Financial Crisis a Warning and Opportunity for Latin America

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By Marcela Sanchez
Special to washingtonpost.com
Friday, October 3, 2008; 12:00 AM

WASHINGTON -- John McCain and Barack Obama made little mention of Latin America during last week's foreign policy debate. Obama, in speaking generally about China, referred to Latin America once, saying "the conspicuousness of their presence (in the region) is only matched by our absence." And McCain mentioned Venezuela's Hugo Chavez and Cuba's Raul Castro to criticize his opponent for suggesting he would meet rogue leaders without preconditions.

Latin America shouldn't feel slighted. The first third of the debate was consumed by the current financial crisis, particularly by how it would affect each candidate's spending decisions, if elected. McCain said he would consider a spending freeze and would cut $18 billion in earmarks while Obama said he would invest in energy independence as well as better health care and education.

A similar debate on economic issues should be happening in Latin America. It is just a matter of time before the U.S. economic turmoil deepens, perhaps into a recession, and Latin America feels the impact. Already the stock markets in Brazil and Chile, two of the strongest economies in Latin America, have been taken for a wild ride, falling precipitously on Monday after the U.S. House of Representatives failed to pass the initial $700 billion financial rescue plan.

A bigger blow, however, will come with the eventual reduction of U.S. demand for imports. For Mexico and Central America, whose economies depend significantly on trade with the United States, the impact will be direct. For South America, whose commodity boom has been driven by China's demand, the impact will come indirectly as U.S. consumers purchase fewer Chinese goods.

In this light, what decisions are Latin American leaders willing to make? If the commodity boom, which has contributed to one of the largest and longest periods of economic growth in the region, is over, what's Plan B?

If you are Argentine President Cristina Fernandez de Kirchner, there is none. In a presentation to U.S. investors at the Council of the Americas in New York last week, Fernandez said her Plan A is working fine. She added that "it seems to me that you (people in the United States) are the ones needing a Plan B." For a country that currently spends more on subsidies for such things as utilities and transportation than it does on social security, a global economic contraction could put Argentina "on the threshold of a known tragedy," according to Argentine economist Agustin Monteverde.

In contrast, Chile has been preparing for a downturn, saving 66 percent of its increased revenues during the recent economic expansion. An Inter-American Development Bank report early this year concluded that Chile would be the one Latin American nation able to sustain a budgetary surplus during a downturn.

In other countries, decisions over spending will be harder, but the good news is that most Latin American nations have some wiggle room because of the belt-tightening that they've been doing in recent years. While running deficits may be "a little riskier" for Latin America due to its long history of inflation and the potential loss of confidence in the currency or the market as a whole, it shouldn't be avoided, according to Nancy Birdsall, president of the Washington-based Center for Global Development. To counter the cycle, spending on infrastructure or unemployment insurance would prove a smart investment, she added.

After a time of surpluses and increased spending, governments will have to determine what spending can be postponed. In an interview from Caracas, Enrique Garcia, president of the Andean Development Corp., said that the key challenge for governments will be, once the budgetary decisions are made, to communicate them clearly to the public and thus build consensus around them.

During an economic downturn, it presumably would be easier to ask people to make sacrifices, argued Marcelo Giugale, World Bank director for poverty reduction and economic management. And in that respect, a crisis could turn into an important opportunity for Latin America to target its spending and put an end to universal subsidies. "Why give subsidies to those who don't need it?" he asked.

Indeed, for countries such as Argentina where state intervention has been pervasive, coming to terms with reduced spending will be more difficult both politically and financially. So a state that has promised so much and suddenly can't deliver will have more to lose than a state that chose its battles more wisely from the start.

Marcela Sanchez's e-mail address is desdewash@washpost.com.


© 2008 The Washington Post Company

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