domingo, 13 de septiembre de 2009

Clarification by The Economist

As you know, The Economist is the flagship liberal newspaper, and usually on the spot on many issues concerning Latin America. Please watch the video below.

sábado, 2 de mayo de 2009

Pain but no panic

Latin America's economies
A traditionally crisis-prone region is belying its reputation. But that has not spared it from the world recession

UNTIL recently many Latin Americans saw the financial crisis and the global recession as events happening somewhere else. But in the past six months the region’s economies have swiftly slumped along with the rest of the world, showing double-digit falls in industrial output. Workers have been laid off in Mexican car factories, Brazilian aircraft plants and Peruvian building sites. For Latin Americans such woes are sadly familiar: income per person in the region has fallen on five separate occasions since 1980. What is different this time is that Latin Americans are faring no worse than the rest of the world. And there are reasons to believe that their recession may be relatively short and mild. That may not be cause for celebration but it is a crumb of comfort.

The bad news is, however, quite bad. Latin American countries have been hit by four different recessionary forces. As the financial crisis in the developed world transmuted into a collapse of manufacturing, trade plunged: total exports for five of the region’s larger economies fell by a third between August and December, partly because fewer goods were sold and partly because the price of commodities fell.

The flow of capital to the region also dried up, leading to a steep rise in borrowing costs for governments and companies. The Institute of International Finance, a bankers’ group, thinks that net private capital flows to Latin America will fall by more than half this year compared with last, to $43 billion (down from a record $184 billion in 2007). Foreign banks have trimmed credit lines, especially for trade. In addition, remittances from Latin Americans working abroad have begun to contract, and fewer tourists have come visiting.

Most forecasters think that GDP in Latin America and the Caribbean as a whole will contract slightly this year, but a moderate recovery will follow next year. The IMF, for example, predicts a contraction of 1.5% in 2009 and growth of 1.6% in 2010. With the population growing at 1.3% a year, income per person will shrink.

All this brings an abrupt end to five years in which economic growth averaged 5.5% amid generally low inflation. This golden demi-decade also saw social progress: according to household surveys, poverty fell from 44% in 2002 to 33% last year, when 182m people were classed as poor; the region’s wide inequality of income narrowed; and tens of millions of Latin Americans joined an emerging lower-middle class.

Just how bad the recession will be varies markedly from country to country (see chart 1). Countries with close ties to the United States’ economy—Mexico and much of Central America and the Caribbean—will fare worse than the regional average. In Mexico the fall in output was still accelerating in February, and the disruption caused by the outbreak of swine flu will make things worse.

By contrast, countries such as Brazil whose exports are more diversified, spanning different markets as well as products, or those whose economies are relatively closed, will be hit less badly. In Brazil there are already signs that recession will be short. Guido Mantega, the finance minister, points out that more Brazilians were hired than fired in March. Many forecasters expect Peru’s economy to buck the regional trend by growing this year and next, partly because it exports much gold, whose price has held up, and partly because it has a fat pipeline of foreign and public investment projects.

Lessons learnt
The good news is that things might be much worse, and in the past usually were. The three classic Latin American sources of weakness—financial systems, currencies and the public finances—have not been an independent source of woe this time, as Augusto de la Torre, the World Bank’s chief economist for Latin America, points out. In the case of financial systems, that is partly because they are relatively small and undeveloped (paradoxically, this was often cited as a drag on growth). But it is also because most were tightly regulated, the result of lessons learnt the hard way over the past quarter-century. So the banking system is not acting as a magnifier of recession.

A decade ago governments in many of the larger countries in the region reacted to a previous bout of financial-market turmoil by switching from fixed to floating exchange rates. They backed these up with more responsible fiscal policies, and by requiring their central banks to target inflation. In contrast to the practice during previous booms, Latin America maintained a current-account surplus (and so accumulated reserves), and paid off public debt.

In this group of countries (Brazil, Mexico, Chile, Peru and Colombia among the larger ones), these policies are now proving their worth. The currencies of several of them depreciated by around 30% when money fled emerging markets in the weeks surrounding the collapse of Lehman Brothers last September. But devaluation, which will help exports, has not led to panic. In contrast to past recessions, when governments were forced to raise interest rates to defend the currency as well as to cut spending, this time they have been able to take steps to mitigate recession. Several of the larger economies have announced fiscal measures to stimulate demand, averaging around 1% of GDP. Some have done more: both Chile and Peru promise to raise public spending by around 10% this year, much of it on infrastructure such as roads and housing. It is not yet clear how much extra spending will happen in practice.

