Latin American Economies Steady Despite Global Financial Shock

By Marcela Sanchez
Special to
Friday, April 11, 2008; 12:00 AM

WASHINGTON -- When the international financial crisis of the late 1990s hit Latin America hard, regional leaders pledged to find their own path to recovery and reduce their dependence on Washington-based lending institutions. Nobody could have imagined at the time that the U.S. would be the epicenter of the next international turbulence, a global credit crisis through which Latin America would still manage to sustain an economic expansion.

"We are going through a difficult housing correction that is also impacting our capital markets," U.S. Treasury Secretary Henry M. Paulson Jr. said at the annual meeting of the Inter-American Development Bank this week. More remarkable were the words that followed: "The good news is that Latin American economies and financial markets have proven more resilient to the recent global financial turmoil than many might have expected."

Indeed, this year Latin American economies are projected to grow for the sixth year in a row and attract billions of dollars in foreign investment. Just last week, Fitch Ratings raised Peru's credit rating to investment grade, a milestone already attained by Chile and Mexico and expected to be reached by Brazil later this year.

Much of the economic expansion has been due to factors beyond the region's control. Record worldwide demand for commodities such as oil, copper, tin and soybeans drove Latin America's average economic growth to 5.6 percent during the last five years, nearly two percentage points higher than if the boom had not occurred, according to IDB calculations.

That said, there is no question that the region also deserves credit for its efforts over the last five years. Unprecedented levels of hard currency reserves, significant public debt reduction, fiscal discipline, flexible exchange rates, low inflation targets and other sound economic policies have clearly strengthened the region's ability to withstand external shocks.

Now, if those measures don't sound particularly different from the prescriptions known as the Washington Consensus, it's because they aren't. "There is no gimmick," said Arminio Fraga, president of Brazil's central bank from 1999 to 2002. "When you take a big picture look to what is being done here, it is very conventional."

In other words, Latin America's urge to break away from the lending institutions that promulgated harsh policies in the 1990s did not mean that the region stopped embracing most of those free-market principles. If anything, the big difference may be that the pressure to implement reforms is now also coming from inside.

Latin Americans "have bought into some of those very basic principles," said Marcelo Giugale, director of economic policy for the World Bank's Latin America region. This new "consensus of the people," as he calls it, "has little to do with right versus left, market versus socialist views," but with a generalized commitment to economic policies to a level often absent in the United States or Europe.

Beyond this new consensus, governments in the region have chosen different approaches to take advantage of the current windfall. Some, such as Argentina, are increasing taxes and spending lavishly. Others are increasing social spending but doing it in a more targeted way to benefit the poor.

The risk is that "sometimes the legitimate desire of governments to respond to demands can generate situations that end up hurting those they want to help," warned Santiago Levy, IDB vice president. As the Mexican architect of programs that provide cash grants to poor families on the condition their children stay in school, Levy wasn't arguing against government intervention but in favor of a more measured, targeted and balanced approach to public spending.

Latin America's seven largest economies, representing 91 percent of the region's gross domestic product, have spent 77 percent of the revenue bonanza since 2002. What's more, only a small share of that has gone to investment expenditures that could help future economic activity, according to the IDB.

The one country that stands out is Chile. Saving most of its gains, the Andean nation is most likely to be the only one in the region poised to sustain a surplus when the inevitable downturn hits. Chile has spent only 34 percent of its increased revenues during the current expansion.

At some point in the near future we will most likely be reading about the effects of a downturn in commodity prices. And at that time we should remember to ask which choices in Latin America undermined growth and which leveraged it to benefit those who most needed it.

Marcela Sanchez's e-mail address is

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