Even precluding a setback in the United States, recovery of the world economy will be very unbalanced between the large emerging economies and the convalescent developed economies.
This imbalance will create pressures on commodity markets from world demand stimulated by the appetite of the new Asian consumers and enormous investments in infrastructure, especially in China. Price pressures are already evident on oil, which is again fluctuating around 80 dollars, copper whose price today is more than double that of a year ago, and a range of agricultural products from cotton to sugar. And if grain prices are not skyrocketing, it is simply because the United States is expecting the largest corn and soy harvests of all time.
While demand will remain firm, industrial goods look set to suffer from oversupply. China, with the world’s highest export sales, will continue flooding the world with industrial goods at very competitive prices.
This distortion in the world economy will also be seen on financial markets. Due to weak growth in developed countries, interest rates will remain very low and world liquidity very abundant, which runs the risk of speculative bubbles on stock exchanges and housing markets in emerging economies. This has already happened: nine of the 10 stock exchanges which produced highest returns in 2009 (in dollars) were in emerging countries, beginning with Brazil with 140%, and Peru, Chile and Argentina.
Since the spreads of sovereign debt instruments will continue to be very low, investors will have no great incentives to differentiate risks, leading to an accumulation of vulnerabilities in fiscally less disciplined countries.
Combined with very varied domestic conditions in Latin American countries, these external factors will surface as internal risks of all kinds. Commodity exporting countries will cope best, especially the most diversified, such as Brazil and others which can rapidly jump onto the export train of fuel and mining products, such as Peru, Colombia and Bolivia. In contrast, Mexico and small countries more dependent on remittances and tourism run the risk of a long period of stagnation and possible fiscal weakening, which is why Mexico and El Salvador have been in the sights of the risk rating agencies.
But commodity exporters will have their own problems, beginning with appreciation of currencies in countries with flexible exchange rates, such as Brazil, Chile and Colombia, and higher inflation in countries that try to peg exchange rates, such as Argentina. Attempts to prevent the entry of capital will not be effective in counteracting these trends.
The recovery in 2010 will make only a modest contribution to creating good quality jobs because the commodity boom and weak demand for industrial products will usher in the “Dutch disease.” Stimulated by currency appreciation, services and construction will go through a good period, but the trend to informalization of employment will strengthen, particularly in countries with more rigid labor systems like Colombia. These trends will not help productivity or the potential for future growth.
But the most serious risks from a commodity boom are political not economic. Latin America’s political systems are not known for their capacity for broad distribution of fiscal booms or for solving the distributive conflicts which they cause. The more these booms are concentrated on a few products or geographical areas, and the more power is concentrated with the risk of excluding minorities, the greater are the risks of political and social instability. Unfortunately, several countries in the region meet these conditions.
No doubt about it, 2010 is going to be a very interesting year.
Note: the author is associated with IDB, but his opinions are his own.