As important, central banks are cutting interest rates steadily (see chart 2). They have scope for further cuts. They have also taken other measures to provide credit. Brazil’s Central Bank, for example, stepped in to provide dollars to help companies to repay foreign debt. It also allowed commercial banks to draw down some of the funds they are required to deposit at the Central Bank in normal times. As a result of these actions, credit is gradually returning, says Henrique Meirelles, the Central Bank’s president. Peru’s Central Bank has taken similar steps. State-owned development banks in Mexico, Chile and Brazil have all stepped up their lending.
The dissenters
Other countries have taken a radically different approach. Venezuela, Argentina and Ecuador have pursued expansionary fiscal policies in recent years, and their populist governments have harassed the private sector and foreign investors. All have fairly rigid exchange rates: Venezuela’s bolívar is fixed, Argentina has long intervened to manage the peso and Ecuador uses the dollar as its currency. The growth of public spending in these countries was highly dependent on the commodity boom. To sustain spending, Argentina and Ecuador have raided pension funds while Venezuela’s government has plucked reserves from the Central Bank. Venezuela’s public debt is low and it can tap local banks for loans, but it is the only one among the region’s bigger economies to have announced a cut in public spending this year.

The IMF reckons that these three will be among the worst-performing Latin American economies, along with Mexico’s, though it thinks Mexico will recover more quickly. Many economists believe that the longer the world recession lasts, the greater the risk that Ecuador, Argentina and Venezuela (in that order) will run out of money. Supporters of these governments point out that the IMF’s past growth forecasts for Venezuela and Argentina have been unduly pessimistic. All three countries are looking to China for support: Venezuela and Ecuador have signed investment agreements, and Argentina has a currency-swap line aimed at reducing its need for dollars. But such help may be inadequate.

Other governments are starting to queue up for support from the IMF. This month Mexico arranged a loan of $47 billion under the fund’s new flexible credit line. Colombia has requested a similar loan of $10.4 billion. This credit is designed for countries with sound policies and carries no strings. Buttressing the balance of payments in this way gives more scope for interest-rate cuts without triggering currency weakness, says Nicolás Eyzaguirre, the IMF’s top official for Latin America.

Even in the better-run countries, the scope for fiscal stimulus is limited. Only Chile, which saved the equivalent of 12% of GDP in a special fund during the boom, can repeat the dose for several years from its own resources. As recession bites, tax revenues are falling everywhere and public deficits rising. Mr de la Torre predicts that in the region as a whole fiscal revenues will fall as a proportion of GDP from 24.4% in 2008 to 21.2% this year. The multilateral banks are stepping into the breach. The World Bank will lend about $14 billion to the region in the year to June, and a similar amount in the following 12 months, up from a recent annual average of $5 billion, according to Pamela Cox, the bank’s vice-president for the region. The Inter-American Development Bank (IDB) has also increased lending, to $15 billion a year. It is seeking to raise more capital.

The big fear in the region is that the longer the recession lasts, the more difficult it will be to sustain government spending without additional aid. That is because the vast stock of public debt to be issued by rich countries may crowd out Latin American borrowers. Researchers at the IDB argue that aid should be geared more to helping government refinance public debt than to providing further stimulus. Unlike rich countries, this argument goes, Latin America may gain more in the medium term by defending its hard-won fiscal stability and relying on the outside world for stimulus.

But there will be political pressure to do more. Already recession has halted some of the social progress of the past few years. Even if the recession is short and mild, the result will be 6m more Latin Americans in poverty than would otherwise be the case, estimates Marcelo Giugale, a poverty specialist at the World Bank. Of these, 4m are people whose incomes will sink below the poverty line, while 2m are people who would have risen above it had it not been for the recession. Mr Giugale notes that traditionally recessions in the region see an increase in child malnutrition and in teenagers dropping out of school to seek money in the informal economy. Public-health provision deteriorates both because budgets are cut and because demand rises as some middle-class Latin Americans can no longer afford private health insurance.

In social policy, too, the region is better placed than in the past. A dozen countries have cash-transfer schemes aimed at tackling extreme poverty in rural areas. In some countries, such as Mexico and El Salvador, governments have increased payments under these schemes. Many are looking at expanding their coverage. Peru is trying to extend the provision of free school meals to cover family members.

