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New consumer class powering economic growth across South America

Here at the end of the Earth, just 600 miles from Antarctica, tourists hike over glaciers and flock to rocky beaches to photograph penguins and 700-pound sea lions.

Tierra del Fuego, or Land of Fire, on the southernmost tip of South America, is as breathtaking and forlorn as its name suggests. This island is also a little-known motor of manufacturing that churns out cellphones and LCD televisions for a seemingly insatiable consumer market — symbol of the stability that has taken hold in a country once accustomed to defaults and hyperinflation.

But the boom in demand and production, and their byproducts — jobs and investments — are evident far from this distant outpost.

From Paraguay to Chile and Brazil to Peru, a growing middle class armed with cheap credit and new confidence in the future is contributing to the most vigorous economic expansion in decades. The growth in South America is still largely driven by Asia-bound exports of copper, iron ore, tin, meat and soybeans.

But economists now talk of a new dynamic that reflects the stronger foundation of more-mature economies: increasingly affluent consumer societies.

The irony, as laid out in a recent report by the International Monetary Fund, is that history’s traditional No. 1 consumer, the United States, is still sputtering from the economic crisis as consumer confidence remains frail. The worldwide recovery is instead driven by emerging economies, with Asia in the lead along with several South American countries, the report said.

“Productivity is going up, investment is going up, the economy is producing more; that is what’s leading people to be able to buy more,” said Steven Phillips, a senior IMF economist and co-author of the report. “More and more people are able to have a better standard of living, and you see it in more consumption.”

The new consumer class includes Ana Karina, a line worker at the modern BGH plant, maker of televisions to cellphones, in Rio Grande, 120 miles from the island’s other city, Ushuaia. Karina said she and her family have a newfound buying power that has given them the chance to take vacations and collect the latest technology: a big LCD television, cellphones, a computer.

“Everything is easier now, there are more things within reach,” she said, taking a break from producing waterproof cellphones. “I think we are going to have many more years of stability and prosperity.”

A quick recovery

Since 2002, about 56 million people across Latin America have risen out of poverty, according to the World Bank, defining the poor as those earning less than $4 a day.

The gap between rich and poor, which had rarely budged even in times of economic growth, began to tighten. With production picking up, unemployment fell to historic levels in some countries, and increasing numbers of workers joined the formal economy, leaving behind unstable jobs lacking regular pay or benefits.

At the same time, governments across the region instituted measures to contain inflation, control spending and encourage investment. So when the American-made financial crisis spread tsunami-like, this region avoided the defaults, devaluations and unemployment that marked the economic shocks of the past.

Economies buckled but quickly recovered, said Augusto de la Torre, the World Bank’s chief Latin America economist.

“Latin Americans used to say, correctly I think, that whenever the U.S. caught a cold, we would get pneumonia,” de la Torre said. “This time, the U.S. really caught pneumonia, or something even worse, so we thought we would be really clobbered.”

Instead, the region has grown so rapidly since a 2009 downturn that economists worry about overheated economies fueling higher inflation, pushing up imports and leading to account deficits.

Last year, output in South America topped 6.6 percent, according to a preliminary report by the United Nations’ Economic Commission for Latin America and the Caribbean. Paraguay and Uruguay grew at more than 9 percent, Peru at 8.6 and Brazil at 7.7 percent. The only country to register negative growth on the continent, Venezuela, is hamstrung by state seizures of companies and is increasingly reliant on oil sales to the United States.

Argentina, where the government says growth hit 9.1 percent last year, is different from neighboring countries, which have implemented Wall Street-friendly policies.

Its $95 billion default in 2001 locked Argentina out of international credit markets. The government’s free-spending ways under President Cristina Fernandez de Kirchner have drawn criticism from international credit rating agencies. Prosecutors have also investigated allegations that the government doctors inflation figures.

Still, Argentina has posted solid growth since 2003, fueled by exports to China. Poverty fell from 45 percent in 2002, after an economic collapse wiped out savings, to 11.3 percent last year.

Booming production

The fruits of that turnaround are apparent here in Tierra del Fuego.

Settled to counter Argentine fears of a Chilean expansion, the island is now home to 57 companies that produced 5 million cellphones last year, up from 400,000 in 2009.

New tax incentives for companies have created thousands of jobs as factories also produce computers and, in a few weeks, gear up to churn out electronic tablets. All the goods are purchased by Argentines, who can now buy on 36-month payment plans that were unheard of three years ago.

“I’m 66 and I do not remember seven years of growth, and that is spurring a change in habits,” said Cesar Guido Lavalle, director of an association representing companies here. “Maybe our level of consumption is exaggerated, but whatever you think, it is a reality.”

Among those who have been doing business here the longest is Ruben Chernajovsky.

Grandson of a Ukrainian immigrant, he started out selling imported almonds in Buenos Aires when he was 20. Now he owns Newsan S.A., which has four plants in Ushuaia and will soon open a fifth.

He remembers the lean years, particularly a decade ago, when he was forced to close down and move to Miami. Today, his factories make motherboards for electronic goods, as well as computers, LCDs, microwave ovens and telephones. His managers expect to employ 2,000 people by June, up from about 1,500 now.

“What you see is growth across the consumer class,” Chernajovsky said. “It is not just the upper middle class buying. We are talking about people at all levels. We’re talking about hundreds of thousands of products.”

foreroj@washpost.com

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