clearly trying to rev up oil exports to China. Argentina benefits from agricultural commodities, but their economic policies (like freezing prices to control inflation) are reminiscent of the failed leftist policies of 40 or 50 years ago. Chile has still good and firm economic policies in spite of the socialist government trying to change them. But they still can’t figure out by what. They have successfully, until now, barred any flexible labor laws so there is still more economic potential in that country if someone manages to implement flexible labor policies.   Ernst

  4. Chris   May 15, 2007 at 9:34 am

    Erst said:  Chile has still good and firm economic policies in spite of the socialist government trying to change them.  I would like to comment on this statement by first mentioning that the government is of the same coalition that has been in power since 1990. Second, I quite frankly disagree with Erst and am quite sure the government is not try to change any of the firm economic policys that make Chilean debt investment grade, such as: 1- An independant, inflation targeting central bank with an excellent record of hitting its mark. 2- Government spending regulated by a structural long term balance of 1% (not many socialist governments who want to “change things” would stick to that one!) 3- The finace minister, Andres Velasco, who concentrates much of the power and influence in the government is a renowned Harvard econ profesor who used to advise in Wall Street!! 4- Stock market indicators haver risen steadily over 69% over last few years and a) the finance ministry is leading more reforms to modernize clear and settlement systems and b) the pention fund reform proposed would allow higher ammounts to be invested anywhere in the world raise returns.  This does not sound like a reformist socialist government to me.  As an example of just how far capatalist economic policy in ingraned in the chilean psyche, observe what happens when you overdo it: the (so far) failed transport system which was implanted by the government this year is in fact failing (in part at least) with huge political costs, because (at least a big part) they insisted on it being privately funded and managed when every developed country has public transport which is subsidized… this in spanish is what we call being “mas papista que el papa”.   So no, I do not think the present government has any intentions of undermining the institutions that give it economic stability nor does it have the intention to do so…at least on purpose.