In the 1980s poverty rose steeply in Latin America, and public services and investment were slashed. There are reasons to hope that it can be different this time. Seven months after the financial crisis hit the region, pain is spreading but not turmoil, nor is economic stability being lost. “If the world economy rebounds, Latin America can rebound,” says Mr Eyzaguirre. The question is when that will happen.

domingo, 1 de marzo de 2009


Chile's economy
Feb 19th 2009 | SANTIAGO
From The Economist print edition

Cashing in the fruits of rigour
LONG held up as a model of policymaking that others in Latin America and beyond should follow, Chile’s economy has recently seemed oddly lacklustre, with growth below the regional average and inflation stubbornly high. As a small, open economy it is uncomfortably exposed to the world recession—the price of copper, its main export, has fallen by almost two-thirds since mid-2008. But virtue sometimes has its reward. More than any other government in the region, Chile’s is able to take action to stimulate the economy. Now it has done so.

Last month Andrés Velasco, the finance minister, unveiled fiscal measures worth $4 billion. Government spending will rise this year by 10.7%. On February 12th the independent Central Bank joined in, slashing its benchmark interest rate by a massive two-and-a-half percentage points, to 4.75%. These measures mean the economy may suffer only a mild downturn.

Mr Velasco’s package includes an extra $1 billion for Codelco, the state-owned copper company, to finance investment; $700m for infrastructure projects; extra benefits for poorer Chileans; and temporary tax cuts for small businesses. The measures are better designed than similar efforts in rich countries, says Eduardo Engel, a Chilean economist at Yale University. “There’s almost no pork.”

Mr Velasco himself says that the challenge is to get the bulldozers moving: “We looked for projects we can do quickly.” Much of the money will go on houses for the poor and road maintenance. He reckons these public works will create 70,000 new jobs directly. They follow an earlier, smaller fiscal stimulus last year.

The government forecasts this year’s fiscal deficit at 2.9% of GDP, but it can easily afford this. That is because it has stuck to a rigorous fiscal rule drawn up by its predecessor requiring it to save much of the revenue gained when the copper price rises. Not only is public debt minimal (4% of GDP in December), but the government has also piled up $20.3 billion (about 12% of GDP) in a sovereign wealth fund which it can now spend. That marks a contrast with neighbouring Argentina, whose government has financed an increase in spending by nationalising private pension funds, shredding investor confidence.

The fall in commodity prices has at least helped to cut Chile’s inflation rate, from 9.9% for the year to October to 7.1% in December. By the end of this year it should have fallen back within the Central Bank’s target range of 2-4%, reckons Rodrigo Valdés, the bank’s former chief economist who now works for Barclays Capital. He expects further substantial interest rate cuts in the course of the year.

Lower rates will not necessarily encourage Chile’s banks, some of which are foreign-owned, to lend. So officials are also trying to inject cash and confidence into the banking system. They have done this in two ways. The Central Bank, which has ample reserves, has auctioned dollars. And the government has given a $500m capital boost to BancoEstado, a state-owned entity which is the third-biggest commercial bank, to allow it to expand lending, especially for mortgages and small businesses.

The government’s decision to save so much of the copper windfall was not popular at the time. But “being a Keynesian means being one in both parts of the cycle,” Mr Velasco says. His approval ratings in opinion polls have leapt over the past few months, as have those of his boss, Michelle Bachelet, Chile’s president. The ruling centre-left Concertación coalition, which has been in power since 1990 and had been looking tired, now has a chance in a presidential election next December it had seemed certain to lose. Good policy can sometimes be good politics.

miércoles, 18 de febrero de 2009

Tables turned: a lesson from Latin America for the west

Tables turned: a lesson from Latin America for the west
(Financial Times, UK)

By Philip Stephens

Here is a parlour game of political identification.

Start with country A. It boasts a free-trade policy to make it one of the world's most open economies. A run of budget surpluses has wiped out its national debt. It has a privatised pensions system and education vouchers that allow the affluent to top up state provision. Fiscal responsibility is enshrined in law.

Now consider country B, a similar-sized emerging economy. It takes pride in an aggressive anti-poverty campaign. The proportion of young people attending university has quadrupled. Public health provision has brought strong gains in life expectancy. The state guarantees a minimum income for the elderly. A publicly owned bank is mitigating the effects of the credit crunch.

For those steeped in the familiar reference points of western politics, the ideological divides are obvious. Country A is governed from the right or centre-right: fiscal conservatism, free trade and private pensions give the game away. As for country B, the emphasis on education, poverty reduction and welfare provision speak to the progressive politics of the left.

Those who have noticed Chile's remarkable political and economic progress since the restoration of democracy nearly 20 years ago will know otherwise. Country A and country B are one and the same - a Latin American success story.

I was reminded of this when Andres Velasco, the Chilean finance minister, visited Europe the other day. Mr Velasco is a member of what might be called the progressive jet set, the network of centre-left politicians that emerged from the "third way" mapped out by Bill Clinton and Tony Blair. Last year Mr Velasco gave an arresting speech at a conference of progressive leaders organised by Policy Network and hosted by Britain's Gordon Brown. Next month the event travels to Chile.

On leave from an economics professorship at Harvard, Mr Velasco is every bit the progressive politician. What marks him out is that he is also as fervent an apostle for supposedly "rightwing" economic policies as he is for the social values of the left. His polished prospectus reminds me of the New Labour mantra that brought Mr Blair to power in Britain in 1997. Lest anyone has forgotten, Messrs Blair and Brown campaigned then on a pledge to marry economic efficiency with social justice.

Unnoticed by much of the world, Chile has done just that. Mr Velasco has a statistic to prove every point. Thus Chile's economic growth rate has averaged more than 5 per cent since the country rid itself of Augusto Pinochet's dictatorship in 1990. The country has established two sovereign wealth funds to invest some of its revenues from copper. It has dismantled tariff barriers. Its banks - the nationalised bank is only the fourth largest - are sound.

When Pinochet finally left office, some 40 per cent of Chileans lived below the poverty line; the proportion now is 12 or 13 per cent. The number of young people at university has risen from 10 per cent to 40 per cent.

If it can be called such, one of the benign legacies of the Pinochet years has been a succession of stable centre-left governments. The politicians have had the space to think beyond the next electoral test. They have been smart enough to modify and improve rather than scrap some of the free-market policies of the previous regime. Thus most people still have private pensions, but the government has added a safety net.

Twenty years ago some two-fifths of Chile's public spending went on debt servicing. The figure now is zero. Instead 70 per cent of all public spending is on social programmes.

Chile, of course, has natural advantages, notably abundant reserves of copper. It sells a surprising amount of good wine. It also has its problems. Inequality has fallen only slowly as the poor struggle to catch up with the professional classes. Chile is not immune from the global crisis - the economy has already slowed.

The less attractive side of the longevity of the ruling Concertacion coalition is that it has been dogged by infighting and corruption allegations. The centre-right Alliance thinks it has a good chance of winning the next presidential election. Some say that such an electoral transfer of power would be a useful testament to Chile's democratic maturity.

There are broader lessons here for the richer nations of the west. Most obviously, politicians should practise what they preach. Not that long ago, the US and Europe were lecturing Latin American countries about their fiscal profligacy, unregulated banks and opaque financial markets. In Chile's case, the tables have been turned. It will not escape unscathed from the global shock, but its fiscal position and financial system are robust - and transparently so.

Mr Brown might feel particularly shamefaced. Had he stuck, as chancellor and prime minister, to the prudence promised in 1997, Britain would not be facing such a dreadful economic bust - nor an annual budget deficit that looks set to tip over 10 per cent of national income.

The broader message, though, lies in the way Chile has separated political ends from means. There is nothing wrong with ideology, whether it is the conservative belief in individual freedom or the progressive view that the state must spread opportunity. Where the tired left-right debates become pointless is in confusing the preferred route with the desired destination.

Chile has avoided the trap by mixing and matching government and market, economic orthodoxy and social intervention. This was the insight that Mr Blair was supposed to have brought to British politics during the 1990s. Now, New Labour looks a tarnished brand. The economy is sinking but Mr Brown is casting the next election in Britain as a tired ideological fight between his pledges to "invest" in public services and Conservative plans to cut taxes.

In truth, once the recession is over, the organising fact of British, and most European politics, will be the huge deficits that governments are now accumulating in the effort to stave off slump. There will be room neither for tax cuts nor spending increases. There will instead be a demand that governments, left or right, spend money more effectively.

Economic recovery will bring in its wake a profound debate about how governments should seek to shape post-financial capitalism. The danger will be of a rush to the old ideological barricades of right and left - the one promoting resurgent nationalism, the other big government.

In Chile, the politicians have preferred progressive politics shorn of the shibboleths. There is indeed a lesson there for the rest of us.

Copyright The Financial Times Limited 2009